By Deon Oberholzer – The market finally has clarity on the use of broad-based ownership and development schemes in Broad-Based Black Economic Empowerment (B-BBEE) ownership structures.
It is almost two years since the office of the B-BBEE Commissioner took a position that that many transactions involving broad-based or development trusts do not constitute genuine black ownership and subsequently forced several companies to change their shareholding structures or risk losing their BEE credentials.
In May of this year our Trade, Industry and Competition Minister Ebrahim Patel has confirmed that such structures can after all, be B-BBEE compliant. In the gazetted Practice Note, Minister Patel sought to clarify a number of issues on what would satisfy the ownership requirements under the B-BBEE Codes.
One of the clarifications was that that Employment Ownership Schemes (ESOPs) or worker ownership schemes which provide a benefit for a defined proportion or all of the current and future black workers of the company as well as broad-based schemes which provide a benefit for certain, specified designated groups, such as black students as recipients of bursaries, can meet the ownership provisions under the B-BBEE. Codes.
The Practice Note also highlights that it is government policy to promote broad-based empowerment through the facilitation of ownership by groups of designated persons through the likes of women’s investment vehicles, youth empowerment structures, cooperatives and community welfare projects.
While the practice note provides clarity on the treatment of broad-based ownership schemes, the B-BBEE Commissioner’s statements in 2019 that broad-based trusts are not compliant with the law may have poisoned the well. The Commissioner is not a fan of trusts, broad-based ownership schemes and employee share ownership programmes because they are often geared towards passive shareholding rather than towards specific individuals who would drive transformation in companies.
However, aligned with the goals and the spirit of B-BBEE, broad-based structures have the potential to benefit a broader base of deserving black beneficiaries than transactions geared to benefit only a few, specified individuals.
Back in 2019, the Commissioner contentiously stated that for a broad-based trust to contribute B-BBEE ownership points, the beneficiaries must exercise voting rights, receive the same economic benefits as other shareholders and ultimately become unencumbered owners of the shares in which they are invested. She drew a distinction between ownership and socio-economic development, saying that ownership should come with vested rights.
Understandably, the Commissioner’s statements resulted in much uncertainty and debate. And, what followed was the subsequent disallowing of some several broad-based shareholding structures.
Amongst the casualties of the fall-out were students, unable to access bursary funding provided by broad-based entities and ESOPs which did not meet the Commissioner’s then stated requirements. In the provision of bursaries, broad-based entities have made a significant contribution to B-BBEE and are an important vehicle for promoting truly broad-based BEE through the development of the country’s future leaders.
In the past two years, how much funding has been diverted from the much-needed development of skills amongst the country’s disadvantaged youth? How many smart and willing youths have lost access to funding for tertiary studies that was made possible by broad-based entities that were disallowed?
Access to tertiary education and skills development opportunities amongst South Africa’s disadvantaged youths is a national crisis as was starkly evident during the 2015 and 2016 #FeesMustFall movement. What began as protest to stop increases in university tuition quickly gained momentum, turning into a national uprising with students demanding free access to higher education.
While the protests lead to the creation in 2018 of a national bursary scheme for poor and working class students totalling R12.4-billion, it is evident that government alone cannot address the problem. Innovative broad-based empowerment solutions have an important role to play in providing disadvantaged youths with opportunities to study. Amongst the rewards of enabling young people who would otherwise not have had a chance to pursue tertiary studies, is earning B-BBEE ownership points.
Structured properly, such development ownership schemes and similar entities are viable black empowerment vehicles that are used by about a third of all major B-BBEE transactions. The Codes even incentivises the use of broad-based entities and companies may score an additional 3 B-BBEE ownership points if a broad-based entities or ESOP has at least 3%.
If companies follow the rules and create the appropriate structures for the meaningful development of the designated group of people they commit to developing, broad-based entities are a useful and viable way to get to a B-BBEE Scorecard Level 1.
Companies may consider the option of setting-up a development scheme exclusively for their own use based on the assumption that it would give them more control over the management of the investment entity. However the downsides are significantly high set-up costs, the complexity of managing the scheme and the responsibility to fund the costs and the accounts of the scheme. There are also various requirements in the Codes for broad-based ownership schemes and trusts which must be adhered to, especially if the shareholding held by such entity is above 10%. These additional criteria are tough to comply with if a trust is set-up specifically to hold shares in one measured entity only.
There may still be a risk of fronting, in that many of the schemes on offer at the moment, for example, present themselves with a fees based “rent-a-shareholder” model. Schemes that do not result in unencumbered actual ownership of the shares by the scheme may still blur the lines on compliance. Therefore, partnering with an already established and compliant entity, such as The Intombazane Development Trust, takes the pressure off and is a good option for companies requiring legitimate, compliant B-BBEE ownership without the risk of fronting.
The Trust’s beneficiaries are young black woman under the age of 29. This allows the Trust to be recognised as a 100% Black Women Owned entity, and helps ensure that new recruits for investing businesses can be targeted from the right demographic groups.
Its share purchase model is structured to provide an optimum balance for the companies in which it owns shares. For example, a transaction with the Trust for a sale of just over 10% of equity will meet the minimum requirements of the Ownership Priority Element in the B-BBEE Codes to gain between 14 and 16 points on the scorecard. A sale of the full 25% + 1 share of equity will secure the full 25 ownership points for a company. A sale of more than 30% of equity will secure the full points and qualify to be recognised as a Black Woman Owned company. The Trust also emphasises a low entry and exit valuations because it is focused on retaining the dividend stream for development purposes.
The Trust can also assist companies with compliance to the Socio Economic Development (SED) element of the Codes as the target beneficiary groups of the Trust qualify for SED. This offers two benefits, namely that the SED contributions would operationalise the Trust while income to the Trust from dividends during the initial years may be low, and at the same time, the management of the SED contributions can be taken care of by the Trust.
Using a vehicle such as this not only removes the complexity of management and compliance, but it also alleviates the concerns that businesses have about selling ownership to a B-BBEE partner such as being trapped into ownership structures from which they can’t easily exit or risk losing control over how the company is managed.
Importantly, partnering with a development scheme like the Intombazane Development Trust means that even small, owner-managed businesses have the opportunity to invest in the development of South Africa’s next generation of leaders.
Though the Commissioner may have tainted their use, it is pleasing to know that the ownership status of correctly structured broad-based schemes is no longer in question. They can and must continue to make a contribution to B-BBEE.
Deon Oberholzer is the CEO of Gestalt Growth Strategies