The amendments to the of the Codes of Good Practice ("Codes") issued under the Broad-Based Black Economic Empowerment Act ("the Act") in 2015, have caused differences in its interpretation between regulators and major entities, regarding ownership structures in respect of Broad-Based Ownership Schemes ("BBOS"), Employee Share Ownership Programmes ("ESOP"), Trade Unions, Not for Profit Companies, Co-operatives and Trusts (together "Collective Enterprises"). Specifically, where Collective Enterprises provide for some discretion in relation to the distribution of proceeds to beneficiaries, are to be considered in the Ownership Scorecard in terms of the Codes.
In order to provide context, the amendments in 2015 sought to increase the number of B-BBEE ownership points contributed by an ESOP or BBOS from 1 to 3 if the ESOP/BBOS had a 3% shareholding in an entity. On promulgation of the amendments, the Department of Trade and Industry issued a Practice Note stating that an ESOP or BBOS could only contribute a maximum of 3 B-BBEE ownership points (out of the total available 25 points) to an entities ownership score. However, due to the uncertainty around this notice, it was withdrawn and the previous position reinstated to account for B-BBEE ownership contribution of ESOPs and BBOS to an entity's Ownership Scorecard not being restricted.
Further, the amendments stated that a BBOS constitution had to define its participants and their claims in order to receive distributions and that its "fiduciaries" (trustees or directors) could not have any discretion in this regard, which requirements had previously applied to ESOPs but were extended to BBOS.
On 18 May 2021, Minister Patel issued a Practice Note to clarify the varying interpretations of the Codes, the effect of which, clarifies that a defined class of Black beneficiaries satisfies the ownership provisions under the Codes, and that specific beneficiaries need not be individually identified, provided that the Collective Enterprises comply with the provisions of the Code. The eagerly anticipated Practice Note seeks to align with Government's policy to promote broad-based empowerment by facilitating ownership by groupings of designated persons through vehicles such as co-operatives, women's investment vehicles, youth empowerment structures, trade union investment vehicles and community welfare projects, as well as, achieving greater inclusivity of entrepreneurs and investors, SMMEs and suppliers, employees, communities as well as other marginalised groups.
The Practice Note seeks to deal with the application of the rules related to the measurement, evidentiary and reporting treatment of discretionary Collective Enterprises and related matters, in order to clarify and regulate the existing legislation provided in terms of the Codes.
Paragraph 3.1.1 of Statement 100 of the Codes recognises that Black people are entitled to participate in measured entities on an indirect basis. The purport of the Practice Note expressly recognises the validity of Collective Enterprises as valid vehicles for furthering B-BBEE, and the interest of that interposing vehicle in a measured entity must in some lawful manner be capable of being attributed to Black people in accordance with paragraph 3.1.1. Therefore, participants who hold ownership rights through the Collective Enterprises are not required, simultaneously, to hold ownership rights in the underlying measured entity.
Single Purpose Collective Enterprises
Discretionary Collective Enterprises allow so called single purpose Collective Enterprises such as educational, developmental and community upliftment type of BBOS or trusts to be recognised in a chain of ownership and the measured entity receiving the points commensurate to the Black ownership housed in such a single purpose Collective Enterprise.
Typically, in such schemes the 'defined class of natural persons' would have a vested right against the income and capital of the scheme but the individuals that might form part of that 'defined class of natural persons' do not have a similar vested right. The individuals would merely have 'hope' to participate in the income and capital but not a vested right to it. However, schemes would provide a discretion to the fiduciaries of the scheme to select individuals from the defined class of beneficiaries that would benefit out of distributions of the scheme. The Practice Note seeks to clarify that such discretion would not contradict the rule that fiduciaries may have no discretion, it simply recognises that a fiduciary may determine the proportion of entitlement that a particular beneficiary will receive from the 'defined class of natural persons'.
Further, where a scheme provides for a formula to determine the proportion of claim of a 'defined class of natural persons' or the entitlement of individuals selected out of that defined class and the fiduciaries are not awarded a discretion to deviate from the formula, the scheme complies with the rule that the fiduciaries may have no discretion on the terms. As long as the scheme does not provide for a discretion to the fiduciaries to distribute less than the proportionate amount or amount determined in terms of the formula to beneficiaries who are members of the 'defined class of natural persons' the requirement that the fiduciaries may have no discretion in relation to these terms are also met.
