19 May 2021

Broad-Based Ownership Schemes: The DTI weighs in on the BBOS debate

by Erika Holmes, Partner, Durban,
Practice Area(s): B-BBEE |

On 18 May 2021, Minister Ebrahim Patel published an extraordinary Explanatory Memorandum on “Discretionary Collective Enterprises”, better-known as “broad-based ownership scheme” in BBBEE parlance.

The Explanatory Memorandum confirms what many BBBEE commentators, including ourselves (link to https://www.wylie.co.za/articles/bbbee-and-broad-based-ownership-schemes-a-rebuttal-to-the-bbbee-commissioners-views/ ), have said previously that:

the Codes expressly recognise that black people are entitled to participate in measured entities on an indirect basis and collective enterprises are valid vehicles for furthering B-BBEE ownership;
a trust does not need to have a static, named set of beneficiaries but rather a “class of natural persons” satisfies the requirement for identification;
“evergreen” ESOP structures, which provides perpetual benefit to workers of the company for as long as they remain in its employ are valid ownership structures;
the beneficiaries do not need to have a vested right to the income or capital of the Trust;
whether distributions are made or not has no bearing on whether or not Economic Interest may be claimed in terms of the Codes;
where the determination of race and gender of Participants are not practically determinable from a pure reading of the trust deed, reliance may be placed on an independent competent person’s report estimating the rights of ownership that flows through the scheme.
Some of the comments in the Explanatory Memorandum however are at odds with the provisions of the Codes, most notably the statement that “if the scheme expressly provides for a fixed percentage of distributions to vest in the ‘defined class of natural person’, it satisfies the rule of identifying the proportion of entitlement of Participants by means of a “written record of fixed percentages of claim”. As long as the scheme does not provide for a discretion to the fiduciaries to distribute less than that fixed percentage to beneficiaries who are members of the ‘defined class of natural person’ – the requirement that the fiduciaries may have ‘no’ discretion in relation to these terms are also met.”  This is not what the Codes say at all.  The Codes require the Trust Deed to set out a formula in terms of which each participant’s proportionate claim to receive distributions or benefits.  Therefore, it is not the total amount of economic interest to be distributed among beneficiaries that must be defined but rather the proportionate entitlement of each participant to receive a portion of that distribution that must be defined.

We also disagree with the Minister’s statements that “Such schemes could typically provide for a discretion to the fiduciaries of the scheme to from time to time select individuals from the defined class of beneficiaries that would benefit out of distributions of the scheme … to the exclusion of others.” Such a discretion is expressly prohibited by the Codes.

The Explanatory Memorandum gives the example of a Trust where the beneficiaries are “Black Female Students that Matriculate in Gauteng Province” and the fixed percentage of proportion of claim of this defined class is “100%”. With all due respect Minister, a percentage of “100%” does not in any way resemble a formula for distributing benefits among beneficiaries.  Similarly, a class of “all black female students that matriculate in Gauteng Province” would oblige the Trust to locate every such qualifying person, unless there were further limiting factors in the Deed.

While most of the Mininster’s comments are welcomed, the lack of alignment of this Explanatory Memorandum with the Codes is of concern. One also wonders the extent of the involvement of the BBBEE Commissioner in this Explanatory Memorandum, which would seem to be minimal, given the 2018 brochure on the Use of Trusts issued by the Commissioner which includes statements like “Where measured entities create Trusts that have the effect of circumventing the B-BBEE Act, for instance by putting in place evergreen structures where shares never vests, … would amount to fronting practice and misrepresentation of the B-BBEE status.”

The Explanatory Memorandum follow the Minister’s comments made at a press briefing earlier this year following the successful BBBEE Commission approval and Competition Commission approval of the Coca-Cola Beverages Employee Ownership Scheme, where the Minister gave his full support for “evergreen” worker trusts which benefitted all current and future workers, without any vesting of shares in a particular group of workers at any stage. It must also be noted that this Explanatory Memorandum follows a year of lobbying from several large collective schemes such as Wiphold who have come under the scrutiny of the BBBEE Commission.