Member Article

After years of uncertainty, Minister Patel has issued a long-awaited Practice Note on 18 May 2021, clarifying the treatment of discretionary collective enterprises for ownership purposes under the Broad-Based Black Economic Employment (“B-BBEE”) Codes. These collective enterprises include:

Broad-Based Ownership Schemes (“BBOS”);

• Employee Share Ownership Programmes (“ESOPs”);
• Trade union investment holding companies;
• Not for Profit Companies (“NPCs”);
• Co-operatives; and
• Trusts
  
  

The minister states that government policy has always been to promote broad-based empowerment, which embraces facilitating ownership by groupings of designated persons through vehicles such as cooperatives, women’s investment vehicles, youth empowerment structures and community welfare projects. However, these arrangements differ from the traditional model of share ownership being held directly or indirectly in the name and for the account of individuals from the designated groups. It was acknowledged that such structures have benefited many Black beneficiaries in terms of economic empowerment and/or access to the economy.

It was further stated that the B-BBEE legislation should ensure broad participation as well as meaningful participation by Black people in the economy and, in doing so, will lead to B-BBEE addressing the triple challenges of poverty, inequality and unemployment in the country. The minister states that B-BBEE should empower and be inclusive of entrepreneurs and investors, SMMEs and suppliers, employees, communities as well as other marginalised groups.

The Practice Note clarifies that broad-based empowerment through collective enterprises was always, and remains, part of the transformation agenda of the government and, as such, should be recognised. However, significant differences in interpretation of the B-BBEE legislation by the B-BBEE Commission, the DTIC and the private sector have resulted in the B-BBEE Commission finding that the vast majority of broad-based schemes such as trusts and not for profit companies are not compliant with the B-BBEE legislation and do not result in genuine and effective ownership for, and participation by, Black people in the economy (and are as such not recognised for purposes of the B-BBEE Codes). This has had a severe impact on business, the economy and the Black beneficiaries of collective enterprises and led to desperate pleas to the government for policy and regulatory certainty on the issue of broad-based ownership.

The Practice Note seeks to clarify the interpretation and application of the B-BBEE legislation in respect of the measurement, evidentiary and reporting treatment of collective enterprises and related matters.

Rights of ownership of beneficiaries of collective enterprises

One of the major concerns about collective enterprises is that the beneficiaries who hold their ownership rights through these enterprises must nonetheless hold ownership rights in the underlying measured entities themselves.

The Practice Note clarifies that this is not required as the B-BBEE Codes expressly recognise that Black people are entitled to participate in measured entities on an indirect basis.

The beneficiaries of a trust, for example, do not acquire any rights of ownership directly in the measured entity. They may acquire rights against the trust to participate in the distribution of benefits but they do not acquire any rights directly in the underlying entity. It is the essence of a trust that the beneficiaries of the trust may acquire personal rights against the trust but do not hold real rights in its underlying assets held by the trust.

Discretion to identify beneficiaries and their benefits

The Practice Note clarifies that the beneficiaries of collective enterprises need not be identified at the commencement of the scheme, nor is a written record of names required in the constitution of the scheme. The B-BBEE Codes expressly permit the beneficiaries to be defined by a class of natural persons, creating broad-based and meaningful ownership by Black people, communities and workers.

The minister states that this is best served through the 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. The use of a defined class of natural persons is also not necessarily limited to BBOS, ESOPs and trusts as other juristic persons, as NPCs also utilise it from time to time.

In this regard, 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. These individuals would have a “spes” or hope to participate in income and capital but not a vested right to it.  

Furthermore, such schemes would provide for discretion to the fiduciaries of the scheme to, from time to time, select individuals from the defined class of beneficiaries that would benefit from distributions of the scheme. Such discretion also extends to the determination of portions of the scheme’s income and capital as to be distributed to a defined class of natural persons (to the exclusion of others) once he/she is selected out of such defined class.

The minister states that discretions like these do not contradict the B-BBEE Codes which provide that fiduciaries may have no discretion in relation to defining beneficiaries and their proportion of their claim to receive distributions. The minister goes on to say that it logically follows that if the constitution of a scheme expressly provides for a fixed percentage of distributions to vest in the defined class of natural persons, that would satisfy the rule of identifying the proportion of entitlement of beneficiaries by means of a written record of fixed percentages of benefits.

Provided that the scheme does not provide for a discretion to the fiduciaries to distribute less than that fixed percentage to beneficiaries to, or deviate from the prescribed formula to determine the claims of, persons selected from members of the defined class of natural persons, the requirement that the fiduciaries may have no discretion in relation to these terms is also met. Once this discretion is exercised, each beneficiary selected to partake in a particular distribution acquires a vested right to the portion of the particular distribution allocated to them at that point in time. Importantly, if a beneficiary was selected to receive one particular distribution of the scheme, it does necessarily entitle that individual to partake in future distributions (that is, beneficiaries could be recycled on an ongoing basis).

