Ownership status of broad-based BEE trusts no longer hanging in the balance

Newly gazetted practice note provides clarity.
Minister of Trade, Industry and Competition Ebrahim Patel. Image: Moneyweb

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.

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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.

COMMENTS   18

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Take your BEE and shove it where the sun doesnt shine!

Hey!!! Patel!!

Go and find a real job man!!

TSK!!

If BEE is such a wonderful idea, why do they need a law to force it upon people? If BEE was a mutually beneficial transaction, then everyone and his dog would have “transformed” willingly, long ago already. Truth be told, BEE is tantamount to the expropriation of 30% of assets and future dividends. That is why they need “BEE codes” to coerce entrepreneurs into a value-destroying transaction.

BEE beneficiaries are consumers, not savers or entrepreneurs. They do not add value to the capital structure and they do not take any risks. Workers still receive their same inflated monthly salaries. The BEE scheme is an additional benefit, stolen legally from the rest of the shareholders. They want a job, but that is not all they want. They also want the business, the capital structure, and the cash flow. It is simple logic that this parasitic endeavour will destroy job opportunities and create increasing inequality between the unemployed and the politically connected BEE beneficiaries.

Consider the runaway unemployment figure and the catastrophic Debt/GDP ratio when you talk about the successes of BEE. Our economy, jobs market, and tax base are consumed by BEE structures and value-destroying inflated BEE contracts. The shebeen owner is the ultimate beneficiary of all BEE schemes because that is where the capital structure of the economy ends up.

You doing what every conservative moron does.. present argument, present “facts”, set stage/scenario that has no proven link yet may have other issues, then conflate it demanding the argument is implemented albeit there is zero discussion on what issue is trying to be resolved and why such a scenario was embarked on to begin with.

Ie in the end, SA is going nowhere because 27+ yrs later people on both sides of the fence refuse to change.

See my next post for some international perspective on your myopic self-interested rant.

Sorry, I don’t understand the logic or reasoning of your argument in the first paragraph of your post or how it relates to the second paragraph. Taken in isolation, the second paragraph does make some sense.

And, by the way, you don’t have to insult people to make your point, whatever that might be.

“Either fraternity is spontaneous, or it does not exist. To decree it is to annihilate it. The law can indeed force men to remain just; in vain would it would try to force them to be self-sacrificing.” – Bastiat “The Law” 1880

One of the founding principles of democracy is freedom of association. This is what the anti-apartheid campaigners fought for. Look what they got instead.

I’m sure many many businesses can benefit from including black stakeholders. It is probably an economic imperative for South Africa if we wish to grow.

These business owners naturally resent the fact that it is pushed down their throats by socialist planners.

Transformation is a funny thing and can be “the road to hell that is built on good intentions”, thanks to corruption and universal law of unintended consequences.

Therefore, while it may have looked good on paper, in reality it has entrenched both racism and inequality.

The forces at play would have been better off looking at Broad Based Economic Efforts that work to spread wealth and skill.

That could still be done, its not too late, but it means that B-BBEE in its current form needs to be sunset.

BEE is fundamentally racist and is having the opposite effect of what it is supposed to achieve.

End it now and there will be more transformation.

I’m a consultant into the corporate space. Neither here nor there. No big deal. I have one single piece of advice for all my clients – exit now & exit fast. Cash first, yourselves later. This is now a free-fall situation. I give you Patel – a full blown communist as one of a 1000 reasons

B-BBEE is only ok if the participants are not any of the current “blessees” who have already made fortunes from connections and other nefarious activities. Those participating in new offerings must be new entrants and must be offered loan capital by finance houses and repayable like any others!! Enough with the crooked dealing! They too must present competence and hard work to grow!! No more jobs for pals.

Met with the commission on this exact issue not long ago. Had an educational trust giving millions every year to young black kids for university bursaries that they would not recognise on an audit.
Met with a complete bunch of fools (5 lined up in a super fancy boardroom) who told me I should just add those people to our existing training spend (already worth millions to other black people) and if I did not it was “not our fault these people will lose their bursaries”.
It was like talking to a wall.
So just add ANOTHER R5m to your expenses……and remain globally competitive???!! Unbelievable….value destruction on an epic scale.

Pity – it is just so much easier to start a company and/or invest elsewhere. This is just too complicated. Just grow the economy without all the bureaucratic social engineering – I am sure the economy would have grown more and there would have been many more jobs for all without all this. Our best human capital (all colours) is also looking at prospects outside of SA. Just do the right things and stop the corruption and incompetence.

Winston Churchill…..”Socialism is inseparably interwoven with totalitarianism and the abject worship of state….this state is to be the arch-employer, the arch-planner the arch-administrator and ruler, and the arch-caucus-boss”

Beware of this very dangerous man, his anc and his fascist ideology!

This is why, when you have an online share-trading platform that allows you to acquire stocks in other markets (like EE, IBKR, etc etc), it becomes a no brainer. Invest in the USA, China, Asia, Europe, etc.

SA shares has the drag (cost) of B-BBEE with it. And SA is a declining colonial power.

If you must have Africa, rather invest in Kenya, Ethiopia, Egypt or Morocco.

BEE is like the quota system in sport .Raises no interest or financial commitment .People just avoid it and spend their energy elsewhere

End of comments.

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