When applying for development funding, companies with full or partial black ownership should be mindful of certain due diligence considerations, especially when it comes to the complex issue of joint shareholding in grape supply. Vinpro enterprise development manager Phil Bowes provides some practical tips.
“Shareholding arrangements of jointly owned entities have been difficult to forge consensus over in recent years. With a matter as serious as fundraising, the best suggestion is to remain compliant with the provisions of the Broad-Based Black Economic Empowerment Amendment Act 46 of 2013 (B-BBEE Act, 2013) and to pass the standardised test associated with this act as set by the Department of Trade, Industry and Competition (DTIC),” Phil says.
As difficult as some of these prescripts are to implement in the agricultural context, meeting them seems to be the best way to compete for scarce funding. A highly emotive issue should be weighed against one set of rules.
“Although we should never diminish goodwill, I would advise these entities to consider three main areas of concern, which may be the deciding factors when their funding applications are reviewed,” Phil says.
Do business at arm’s length
Firstly, good governance requires a balance of powers and commercial interests, which need to be reflected in the patterns of decision-making. Directors or trustees who hold voting rights both for the offtaker and for the empowered supplier are seen to have conflicting interests. Family trusts and/or commercial offtakers do well to secure oversight of joint initiatives by assigning representatives to these decision structures. The BEE Commissioner’s manual on the use of trusts in BEE ownership initiatives is a good resource on matters such as board or trustee composition, which also stipulates the percentage of independent fiduciaries to be included in a trust.
Don’t bind the supplier to a single offtaker. Affording suppliers the option to supply to alternative offtakers may put a dampener on the current offtaker’s willingness to invest in its supplier. However, some joint initiatives have exercised their option to supply alternate markets while cellar space is limited (owing to Covid-19).
Manage the issue of encumbered debt. The B-BBEE Act, 2013 provides for specific milestones against which a loan (which resulted in black shareholding) needs to be paid back. The terms set out in lenient vendor financing schemes can be to the detriment of black ownership status if progress is not shown in paying back these loans, or if loans are left to linger indefinitely.
Appropriate flow of information
The rule of thumb is to ensure that all stakeholders are sufficiently acquainted with all aspects of the business that will enable them to exercise control over and have decision-making power that comes with ownership of an enterprise.
Discern between appropriate confidentiality and the equitable flow of information.
Capacity to operate independently
The B-BBEE Act, 2013 terms this as developing a track record to operate as a broad-based ownership scheme or demonstrating evidence of full capacity to do so. Goodwill and risk mitigation on the part of the existing business partner is often expressed by supporting the administration of the business, which saves costs and utilises existing resources and know-how. However, the Act seeks to promote independence from outside parties.
It is advised that grape suppliers manage their operational and administrative activities independently as soon as is feasible.
The B-BBEE Code of Good Practice’s Annexe 100(B) provides consolidated guidelines for all of these issues of concern when it comes to joint shareholding in grape supply. Vinpro’s enterprise development division can assist with an interpretation of the B-BBEE Code of Good Practice and Annexe within the context of the wine industry, as well as other BEE-related advice.
Phil Bowes is a certified BEE advisor (BEE MDP, Wits) and has 13 years’ experience reviewing development projects in vineyard production. Contact him at tel 021 276 0429 or email firstname.lastname@example.org.