The Practice Note further provides that once the fiduciaries exercise 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, it is important to understand that if an individual at one point in time was selected to partake in a distribution of the scheme, it does not necessarily entitle that individual to partake in future distributions. These discretionary powers afforded to fiduciaries are critical to ensure meaningful beneficiation of some members of the class of natural persons.
By way of illustration, the SAB Foundation Trust, being one of the three beneficiary structures under the SAB Zenele Empowerment Scheme, was formed in order to support entrepreneurship projects to benefit low-income communities. As such, the 'defined class of natural persons' rights, are however, vested and the fiduciaries would not be allowed to award funds to any individuals that fall outside of the 'defined class of natural persons'.
Dividends in kind
The Practice Note furthers recognises that similar to dividend distributions out of companies in cash to beneficiaries, they may also be in kind by way of the scheme paying for skills development, education or training on behalf of the beneficiaries or facilitate access to funding or fund social or community interventions or developments for the benefit of the participants who are a 'defined class of natural persons'. Discretionary schemes making distributions in kind to members of a 'defined class of natural persons' does not in any way detract from the Economic Interest points claimable by or through these schemes.
Minors are not restricted from being participants or beneficiaries in any way of discretionary Collective Enterprises whether as part of a defined class of natural persons or individually.
Whether distributions are made or not has no bearing on whether or not Economic Interest may be claimed. In terms of the Codes, Economic Interest is attached to the right to receive dividends or a similar right and not to the distribution itself. Measured entities and discretionary Collective Enterprises may not be penalised for not having made distributions in any particular year.
Evergreen ESOP structures
The Practice Note provides clarity around evergreen ESOP structures, which provide perpetual benefit to workers of a company, which 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. The identification of participants is provided in terms of Annexure 100C of the Codes, which permits a scheme that identifies the participants as employees of the company for so long as they remain in its employ. Paragraph 2.5.5 in Annexure 100C says that all accumulated Economic Interest of the scheme is payable to the participants at the earlier of a specified date or event, or the termination of the scheme. The purpose is to ensure that the accumulated Economic Interest of the scheme ultimately goes to its participants and not to anybody else. 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.
Measuring and Evidentiary requirements
The Practice Note provides that the terms of a constitution, Memorandum of Incorporation ("MOI") or Trust Deed of a discretionary Collective Enterprise need to have a clearly defined objective and may 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 may deem fit from time to time to some members of a 'defined class of natural persons' to the exclusion of others.
Therefore, a discretion to fiduciaries exercised within the confines of the 'defined class of natural persons', in accordance with the terms of the constitution, MOI or Trust Deed, will not disqualify the Collective Enterprise from qualifying for recognition as BBOS, ESOP, Trust or in general from qualifying under the Ownership Scorecard.
Where such a discretion or a partial discretion exists, the race and gender composition of Rights of Ownership that flow through the Collective Enterprise must be determined with reference to the wording of the constitution, MOI or Trust Deed and any applicable law having regard to the race and gender of members of the defined class of natural persons and that classes vested proportion of entitlement to income and or assets.
Participants in Collective Enterprises with these 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. As such, the voting rights of such participants, although exercised by such fiduciaries, will be attributed to the race and gender of the participants and not that of the fiduciaries.
Listed companies which are required to report on their B-BBEE compliance to the B-BBEE Commission in terms of section 13(G) of the Act that have one or more discretionary Collective Enterprises or other juristic entities in its chain of ownership that are not capable of reporting on 'the Black people' in terms of racial classification, their number, their province or age will be required to report only on the participation of 'Black people' but not the other categories, and must do so in line with the information that the discretionary Collective Enterprises are able to produce. A measured Entity which is unable to produce verified information requested cannot, however, be compelled to do so, and therefore cannot be considered as non-compliant with the requirements of Annexure 100 B-D of the Codes, unverified information cannot be included in the Ownership Scorecard.
Given the great importance of B-BBEE and its impact on the lives of those historically disadvantaged. The release of the Practice Note and clarity provided seeks to further strengthen broad-based empowerment vehicles, as well as incentivise employee participation and ensures that the regulatory environment promotes the participation of individual entrepreneurs from designated groups and maintains policy momentum to improve the level and quality of representation of Black South Africans in the economy.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.