A lighthouse over rocky shores – B-BBEE

18 Aug 2021

In recent years in the B-BBEE sector, there has been a groundswell of uncertainty and difference of opinion between legal practitioners, verification agents and the B-BBEE Commission on how certain structures provide for Black people to be recognised as holding rights of ownership for measurement purposes. Government policy has been to promote meaningful broad-based empowerment (it is in the name after all), which includes facilitating ownership by groupings of designated persons through appropriate vehicles such as cooperatives, investment vehicles, youth empowerment structures, trade union investment vehicles and community welfare projects. This, in an effort to reach and benefit as many previously disadvantaged persons and groups as possible.

In May 2021, the Minister of Trade, Industry and Competition (“Minister”) published a welcomed explanatory memorandum (“Practice Note”) providing direction and certainty on the rules for discretionary collective enterprises (Broad-Based Ownership Schemes (“BBOS”), Employee Share Ownership Programmes (“ESOPs”), Trade Unions, Not for Profit Companies, Co-operatives and Trusts) (“Discretionary Collective Enterprises”) under the Codes of Good Practice (“Codes”) in terms of the Broad-Based Black Economic Empowerment Act.

A couple of important clarifications in the Practice Note include:

1. The rules of BBOS, ESOPs and trusts state that the constitution of the scheme must define the participants and the proportion of their claim to receive distributions. In terms of the Codes the use of a ‘defined class of natural person’ satisfies the requirement for identification. The Codes recognise that black people are entitled to participate in measured entities on an indirect basis. Accordingly, the Practice Note expressly recognises the validity of Discretionary Collective Enterprises as legitimate vehicles to further B-BBEE;
2. The rule is that fiduciaries to a scheme do not have a discretion in relation to defining participants and the proportion of their claim to receive distributions. However, fiduciary discretions allow fiduciaries to select individuals from a defined class of beneficiaries that would benefit out of distributions of the scheme or determine the proportion of entitlement a particular beneficiary will receive once he/she is selected out of the ‘defined class of natural person’. As long as the scheme does not provide for a discretion to the fiduciaries to distribute less than that fixed percentage to beneficiaries who are members of the ‘defined class of natural person’ – the requirement that the fiduciaries may have ‘no’ discretion in relation to these terms are met. It is clear that these discretionary powers afforded to fiduciaries are critical to ensure meaningful beneficiation of some members of the class of natural persons;
3. Only Black People participants attract recognition on the ownership scorecard, the Codes place no restrictions on the nature of participants. Accordingly, minors are not restricted from being participants or beneficiaries in any way whether as part of a defined class of natural persons or individually. This is something the B-BBEE Commission has previously and strongly tried to disagreed with;
4. Distributions out of Discretionary Collective Enterprises may be in either cash or kind. Schemes paying for skills development, training, education or facilitating access to funding are examples of the latter. Discretionary Collective Enterprises 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;
5. 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 attaches to the right to receive dividends and not the distribution itself. Measured entities and Discretionary Collective Enterprises may not be penalised for not having made distributions in any particular year;
6. Discretionary Collective Enterprises allow the 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 the single purpose Discretionary Collective Enterprise; and
7. A participant’s rights in a Discretionary Collective Enterprise are typically represented by the fiduciaries who make decisions on their behalf. Therefore, the voting rights of participants, although exercised by the fiduciaries, will be attributed to the race and gender of the participants and not that of the fiduciaries. The B-BBEE Commission has similarly been critical of this and tried to insist that individual participants must have the same rights as shareholders including the right to vote.

The intention behind B-BBEE is to empower black people, black women, black designated groups and other black participants like employees and communities inclusive of entrepreneurs, investors and SMMEs. Discretionary Collective Schemes are a valid mechanism in which to achieve this. Although we have been navigating the proverbial choppy waters, the Practice Note which seeks to clarify and regulate these issues is a welcome lighthouse over rocky shores.

See also:

• Court overturns BBBEE pre-qualification
• Affirmative Action: Ten lessons learnt from recent case law
• The Property Sector Transformation Code: Estate agent’s take note
• Fronting under the BBBEE Act

(This article is provided for informational purposes only and not for the purpose of providing legal advice. For more information on the topic, please contact the author/s or the relevant provider.)