Market welcomes clarity on B-BBEE Codes

The market has welcomed news from the Minister of Trade, Industry and Competition with respect to clarifying the country’s existing Broad-Based Black Economic Empowerment (B-BBEE) Codes (Codes). The Practice Note on the Rules for Discretionary Collective Enterprises, published in May, provides much-needed guidance on how ownership by entities such as Broad-Based Schemes, Employee Share Ownership Programmes (ESOPs), Trade Unions, Not for Profit Companies, Co-operatives, and Trusts (together “Discretionary Collective Enterprises”) should be interpreted under the Codes.

Over the past few years, and as outlined in our article in the February issue of IR Alert (“B-BBEE structures continue to play an important role in the South African transformation landscape, confirms Patel”), there have been significant differences of opinion between the B-BBEE Commission (Commission) and major entities operating in the B-BBEE space on how ownership structures like Discretionary Collective Enterprises should be considered for ownership purposes under the Codes.

This lack of clarity could have severely impacted leaders in empowerment in our country like Kagiso Tiso Holdings (KTH), the Mineworkers Investment Company (MIC), WDB Investment Holdings (WDB), Thebe Investment Corporation (Thebe), and SIOC-CDT, among others, which are jointly worth tens of billions of rands in value. More significantly, billions of rands worth of BEE transactions that had been concluded with various broad-based BEE entities stood at risk of not being recognised. And while the intention of the Commission was noble, i.e. to root out those broad-based structures that were nothing but fronts, the approach that evolved had the unintended consequence of “throwing the baby out with the bath water” as it were.

The Practice Note clearly states that broad-based empowerment through collective enterprises was always, and remains, part of the transformation agenda of the government and, as such, should be recognised. Above and beyond this, the Practice Note specifically deals with the interpretation of the Codes in respect of the beneficiaries of collective enterprises, which the Commission had previously held should hold ownership rights in the underlying entities themselves, with a key point of contention being the interpretation and application of “a defined class of natural persons”. The Practice Note clarifies that this is not required as the Codes expressly recognise that black people are entitled to participate in measured entities on an indirect basis. It further clarifies that the individual beneficiaries of collective enterprises need not be identified at the commencement of the scheme, nor is a written record of names required in the constitution of the scheme.

The Codes expressly permits beneficiaries to be defined by “a defined class of natural persons”, creating broad-based and meaningful ownership by black people, communities and workers. In this regard, the defined class of natural persons would have a vested right against the income and capital of the scheme but the individuals that might form part of that defined class of natural persons do not have a similar vested right. These individuals merely have what is referred to as a “spes” or hope to participate in income and capital but not a vested right to it.

The Practice Note provides a useful example of how collective enterprises can operate (explaining the application of “defined class of natural person” and discretion):

“As an example, a bursary scheme that is 100% for ‘Black Female Students that Matriculate in Gauteng Province’ would be such a Collective Enterprise. In this example the defined class of natural person would be ‘Black Female Students that Matriculate in Gauteng Province’ and the fixed percentage of proportion of claim of this defined class would be ‘100%’. Typically, not all black female students that matriculate in Gauteng have a vested right to receive bursaries out of the scheme’s limited funds, but only those that are selected by the fiduciaries from year to year. The defined class of natural persons’ rights, are however, vested and the fiduciaries are not allowed to award a bursary to any individual that falls outside of the defined class of natural persons by, for example, awarding a bursary to a black male or white female or black female matriculating outside of Gauteng. Also, the value of a distribution to a black female student selected may, if such discretion is provided to the fiduciaries, differ from the value of distributions to other black female students that were selected as long as the ‘defined class of natural person’ do not receive anything less than provided for by means of the fixed percentage (100% in this example).”

The Practice Note further deals with the matter of how beneficiaries of collective schemes exercise their voting rights, noting that beneficiaries of discretionary collective enterprises seldom have the right to vote at general meetings of underlying entities. Their rights are represented by the fiduciaries of the schemes, who make decisions for and on behalf of the beneficiaries. Thus, voting rights, although exercised by such fiduciaries, will be attributed to the race and gender of the beneficiaries for measurement purposes.

Market welcomes clarity on B-BBEE Codes
Other key points of disagreement that are clarified in the Practice Note include the following:
• the extent and nature of fiduciaries’ discretion, with the Practice Note stating that discretion is allowed, within specific confines, going on to detail these circumstances, including that fiduciaries may not re-define the beneficaries;
• the issue of black minors being recognised as beneficiaries of ownership schemes (whereas previously their lack of legal capability to exercise votes was deemed to render minors ineligible);
• that it is not a requirement for schemes to make distributions annually (clarifying that the lack of annual distributions does not disqualify one from claiming economic interest points under the Codes); and
• that evergreen ESOP structures that provide perpetual benefit to employees also satisfy the requirements of ownership under the B-BBEE Codes.

Minister Patel has proposed the appointment of a panel of experts to deal with the following additional issues that were beyond the ambit of the Practice Note, i.e. the promotion of black industrialists and small businesses; improved rigour and credibility to BEE
statistics and practices; and an adjustment to BEE reporting requirements, a development which we look forward to.

How can we help?

Tamela has implemented numerous BEE ownership transactions over the past 12 years and has experience in structuring sustainable BEE structures. We can thus provide detail on the Practice Note specifically with reference to your own ownership structure.
For more information, please contact Tshepisho Makofane, 083 287 2651 / tshepisho@tamela.co.za