I FIND the argument by some leaders of listed companies that another round of black economic empowerment (BEE) deals should be prohibited because such transactions dilute existing shareholders very problematic.
I want to argue that, if anything, this is discrimination against BEE, a policy created to correct the economic wrongs of the past.
This type of reasoning has been maintained by many of those who are supporters of the "once empowered, always empowered" principle.
As we all know, the mining industry is expected to argue strongly in court for this "once empowered, always empowered" principle to be maintained. Many, even in sectors outside mining, maintain this argument. So the well-known cry is that existing shareholders are prejudiced when BEE partners sell out and there is an expectation for another round of deals. The thinking here is that existing shareholders have to spend a lot of money topping up their stock when new shares are issued to accommodate new holders.
Honestly, this argument does not get out of the starting blocks. This lowly newspaperman believes lawyers arguing in favour of the "once empowered, always empowered" principle should not even bother with that soppy story in front of a judge.
Here’s why I think so.
If you as an investor have decided to buy shares in a listed company then you must understand that the nature of the game dictates that you may face a dilution at some point, especially if you do not have the capital to top up your shares.
This does not apply to BEE deals alone — it also applies in many other instances. These include rights issues or other share placement structures that companies implement as part of efforts to raise capital earmarked for the growth of the company.
One of the reasons why companies list is to be able to raise more capital — it’s not just a nice feeling to be listed on the JSE or any other stock market for that matter.
We know that many companies on the JSE have done rights issues to grow and many shareholders who did not have capital to top up got diluted. So why are courts being asked to discriminate when it comes to shares being issued for BEE purposes?
Some may argue that rights issues are done to raise capital to grow the company and BEE is not. It would be absolutely wrong to argue that BEE deals do not constitute a business imperative. By the way, in case many of you have forgotten, many rights issues are often done at a discount to the existing market prices.
Why should it be an issue when BEE deals are equally done at a discount to the current trading prices?
Can you see the hypocrisy in this line of thinking?
A number of companies I know have done BEE deals and raised some capital from the black shareholders by selling issued shares to them. In turn, these companies have gained credentials that helped drive growth.
Many of these BEE companies have quietly told me they did not get much of a discount when they bought into a certain company and yet that company got credited by the government for having a black shareholder.
You see, the reality is that BEE is a business transaction and nothing else. It is not some free ride as some people see it. BEE benefits the growth of companies, if the right partners are chosen. Black shareholders put skin in their game and raised capital in the form of debt to pay for the shares acquired. Therefore we cannot discriminate against BEE.
Many of you will say I am theorising, but for practical examples look at the Sanlam, Old Mutual and Nedbank BEE transactions. Businessman Patrice Motsepe at Sanlam had to put in a lot of his cash to buy into the group. They were given performance targets to help grow the company.
If you choose some of the companies I have mentioned they will gladly tell you that the BEE shareholders helped them access markets that the company ordinarily would have struggled to gain entry to had there been no BEE partner.
Today many companies that have done the right BEE deals are richer and bigger. Like any typical rights issues, the fact is BEE deals do help companies to grow. The deals do not happen every year, they happen after some time, and many companies have done rights issues several times over.
• Ndzamela is finance writer