23 Oct 2019

BBBEE and Broad-Based Ownership Schemes: A Rebuttal to the BBBEE Commissioner's Views

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

  1. What is the future for broad-based schemes and non-profit schemes in BBBEE ownership structures? The BBBEE Commissioner seems to regard most of these as vehicles for wholesale fronting rather than mechanisms to provide benefits to a broad-base of participants.
  2. Over the 15 years that I have been providing legal advice in the BBBEE space, I have seen BBBEE sentiment swing from narrow-based to broad-based and back to narrow-based BBBEE, while the policy, primarily in the form of the BBBEE Codes of Good Practice, has shifted towards a more narrow-based approach. However, the Codes do not back up the extremely narrow-based views expressed by the BBBEE Commissioner.
  3. The guidelines issued by the BBBEE Commissioner in November 2018 on Trusts, broad-based ownership schemes (“BBOS”) and employee share ownership programmes (“ESOP”) indicates that where such vehicles either (1) do not have active participation in the management of the measured entity; or (2) where they provide that the shares never vest in the beneficiaries or (3) where they have as their main object the creation of community projects or skills development or employee benefits or (4) where they include minor children as beneficiaries or (5) where they have an element of passiveness in the treatment of beneficiaries, such trusts, BBOS and ESOPs, can never be recognized for BBBEE ownership purposes.
  4. The guiding principle contained in Statement 100 of the Codes regarding the measurement of black ownership is this:“An Entity receives points for participation by Black people in its Rights of Ownership, using the Ownership scorecard. Black people may have Rights of Ownership in an Entity as direct Participants or as Participants through some form of entity such as: a company, a CC, a co-operative, a trust, a BBOS, an ESOP, …”
  5. The critical aspects of this principle are that:
  •  black participation can be direct or indirect;
  •  black natural people (being the definition of participants) must ultimately be identified; and
  •  these black participants must hold “Rights of Ownership”, defined as a claim to receive economic interest like dividends and the right to exercise voting power that is not subject to any limit.
  1. The concept of Rights of Ownership does not include bare dominium in the actual shares or other ownership interest, but only the right to the consequences attaching to such ownership. The term “Rights of Ownership” is used almost invariably throughout Statement 100 of the Codes rather than the term “ownership”. Moreover, a claim to receive an economic return of ownership like a dividend is not a vested, absolute right to receive a proportionate share of all the profits and gains made by the entity but one that is contingent on whether, when, if and how much the directors decide to declare such a dividend. Furthermore, the exercisable voting rights of the participants, being the black natural persons that hold rights of ownership, are not akin to exercising management control over the entity. The voting rights of the participants are akin to shareholder voting rights which, in terms of the Companies Act 2008, are limited to very circumscribed circumstances, the most important of which is the ability to vote on the appointment and removal of directors, who actually manage and control the entity.
  2. In particular, when dealing with BBOS, ESOPs, trusts and non-profit entities, the Codes only use the term “Rights of Ownership” and not “ownership”. This accordingly allows for a non-profit entity to confer ownership points on a measured entity despite not having any actual owners itself, provided, among other things, that it is able to produce a Rights of Ownership certificate estimating the extent to which black participants hold Rights of Ownership in it.
  3. But the loose drafting of the Codes leaves many questions about BBOS, ESOPs, trusts and non-profit entities unanswered, such as:
  •  does a BBOS that distributes only 85% of the value of its total benefits to black participants qualify as a 100% black-owned entity or only 85% black-owned?
  •  does a “class of natural persons” contemplate that different participants may qualify and later disqualify as members of the class at different times?
  •  if the fiduciaries of a BBOS have no discretion on the identity of the participants but another entity does, is it disqualified as a BBOS?
  •  what management role do shareholders usually have in a company having shareholding?

I have very clear answers to these questions. If you need more information, please contact me, Erika Holmes, Partner of Shepstone & Wylie Attorneys at holmes@wylie.co.za or 031 575 7410.