Validity of lock-in provisions in BEE transactions

11 September 2020 596
“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.
Our advice would be to engage your attorneys to advise you on the legality of your lock-in provisions taking into account the above factors. It is not automatic that your lock-in provisions will be valid and enforceable, but likewise it is not a foregone conclusion that they are not enforceable. Your transaction documents and related information will accordingly need to be assessed by your advisors to guide you on how to deal with the intended course of action proposed by your BEE partners.