In February, Department of Trade, Industry and Competition (dtic) Minister Ebrahim Patel commented that broad-based ownership schemes are seen as genuine broad-based black economic empowerment (B-BBEE) – a position at odds with the B-BBEE Commission’s stance at the time.
Black ownership schemes reacted to the commission’s statement by calling on Patel to provide urgent written clarity on the matter. On May 18, Patel provided that clarity by way of a gazetted practice note.
This practice note finally provides broad-based empowerment schemes with a clear way forward.
Ownership schemes or trusts are a highly popular type of black empowerment vehicle, utilised by a third of all major B-BBEE transactions. However, B-BBEE Commissioner Zodwa Ntuli has remained sceptical of the model.
Passive shareholding concerns
Her concern with trusts, broad-based ownership schemes and employee share ownership programmes has been that they lean towards ‘passive’ shareholding, meaning that there are no specific black individuals able to drive transformation in the company.
She also stated that there is little certainty around whether broad-based ownership really benefits the intended recipients.
The gazetted practice note issued by Patel now provides both guidance to regulators and clarity in the market in terms of the treatment of broad-based empowerment vehicles.
It highlights the fact that government policy has always been to promote broad-based empowerment, including the facilitation of ownership by groupings of designated persons through vehicles such as cooperatives, women’s investment vehicles, youth empowerment structures, trade union investment vehicles and community welfare projects.
No individual participant naming required in broad-based ownership schemes
The practice note seeks to clarify the point that a defined class of black beneficiaries satisfies the ownership provisions under the B-BBEE codes. This means that Employment Ownership Schemes (ESOPs) or worker ownership schemes which provide a benefit for a large proportion or all of the current and future black workers of the firm, or broad-based schemes which provide a benefit for certain designated groups like black students as recipients of bursaries, can satisfy the ownership provisions under the B-BBEE codes.
The rules for broad-based ownership schemes, employee share ownership programmes and for trusts contained in the BEE codes determine that the constitution of these schemes must define the participants and the proportion of their claim to receive distributions. However, in terms of the codes the use of a ‘defined class of natural person’ satisfies the requirement for identification.
This option to use a ‘defined class of natural person’ as participants when structuring a broad-based ownership scheme, ESOP or trust, as opposed to a written record of names of participants, was expressly provided for in the codes in furtherance of the objectives of the act.
Broad-based and meaningful ownership in the economy by black people, communities and workers, is often best served through this mechanism of identifying a natural class of persons to benefit from the scheme as opposed to a list of individuals with vested rights against the income and capital of the scheme.
Other juristic persons such as non-profit companies also utilise this mechanism from time to time.
Recognising ownership of evergreen structures
Evergreen ESOP structures, which provide a perpetual benefit to workers of the company, may also satisfy the ownership provisions of the codes.
The defined class of beneficiaries in such cases may be ‘workers of the firm’ in question, and the employees of the company for as long as they remain in its employ are defined as the participants in the scheme.
The scheme’s constitution may accordingly say no more than that its accumulated economic interest must be distributed to its participants on termination or winding-up of the scheme.
Challenges still to be addressed
In the course of the discussion, broader policy questions have arisen on ways to further strengthen broad-based empowerment vehicles like ESOPs, including through measures to encourage participation of worker nominees on company board.
Challenges with existing schemes (covering their funding mechanisms, fronting practices, inadequate information to intended beneficiaries and governance challenges) will also need to be addressed.
Patel writes that these issues are beyond the scope and intention of the practice note, and a panel will be appointed to provide a report on ways to address these areas.
The main goal, for South Africa’s future, is to ensure that broad-based ownership provides significant opportunities to strengthen the transformation of the economy.
* Evon Jeewan is a corporate finance principal at investment bank Bravura.