One of the more frequently used, and even more frequently misunderstood, chapters in the BBBEE Codes of Good Practice is Statement 102: Sale of Assets.
This statement effectively allows a seller to obtain some ownership points to the extent that it sells a separately identifiable business division or unit to another entity that has black ownership.
Statement 102 requires the sale to result in the creation of a viable, sustainable business or business opportunity for black people. It must involve the transfer of critical and specialized skills and managerial skills and the transfer of productive capacity. The transaction may not include any unreasonable limitations or conditions regarding the business’ client or customers and the business must have client, customers and supplier other than the seller. If there are any on-going contracts between the seller and the business, they must be on fair and reasonable terms and negotiated at arms’ length. The black ownership of the purchaser must stay the same or improve over a period of 3 years following the sale. The fairness of the value and terms of the sale transaction must be confirmed by an opinion by an independent expert. The seller must not have the ability to buy back the business within 3 years of the transaction. Certain transactions are specifically excluded from qualifying as a Statement 102 sale, such as the sale of a franchise by a franchisor to a franchisee.
One of the most beneficial aspects for a seller in concluding a Statement 102 sale transaction is that it radically reduces the seller’s Net Value points requirement, an element that is a priority element and can result in the entity being discounted by a BBBEE status level if it fails to meet the 40% sub-minimum level of compliance.
The heading of Statement 102 itself creates much confusion as the sale of a mere asset would seldom qualify for recognition under this statement, which requires that the transfer of a viable, sustainable business, plus productive capacity and specialized skills. Some commentators have said “This includes the sale of a building, land, warehouse, IP, equipment, an operating division, a license or any other defined asset.” This would only be the case if all the qualifying criteria of the asset sold would be met.
Further confusion was added by the DTI’s decision in 2015 to replace the term “associated entity” (which previously referred to the purchasing entity) to the term “separately identifiable related business” (which refers to the business unit or asset being sold). This has resulted in the formula for calculation of Net Value points becoming an interpretative lottery. Please be aware however, that there is a clear distinction in the calculation of the seller’s ownership points for economic interest and voting rights compared to the calculation of Net Value points, a point that is often overlooked.
The term “separately identifiable related business” has also led to much confusion regarding the nature of the purchaser; particularly whether it must be unrelated to the seller and whether it must be at least 51% black-owned.
For example, on the BBBEE Commission’s website, the answer given to the question “Can a measured entity recognize points for assets sold to a company it has shares in, for the purpose of statement 102?” is “Points can be recognized where assets are sold to a company in which the seller has no relationship with the purchaser, which means it has to be a separately identifiable business”. That is certainly not the position stated in the actual Codes of Good Practice.
Other commentators have stated in articles that “… for black ownership to qualify, the business must be sold at a minimum to a 51% black ownership company.” Again, this is not backed up in the actual Codes of Good Practice.
The biggest area for confusion comes in relation to the calculation of the ownership points attributable to the seller after concluding such a transaction. The formula included as a schedule to Statement 102 only applies to the calculation of economic interest and voting rights and not Net Value points, which requires another calculation method.
The numerous restrictions, qualification criteria and prohibitions must be carefully noted when drafting the relevant agreements pertaining to such a sale in order to ensure compliance with Statement 102. For example, we have seen many advisors suggesting that sale and leaseback transactions qualify. However, the Codes clearly state that the business transferred must have clients, customers and suppliers other than the seller.
Therefore, the structuring of these deals requires proper consideration and care to ensure that the parties’ requirements are met and that the criteria of the Codes are met.