Minister Patel has issued a Practice Note in terms of the Broad-Based Black Economic Empowerment Act Rules for Discretionary Collective Enterprises to provide much needed clarity on how ownership schemes and structures should be interpreted under the B-BBEE Codes. There has been much uncertainty regarding what constitutes black ownership when it comes to broad-based ownership schemes (BBOS) and employee share ownership schemes (ESOP) in recent years. This uncertainty has been cleared up by a Practice Note that the Minister of Trade, Industry and Competition, the Honourable Minister Ebrahim Patel, published in the Government Gazette on 18 May 2021.
An explanatory memorandum in terms of section 14(2) of the B-BBEE Act has been issued in order to guide the Department of Trade, Industry and Competition, the B-BBEE Commission as regulator and the market on the approach to be followed in giving effect to the policy and legislation currently in force.
The Practice Note provides clarity on how ownership by entities such as BBOSs, ESOPs, and Trade Unions, Not for Profit Companies, Co-operatives and Trusts (Collective Enterprises) should be interpreted under the B-BBEE Codes of Good Practice (Codes).
At the outset, Minister Patel notes that in the recent years there have been significant differences of opinion and interpretative misalignment in the B-BBEE space on how ownership structures, such as discretionary Collective Enterprises, should be considered and treated for ownership purposes under the Codes.
The Minister states in broad terms that government advocates and promotes that the implementation of B-BBEE legislation should ensure broad participation as well as meaningful participation of black people in the mainstream economy. He notes that discretionary structures have benefited many black beneficiaries in regard to accessing the economy and/or economic empowerment.
The highlights from the Practice Note regarding the rules for discretionary Collective Enterprises are:
- A defined class of black beneficiaries satisfies ownership for purposes of the Codes and beneficiaries need not be individually identified. Discretion that fiduciaries may have to vest entitlements in beneficiaries from time to time, and even discretion in relation to the portion of their entitlement, is acceptable.
- Broad-based and meaningful ownership in the economy by black people, communities and workers are often best served through the mechanism of identifying a natural class of persons to benefit from the scheme, rather than a list of individuals with vested rights. Non-profit companies are also entitled to use a defined class of natural person beneficiaries.
- Following the fiduciaries‘ exercise of their discretion, each beneficiary selected to partake in a particular distribution acquires a vested right to such portion of the particular distribution allocated to them at that point in time. Subject to the provisions of the scheme, this type of mechanism means that if an individual at one point in time was selected to partake in a distribution of the scheme, that it does not necessarily entitle that individual to partake in future distributions.
- The discretionary powers afforded to fiduciaries are necessary to ensure meaningful benefits flow to a class of natural persons. The defined class of natural persons’ rights are still vested and the fiduciaries are not allowed to award a benefit to any individual that falls outside of the defined class of natural persons. Recipients of student bursaries will satisfy black ownership under the Codes and entitlements of beneficiaries may vary from year to year. The fact that fiduciaries can decide from year to year who the recipients of the bursaries will be within the prescribed description does not detract from the black ownership and is acceptable.
- While only black people attract recognition on the ownership scorecard, the Codes place no restrictions on the nature of participants and minors (i.e. black persons under the age of 18) are not prohibited from being participants or beneficiaries in any way. BBOS‘ with minors as beneficiaries qualify for recognition as black ownership, as their ownership rights are exercised by the fiduciaries of the scheme, such as the trustees, despite the minors’ lack of legal capacity. This is evidenced by these fiduciaries having the discretion to distribute the economic interest of the vehicle in question to its beneficiaries (as provided for in the constitution of the vehicle) and voting shares held on behalf of beneficiaries.
- As with dividend distributions out of companies which may be in cash or kind, distributions out of different types of Collective Enterprises may also be in kind. Instead of making cash distributions to beneficiaries, the scheme may pay for skills development, education, or training on behalf of the beneficiaries or facilitate access to funding.
