Examining the impact of selling restrictions in B-BBEE transaction documents

​​​Restrictions on the sale of a Broad-Based Black Economic Empowerment (B-BBEE) shareholder's interest in a company is often a contentious point of negotiation in a B-BBEE transaction.

From the company's and the incumbent (normally non-B-BBEE) shareholder's perspective, requiring some level of restriction is generally justified by the need to maintain a certain level of Black shareholding in the business as well as the funding associated with the B-BBEE transaction, the costs of concluding a new B-BBEE transaction and the need to ensure that any replacement B-BBEE shareholder stands up to ethical scrutiny and is not involved in any competing business. From the B-BBEE shareholder's perspective, restrictions may mean that it is prevented from realising value and liquidity as a result of its investment in the company for a specified period of time or sometimes indefinitely.

Selling restrictions on B-BBEE shareholders were recently considered in the unreported judgment of Coral Lagoon Investments (Pty) Ltd and Another v Capitec Bank Holdings Limited and Others (Rorisang Basadi Investments (Pty) Ltd and Another intervening); Transnet Second Defined Benefit Fund v Capitec Bank Holdings Limited and Others*.

This case involved a dispute between Capitec Bank Holdings Limited (Capitec) and its B-BBEE shareholder, Coral Lagoon (Pty) Ltd (Coral Lagoon), a subsidiary of the now notorious Regiments group of companies.

​Coral Lagoon became a 12.21% shareholder in Capitec in December 2006. It acquired its shares at ZAR30 each, representing a premium of ZAR1.12 per share to the prevailing market price. The transaction was largely funded by the Industrial Development Corporation (IDC), with a smaller portion funded by Capitec itself. The subscription agreement contained a selling restriction on Coral Lagoon which, in summary, stated that if Coral Lagoon encumbered or sold any of its shares in Capitec to any person or entity which, in Capitec's opinion, did not comply with the Broad-Based Black Economic Empowerment Act, 2003 (B-BBEE Act) or the Codes published in terms of that Act, Coral Lagoon could be required by Capitec to re-acquire the same number of shares sold by Coral Lagoon. This would ensure that the Capitec shares would always be owned by a qualifying Black person, as defined in the Codes.

In February 2012, Coral Lagoon, with the approval of Capitec, sold a portion of its shares to the Public Investment Corporation, realised some value and was able to liquidate its loan from the IDC. As a result, Coral Lagoon's shareholding in Capitec was reduced to 5.6%.

The Transnet Second Defined Benefit Fund (TSDBF), claiming to have been a victim of "state capture" committed by Regiments (the majority shareholder of Coral Lagoon), launched proceedings against Regiments and companies linked to Regiments for the recovery of losses it had suffered. A settlement agreement was eventually struck between TSDBF, Coral Lagoon and Regiments, in terms of which Coral Lagoon agreed to sell approximately 0.7% of the issued shares in Capitec to TSDBF and to liquidate the debt Regiments owed to TSDBF. The implementation of the settlement agreement was subject to Capitec agreeing to the sale of the shares to TSDBF.

However, Capitec withheld its consent, on the basis that, in its opinion, TSDBF was not a qualifying Black shareholder. It said 60% of TSDBF's pensioners were White. Capitec also threatened all parties with litigation should they proceed with the sale, an action which the court regarded as intimidatory and not consonant with Capitec's duty of good faith and reasonable conduct.

This prompted Coral Lagoon to approach the Johannesburg High Court to request a declaration that Capitec’s refusal to approve the sale was (i) unreasonable; (ii) in breach of Capitec's contractual duties of good faith as contemplated in the subscription agreement and common law; and (iii) unlawful, inconsistent with and unconstitutionally infringed on, Coral Lagoon's fundamental rights to equality, dignity and property in terms of the Constitution and/or the B-BBEE Act.

On the morning of the hearing, Capitec made an open offer to Coral Lagoon, in terms of which Capitec would consent to Coral Lagoon selling a portion of its shares on the open market and pay the proceeds of that sale to TSDBF, which according to Capitec would liquidate Regiment's debt to TSDBF. Furthermore, upon the listing of the Capitec B-BBEE shares on a licensed exchange, Capitec would consent to the sale of a further portion of the shares on the open market through that exchange. The rest of its shares could only be sold to a qualifying Black shareholder willing to accept a restriction on selling these shares for a further period of 10 years. Coral Lagoon rejected the offer.

The court decided that Capitec's claim that it was correct for it to withhold its consent since it was for the legitimate purpose of protecting its B-BBEE rating, held no weight, since the sale would only reduce Capitec's B-BBEE shareholding by 0.7%. The court also referred to previous occasions when Capitec voluntarily gave up 4.38% of its B-BBEE ownership in order to assist other investors. According to the court, if Capitec was indifferent to losing 4.38% of its rating, then it could not complain about losing 0.7%. The court also noted that this inconsistency regarding Capitec's protection of its B-BBEE ownership, and Capitec's failure to provide a reasonable justification for this inconsistency, strengthened the argument that Capitec was not acting in good faith and did not constitute reasonable conduct towards Coral Lagoon.

The court also held that by refusing to grant its consent, Capitec was willing to retain Regiments as a shareholder, even though it recognised that Regiments had stolen more than ZAR1 billion from indigent pensioners belonging to the TSDBF. The court expressed the view that being afforded and taking the opportunity to sever links with such a questionable shareholder could serve Capitec's interests just as well as maintaining its B-BBEE shareholding. Thus, the court found that Capitec's protection of its B-BBEE rating for refusing consent was not persuasive.

The court also expressed the view that the open offer evidenced a lack of good faith on Capitec’s part. Among the reasons cited by the court was that the open offer was subject to the condition that Coral Lagoon be willing to list its shares on an exchange which does not yet exist, but which, if it ever materialised, would price Coral Lagoon's shares lower than if they remain listed on the JSE. Alternatively, it would be required to sell its shares to a qualifying Black shareholder who agreed to a further 10-year sale restriction.

In closing, the court mentioned Coral Lagoon's contention that Capitec's conditions of its open offer showed that Capitec discriminated and continues to discriminate against it because it is a Black shareholder. Coral Lagoon pointed out that it paid a premium for its shares and that there was therefore no commercial rationale for forcing it to list its shares on a B-BBEE exchange if one were to be formed, or to selling to another black shareholder who would agree to a further 10-year selling restriction. It contended that the restriction clauses were in breach of its rights to equality and dignity, further supported by Capitec’s open offer. Although remarking that there was "much force" in the contentions of Coral Lagoon, the court concluded that there was no reason to explore that contention further given the court's decision that Capitec had breached its contractual and common law duty of good faith by failing to provide its consent to the sale.

This concluding remark by the court, although not decisive, is worth considering in relation to the negotiation and inclusion of selling restrictions on a B-BBEE shareholder in B-BBEE transactions. ​The fact that a transaction is a B-BBEE one would not, in itself, justify imposing a selling restriction on a B-BBEE shareholder. More important would be the commercial rationale underpinning the proposed restriction. In this regard, factors such as whether the transaction involved a sale at market value, a premium or a discount would be relevant. Other relevant factors could be the funding and terms associated with a B-BBEE transaction. In all instances, though, the terms of any selling restrictions should perhaps now also be considered within the context of whether those restrictions would unfairly infringe on the B-BBEE shareholder's right to equality, dignity and property as set out in the Constitution.​​

*(30899/2019; 24805/17) [2019] ZAGPJHC 427 (5 November 2019)