MTN's Zakhele Futhi inconsistent with BEE Act

The BBBEE Commission has published a report saying that the scheme, which was announced by MTN on 12 September 2016, is inconsistent with the Act that provides a legislative framework for the promotion of black economic empowerment (BEE).

“The commission found that the black ownership held through MTN Zakhele-Futhi is contrary to the objectives of the B-BBEE Act and further that the MTN Zakhele Futhi, as a broad-based ownership scheme, did not comply with the rules in Annexe 100 (D) of Statement 100 of the Codes of Good Practice,” said the commission.

This outcome follows an investigation initiated in 2017 by the commission against the MTN Group. The initiative was put in place by MTN when the existing MTN Zakhele Scheme that was launched in 2010 and wound up on 24 November 2016.

The initiative was valued at R9.9bn, which was intended to afford qualifying black individuals and groups the opportunity to apply for shares in MTN Zakhele-Futhi, an entity through which the multitudes of black participants that would subscribe to this scheme will hold ownership.

In turn, MTN Zakhele-Futhi would acquire approximately 4% equity in MTN at a 20% discount, making the black participants who subscribed to the MTN Zakhele-Futhi Scheme indirect shareholders in MTN.

The commission -- which is an agency of the Department of Trade and Industry -- said the scheme is contrary to the Act on the basis of a number of restrictions and limitations placed on the black shareholders, which are at odds with the requirements for ownership in the Codes of Good Practice.

MTN’s response

Upon issuance of the preliminary findings to MTN for its response as required by the B-BBEE regulations, the telecommunications network provider responded and denied engaging in any practice, conduct or arrangement that is contrary to the B-BBEE Act.

However, the cellphone giant expressed its willingness to cooperate with the commission and implement changes to the MTN Zakhele-Futhi Scheme to address the concerns raised in the preliminary findings.

“On the basis of the cooperation demonstrated by MTN, the commission issued its final findings which included remedial recommendations to be implemented by MTN, which in the view of the commission will address the concerns raised.”

Remedial recommendations

The commission also announced remedial recommendations to address the defects identified in the scheme. These include changes to the governing documents, such as the memorandum of incorporation and the relationship agreement concluded in respect of MTN Group Limited and MTN Zakhele-Futhi (RF) Limited, to grant black shareholders effective rights, control, participation and economic benefits in respect of their stake.

The remedial recommendations include effective amendments to the governing documents to enable MTN Zakhele-Futhi as the entity through which the black shareholders hold shares in MTN to be able to exercise the rights as the shareholder, to nominate representation on the board of MTN; to remove the veto rights that MTN has in respect of the trickle dividend and the general dividend that would flow to black participants.

The recommendation also make provision for MTN Zakhele-Futhi to appoint its own chairperson of the board and board members, who need not be MTN appointees/nominees, amongst other things.

In addition, specific officials and members of the board of MTN are required to undergo training on B-BBEE and corporate governance, of which training must be extended to fiduciaries of MTN Zakhele-Futhi as the black shareholders representing the multitudes of black participants who subscribed to the shares at the cost of MTN.

MTN is also expected to develop and submit a compliance programme to ensure future compliance with the B-BBEE Act, and to seek prior advice from the Commission in respect of any ownership scheme they may wish to implement in the next two-year period.

“MTN has demonstrated cooperation and willingness to remedy the defects identified by the commission, and the commission will monitor the implementation of the recommendations issued,” said the commission.

The commission added that it considers compliance with the B-BBEE Act as critical to achieve the envisaged change in the patterns of ownership through the transfer of productive assets of the South African economy to black people.