- Discretionary schemes which make distributions in kind to members of a defined class of natural persons in no way detracts from the economic interest points claimable by or through these schemes.
- Whether distributions are made or not has no bearing on whether Economic Interest may be claimed in terms of the Codes. Economic interest attaches to the right to receive dividends or a similar right and not to the distribution itself, with the primary factor in determining whether a dividend can be declared, or distribution made, being solvency and liquidity considerations of the business or Collective Enterprises. Measured entities and discretionary Collective Enterprises may not be penalised for not having made distributions in a particular year. Such earnings retained and not distributed ultimately vest in the individual or defined class of natural persons.
- The rules in the Codes that require the financial reports of Collective Enterprises to be presented to participants at an annual general meeting means that participants must be invited to the annual general meeting of a Collective Enterprise but this does not mean that all will attend or that attendance of all participants is required for compliance.
- Discretionary Collective Enterprises allow ‘single purpose Collective Enterprises’ such as educational, developmental and community upliftment type of BBOSs or trusts to be recognised in a chain of ownership and for the measured entity to receive the points proportionate to the black ownership housed in a single purpose Collective Enterprise.
- Evergreen ESOP structures, which provides perpetual benefits to workers of the company, may also satisfy the ownership provisions of the Codes. In such case, the defined class of beneficiaries in such cases may be ‘workers of the firm’. Annexure 100(C) of the Codes permit a scheme which identifies the participants as employees of the company for as long as they remain in its employ. So-called ‘good and bad leaver’ principles are therefore acceptable. While Annexure 100(C) requires that all accumulated economic interest of the scheme be payable to the participants at the earlier of a specified date or event, or the termination of the scheme, it does not require such an earlier date or event to be specified at all. Its only purpose is to ensure that the accumulated economic interest of the scheme ultimately goes to its participants and not to anybody else. It is enough for the scheme’s constitution to say no more than that its accumulated economic interest must be distributed to its participants on termination or winding-up of the scheme.
- The terms of a discretionary Collective Enterprise’s founding documents need to have a clearly defined objective and may, notwithstanding the rules for ESOPs, trusts and BBOSs (e.g. that at least 85% of the value of benefits allocated must accrue to black people, 50% of the fiduciaries must be independent, 50% of the fiduciaries must be black people and 25% must be black women), provide for a discretion to the fiduciaries to distribute, in their sole and unfettered discretion, such portions of the scheme’s income and capital as they deem fit from time to time to some members of a defined class of natural persons to the exclusion of others.
- This discretion, exercised within the parameters of the defined class of natural persons, in accordance with the constitutional documents of the entity, will not disqualify the Collective Enterprise from qualifying for recognition as a BBOS, ESOP, trust or in general from qualifying under the ownership scorecard.
- Where the wording of the founding documents is clear as to the racial or gender composition, the constitutional document will serve as the written record to these facts. Where this is not the case, reliance may be placed on an independent competent person’s report estimating the rights of ownership that flows through the scheme. Where determination of race and gender of participants are indeterminable despite such mechanisms provided for, the participants must be regarded as non-black.
- Participants in Collective Enterprises with discretionary terms seldom have the right to vote at general meetings of the scheme. Their rights are represented by the fiduciaries who make decisions for and on their behalf. The voting rights of such participants, while exercised by such fiduciaries, will be attributed to the race and gender of the participants and not that of the fiduciaries.
The Minister notes that these challenges still need to be addressed: ways to strengthen broad-based empowerment vehicles like ESOPs; how to address the challenges with existing schemes; and how to promote participation of individual entrepreneurs to improve the level and quality of black representation of black South Africans in the economy.
Minister Patel has announced that he will appoint a panel to provide a report on ways to address these issues so that a process can be followed to ensure the appropriate changes are affected to minimise exploitation of the B-BBEE provisions and to ensure that broad-black ownership strengthens transformation of the economy.