Page 21 - Q&A

Validity of lock-in provisions in BEE transactions

August 2020 BEE
“A few years ago, our company entered into a BEE transaction with BEE partners
to address our ownership. In the transaction documents, restrictions were
imposed on the BEE partners that they could not sell or encumber their shares
for a period of at least ten years. These lock-in provisions were a necessary
part of the financing and overall transaction. With the current difficult economic
times, our partners want to sell a portion of their shares and are disputing the
validity of our lock-in provisions. Are lock-in provisions legally enforceable?”

Your question is a pertinent one and has been the topic of debate and even
court consideration in recent times. Yet, despite the attention to this subject, the
answer to when such lock-in restrictions are valid, reasonable and equitable
still remains uncertain. With every BEE transaction being bespoke, any answer
will always have to be considered on a case by case basis to determine the
appropriateness of the restrictions in the context of the transaction.
What has arisen from the debate is guidance on aspects which should be
considered in arriving at an answer. They include the following:
1. Do the restrictions unfairly infringe on the BEE shareholder’s right to equality,
dignity and property as set out in the Constitution of the Republic of South
Africa? Any infringement on such rights which are not justifable can result
in the transaction and the restrictions imposed therein being null and void.
2. Is there a commercial rationale underpinning the restrictions imposed?
The fact that the transaction is a BEE transaction would not, in itself,
justify imposing a restriction on the BEE partners. It is therefore important
to consider whether the restrictions would have been applicable in a
transaction which did not constitute a BEE transaction.
3. Can the restrictions be seen as discriminating against the BEE shareholder?
The shareholders of a company should as far as possible be treated and
afforded equal rights, irrespective of their BEE position.
4. Do the restrictions result in a breach of the provisions of the Broad-Based
Black Economic Empowerment Act 53 of 2003 or the B-BBEE Codes of Good
Practice which aim to protect the rights of BEE shareholders?
5. Did the BEE shareholders accept the terms of the contract and the
restrictions imposed freely and without any undue influence?
6. Do the restrictions affect the value of the shares as held by the BEE
shareholder? If the value of the shares are negatively affected by the
restrictions, the BEE shareholding may not be fully recognisable for BEE
verification purposes.

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