DealMakers - Q3 2024 (released November 2024)
Understanding Statement 102 within South Africa’s B-BBEE framework
by Leigh Lambrechts and Loatile Baiphaphele
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There are several pricing mechanisms which can be applied when purchasing or disposing of the shares of a company or a business (Target). In this article, we discuss some of the common pricing mechanisms and key considerations for buy-side and sell-side transactions.
Businesses receive points through several means, ranging from the shareholder or ownership makeup of the business and how the business procures services and products from previously disadvantaged suppliers, to how skills development occurs in a service agreement or commercial relationship. For large businesses operating in South Africa, both foreign and domestic, a clear understanding of how the B-BBEE points system works and the best ways it aligns with overall business strategy can create exciting commercial opportunities within South Africa’s private and public sectors.
One such way a business can earn B-BBEE points is through the different options provided by Statement 102 of the B-BBEE Codes that form part of the Act. Statement 102 merits greater investigation because points earned under it allow the seller to claim the benefit of the sale for their B-BBEE scorecard.
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What is Statement 102 and which transactions qualify?
Statement 102 refers to a business sold under its auspices as a Separately Identifiable Related Business (SIRB). A SIRB is defined as a “business that is related to the seller by being a subsidiary, joint venture, associate, business division, business unit, or any other similar related arrangements within the ownership structure of the seller”.
Leigh Lambrechts
Loatile Baiphaphele
Statement 102 addresses how B-BBEE points are assigned through the transfer of ownership of a company to previously disadvantaged persons by another company. Three qualifying transactions can lead to the ownership of a SIRB changing hands from one party to another. These are the sale of certain assets; equity instruments in an entity; and a business.
For ownership points to be recognised, the qualifying transaction must:
4result in the creation of viable and sustainable businesses or business opportunities in the hands of black people; and
4result in the transfer of critical and specialised skills, managerial skills, and productive capacity to black people.
Critically, while a sale may meet the criteria of a qualifying transaction under Statement 102 at a high level, no B-BBEE points will be awarded if the transaction does not result in the transfer of critical and specialised skills or productive capacity to previously disadvantaged communities. Furthermore, the business must be a viable and sustainable enterprise so that beneficiaries do not fall victim to fronting and other nebulous practices that seek to circumvent B-BBEE law. No unreasonable limits or conditions relating to conditions of sale should exist.
Transactions that do not qualify under Statement 102
As noted above, over the years, numerous companies – whether unknowingly or otherwise – have sought to accrue B-BBEE points through practices that do not meet the conditions laid out in the B-BBEE Act. It can be quite costly for a business to engage in a transaction that they believe will improve their B-BBEE status when, in reality, it will go unrecognised according to the Codes and Statement 102. As such, it can be as important to know which transactions do not qualify under the Statement, as knowing which do.
The following transactions do not qualify under Statement 102:
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Business rights transferred through a license, lease or a similar legal mechanism that does not confer unrestricted ownership.
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The sale of a franchise by a franchisor to a franchisee (however, sales by franchisees to other franchisees or new franchisees do qualify).
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If a repurchase transaction is entered into within a stipulated period after the transaction has been implemented, even if transaction implementation is deferred post-year.
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Furthermore, ownership points under the Act are subject to existing contracts between the parties remaining in effect, subject to levels that represent expected and reasonable market norms.
When comparing the transactions that qualify under Statement 102 with those that do not, it becomes increasingly clear how the Statement and broader Act strive for meaningful change when ownership of a business changes hands in South Africa.
The excluded transactions are done so because they do not practically guarantee the beneficiaries of the transaction either the sustainable transfer of skills and/or meaningful business control to be used as a platform for future wealth creation.
Given the opportunities presented by Statement 102 and the Act, and having explored some of the complexities above, it is highly advised that sound legal advice is sought when engaging in a transaction, to ensure all parties benefit from its execution materially and within the B-BBEE framework.
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Lambrechts is a Partner and Baiphaphele an Associate | Webber Wentzel.