The Practice Note provides a useful example of how collective enterprises can operate:

“As an example, a bursary scheme that is 100% for ‘Black Female Students that Matriculate in Gauteng Province’ would be such a Collective Enterprise. In this example the defined class of natural person would be ‘Black Female Students that Matriculate in Gauteng Province’ and the fixed percentage of proportion of claim of this defined class would be ‘100%’. Typically, not all black female students that matriculate in Gauteng have a vested right to receive bursaries out of the scheme’s limited funds, but only those that are selected by the fiduciaries from year to year. The defined class of natural persons’ rights, are however, vested and the fiduciaries are not allowed to award a bursary to any individual that fall outside of the defined class of natural persons by for example awarding a bursary to a black male or white female or black female matriculating outside of Gauteng province. Also, the value of a distribution to a black female student selected may, if such discretion is provided to the fiduciaries, differ from the value of distributions to other black female students that were selected as long as the ‘defined class of natural person’ do not receive anything less than provided for by means of the fixed percentage (100% in this example).”

These discretions, the minister states, are critical to ensure meaningful beneficiation of some members of the class of natural persons and will not disqualify collective enterprises from qualifying for recognition under the ownership scorecard.

Black minors are recognised

The Practice Note states the B-BBEE Codes place no restrictions on the nature of Black people who may be beneficiaries of collective enterprises. In particular, minors are not restricted from being beneficiaries in any way whether as part of a defined class of natural persons or individually.

Nature of benefits and “single purpose” schemes

It has also been clarified that economic interest in the B-BBEE Codes attach to the “right” to receive dividends and not the dividend itself. Measured entities and collective enterprises cannot be penalised for not having made distributions in any particular year as any retained earnings would in any event vest in the individual or defined class of natural persons who had vested rights in such earnings.

In addition, the Practice Note clarifies that benefits could be in cash or in kind as, in most instances, collective enterprises provide benefits in the form of skills development, education or training on behalf of beneficiaries, or provide access to funding or fund social or community interventions or developments. These benefits in kind do not, according to the minister, in any way detract from the economic interest recognition through these schemes.

Importantly, this clarification clearly recognises collective enterprises which serve a “single purpose” such as educational, developmental and community upliftment types of BBOS or trusts and, as such, are to be recognised.

ESOPs

It is further clarified that evergreen ESOP structures that provide perpetual benefit to employees would also meet the requirements of ownership under the B-BBEE Codes, which specifically permit an ESOP to identify the participants as employees of the measured entity for as long as they remain in its employ.  Further, the B-BBEE Codes state that all accumulated economic interest in such a scheme is payable to the participants at the earlier of a specified date or event, or the termination of the scheme, but there is no requirement to have an earlier date or event to be specified at all. The purpose is to ensure that the accumulated economic interest of the scheme ultimately goes to its participants only. Thus, an ESOP is permitted to simply provide that all accumulated economic interest must be distributed to its participants on termination or winding-up of the scheme.

Voting by collective enterprises

The Practice Note states that beneficiaries of discretionary collective enterprises seldom have the right to vote at general meetings of underlying entities. Their rights are represented by the fiduciaries of the schemes who make decisions for and on behalf of the beneficiaries. Thus, voting rights, although exercised by such fiduciaries, will be attributed to the race and gender of the beneficiaries for measurement purposes in terms of the measurement principles discussed below.

B-BBEE measurement of collective enterprises

In respect of the B-BBEE measurement of discretionary collective enterprises, the race and gender composition of the rights of ownership that will flow through to measured entities must be determined with reference to the constitution of the enterprise. In this regard:

• where the constitution is clear on the racial or gender composition of beneficiaries, that will serve as a written record of those facts, thereby satisfying the requirement for identification;
• where the determination of race and gender of beneficiaries are not practically determinable from the constitution, reliance may be placed on an independent competent person’s report estimating the rights of ownership that flows through the enterprise. Such report may have regard to various factors which could include ad hoc distributions to beneficiaries of income and capital; official estimating records such as publicly available municipal records, university or school enrolment records and the South African census reports;
• where the determination of race and gender of beneficiaries is indeterminable, the beneficiaries must be regarded as non-Black.
  
  

Reporting requirements by JSE-listed companies

JSE listed companies are required to annually report on their B-BBEE compliance to the B-BBEE Commission in terms of section 13(G) of the B-BBEE Act, as read the B-BBEE Regulations. If such entities recognise any Black ownership from discretionary collective enterprises with a class of beneficiaries, it may not be possible to report on all the information required by the B-BBEE Commission, such as the number of beneficiaries, their provincial location, age, racial classification etc. This may be the case as the defined class of natural persons may not make this distinction or the competent person may be unable to do so. In any event, the minister acknowledged that the B-BBEE Codes do not require this level of information for a B-BBEE verification.

The Practice Note provides that a measured entity in these circumstances 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 collective enterprises are able to produce. Measured entities, however, cannot be compelled to provide such information if it is not available.

This long-awaited clarity from the minister will finally put to rest the uncertainty over the legitimacy of broad-based empowerment schemes such as the collective enterprises and the future of many legitimate and collective enterprises in the market. It is expected that all adverse assessments and investigations by the B-BBEE Commission on those schemes that are compliant with the applicable rules set out in the B-BBEE Codes as clarified in the Practice Note will need to be withdrawn and assessed differently going forward.

We recommend that all existing collective enterprises assess the terms of their constitutional documents and align them with the principles contained in the Practice Note.

Please contact ENSafrica’s B-BBEE Practice Group if you require any assistance with your collective enterprises.

Sanjay Kassen
Corporate Commercial Executive 
[email protected]
+27 82 561 1509

Witness Makhubele
Corporate Commercial Executive
[email protected]
+27 82 708 0382