In a Gauteng High Court judgment issued on 25 November 2024, Judge Fisher concluded his judgment against, among others, 6 executives of Dimension Data with this statement:
“This is a cautionary tale for those who apply and regulate the BEE infrastructure which is so vital to the development of our constitutional democracy.”
The case is Dimension Data Facilities (Pty) Ltd and others v Identity Property Co (Pty) Ltd and others including Jeremy Ord, Steven Nathan, Grant Bodley, Athanasios Missaikos, Bruce Watson, Jason Goodall and Mark Epstein.
In summary, the 6 executives, being Ord, Nathan, Bodley, Missaikos, Watson and Goodall, together with their business associate and consultant, being Epstein, constructed a private equity fund, purportedly aligned with the terms of the BBBEE Codes, which purchased the Bryanston office campus of Dimension Data for R1.4 billion in a sale of rental enterprise transaction in terms of Statement 102 of the BBBEE Codes. Statement 102 awards a seller black ownership points for the sale of a separate business unit to a purchaser which is at least 51% black-owned.
The judge held that due to the non-disclosure to Dimension Data and its Japanese shareholder, Nippon, of their involvement in the purchasing private equity fund and their use of company information for private gain, combined with the apparent under-valuation of the property in the sale transaction, the executives had breached their fiduciary duties. The judge declared the transaction void and ordered the property to be re-transferred to Dimension Data.
The judgment makes the following astute and useful observations about this private equity fund which clearly shows its use as a fronting instrument:
1. the 5 white executives and their 2 white business consultants were the sole investors in the fund as the undisclosed, limited partners;
2. the black female-owned entity which was appointed as the general partner, had limited to no knowledge of the identities of the limited partners who were the investors in the fund;
3. all communications given by the architects of fund were that it was for the benefit of a wide-range of black female beneficiaries;
4. the terms of the private equity fund partnership agreement had been drafted in a manner which:
- enabled the limited partners (the investors) to terminate the mandate of the general partner, being the black fund manager, at any time without cause; and
- the only assets which the fund was to own would be those which the limited partners / investors selected, which thereby removed any autonomy of the black fund manager in making investment decisions.
The use of private equity funds in BBBEE transactions is commonplace and the provisions of the BBBEE Codes permit a black private equity fund which meets certain criteria to be deemed to a black natural person. Most of those criteria regulate the functions, investment strategy and ownership composition of the fund manager rather than the fund itself. The purpose of those provisions of the Codes is to promote black fund managers as an exercise in promoting black skills development and ownership. Despite the limited requirements placed on the fund itself, this does not permit these private equity funds to arrange themselves in a manner which amounts to the circumvention of the purpose and spirit of the BBBEE Act and Codes as such would amount to a fronting exercise.
To meet the spirit of the BBBEE Act, and to be deemed to a black natural person, a private equity fund must ensure, at the very least, that:
- the terms of the agreements are fair and at arm’s length;
- the black fund manager is suitably skilled and licensed and has sufficient autonomy to direct the investment strategy of the fund;
- the investment strategy genuinely attempts to invest in majority-black-owned entities;
- the ability of the limited partners to remove the black fund manager is limited to cases of breach or misconduct or other just cause; and
- the general partner and fund manager are fully appraised of and involved in the transactions which the fund enters into.
In the absence of the above contractual set-up, the private equity fund runs the risk of being on the receiving end of a judgment such as the one above, where the judge found that the fund and the transaction it entered into was not only an illegal scheme, but “an aberration and not capable of being remedied”.
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Read the full publication at Shepstone & Wylie
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