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GUIDE – BROAD-BASED BLACK ECONOMIC EMPOWERMENT
2
BOWMANS
Contents
04 Introduction
06 OurFirm
07 OurFootprintInAfrica
08 RecentB-BBEEDeals
09 AnOverviewOfB-BBEEInSouthAfrica
12 TheMeasurementOfB-BBEE(AndanOverviewoftheElementsOfB-BBEE)
16 EMEs,Start-UpEnterprisesandQSEsUndertheCurrentCodesandtheNewCodes
18 AnOverviewoftheChangesIntroducedbytheNewCodes
21 SpecialFocus:OwnershipUndertheCurrentCodesandtheNewCodes
24 SpecialFocus:EnterpriseandSupplierDevelopmentUndertheCurrentCodesandtheNewCodes
27 TheMeasurementofOwnershipbyTrustsinTermsoftheCodes
30 B-BBEEFundingStructures
33 MonitoringofB-BBEECompliance
35 KeyContacts
Guide - Broad-Based Black Economic Empowerment
3
Introduction
Broad-based black economic empowerment (B-BBEE) is a central part of the South African government’s economic transformation strategy. The formulation of policy and legislation to achieve B-BBEE has been driven by the Office of the Presidency together with the Department of Trade and Industry (DTI). A multi-faceted approach to B-BBEE has been adopted with a number of components which aim to increase the numbers of black people (being South African citizens who have been racially classified as African, Indian or Coloured) that manage, own and control the country’s economy, and to decrease racially based income inequalities.
InthisguideweprovideageneraloverviewofB-BBEEinSouthAfrica.Wealsodiscuss
themeasurementofB-BBEEandtheprincipaldifferencesbetweentheCodesofGoodPracticepublishedin2007(currentCodes)undertheBroad-BasedBlackEconomicEmpowermentAct53of2003(BEEAct)andtherevisedCodesofGoodPractice(newCodes),whichareexpectedtocomeintoeffecton30April2015.
Inaddition,weprovidetwospecialfocuspieces–(1)ownershipunderthecurrentCodesand
thenewCodes,and(2)enterpriseandsupplierdevelopmentunderthecurrentCodesandthenewCodes.WealsoprovideanoverviewofanumberofpertinentB-BBEEissuessuchasthemeasurementofownershipbytrustsunderthecurrentCodesandthenewCodes,financialassistanceforB-BBEEwithaparticularfocusonnotionalfundingstructures,andthemonitoringofB-BBEEcomplianceparticularlyinthecontextoftherecentamendmentstotheBEEAct,suchastheintroductionofenforcementmechanismsforthecombatingof“frontingpractices”.
BOWMANS
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Guide - Broad-Based Black Economic Empowerment
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5
WithsevenofficesinfiveAfricancountriesandover400specialisedlawyers,
wedrawonouruniqueknowledgeofthebusinessandsocio-politicalenvironmenttoadviseclientsonawiderangeoflegalissues.
Everywherewework,weofferclientsaservicethatuniquelyblendsexpertiseinthelaw,knowledgeofthelocalmarketandanunderstandingoftheirbusinesses.Ouraimistoassistthemtoachievetheirobjectivesassmoothlyandefficientlyaspossiblewhileminimisingthelegalandregulatoryrisks.
Ourclientsincludecorporates,multinationalsandstate-ownedenterprisesacrossarangeofindustrysectorsaswellasfinancialinstitutionsandgovernments.
Ourexpertiseisfrequentlyrecognisedbyindependentresearchorganisations.WereceivedawardsinthreeoutoffourcategoriesattheDealmakersEastAfricaAwardsfor2019:toplegaladviserintheM&ACategoryforbothdealflowandvalueandadvisedontheDealoftheYear.IntheDealmakers SouthAfricaAwardsfor2019,wewereplacedthirdfordealvalueintheM&ACategoryandadvisedonboththeDealoftheYearandtheBEEDealoftheYear.
We help our clients overcome legal complexity and unlock opportunity in Africa. Our track record of providing specialist legal services in the fields of corporate law, banking and finance law and dispute resolution, spans over a century.
BOWMANS
6CONTENTS PAGE
Our Firm
WeprovideintegratedlegalservicesthroughoutAfricafromsevenoffices
(CapeTown,DaresSalaam,Durban,Johannesburg,Kampala,MokaandNairobi)infivecountries(Kenya,Mauritius,SouthAfrica,TanzaniaandUganda).
Weworkcloselywithouralliancefirm,AmanAssefa&AssociatesLawOffice,inEthiopia,andourbestfriendsinNigeriaandMozambique(UdoUdoma&Belo-OsagieandTacianaPeãoLopes&AdvogadosAssociados,respectively).WealsohavestrongrelationshipswithotherleadinglawfirmsacrosstherestofAfrica.
WearerepresentativesofLexMundi,aglobalassociationwithmorethan160independentlawfirmsinallthemajorcentresacrosstheglobe.Thisassociationgivesusaccesstothebestfirmsineachjurisdictionrepresented.
Guide - Broad-Based Black Economic Empowerment
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Our Footprint in Africa
Mozambique
Kenya
Tanzania
South Africa
Nigeria
Uganda
Mauritius
Best friends
Bowmans offices
Significant transaction or advisory experience
Alliance firms
Ethiopia
BowmanshasextensiveexperienceinadvisingandactingforclientsinallareasofB-BBEE.Wehavebeeninvolvedinseveralground-breakingB-BBEEtransactionsandhaveadvisedmajorinternationalcommercialandindustrialcorporations,mininghousesandbanksinmanyareasofeconomicactivityinthecountry.OurlawyersareuptodatewiththemostrecentdevelopmentsinB-BBEEandarewell-placedtoprovidecomprehensiveadviceandstrategiesforlastingandsustainabletransformation.
RecentB-BBEE-relatedM&Adealsincludeadvising:
• BP,inrelationtoitsblackeconomicempowermenttransactionintermsofwhichthefollowingtwonewB-BBEEpartnersacquiredordinarysharesintheusedsharecapitalofBPSouthernAfrica:(i)KapelaInvestmentsacquired20%plusoneshare;and(ii)theBPSAEducationFoundationacquired5%ofthetotalissuedshares.
• FLSmidth,inrelationtoabroad-basedblackeconomicempowermenttransactionintermsofwhichacommunitytrustformedforthebenefitofHDSAwillacquirea25.1%equitystakeinFLSmidthSouthAfrica.PPC,onitsZAR1.1billionempowermentandrestructuringdeal,whichresultedinsharesbeingissuedtoanemployeesharetrustestablishedforthebenefitofallPPC’sSouthAfricanemployees,strategicbusinesspartners,andtoabroad-basedtrustforthebenefitofvariousblackwomenintheregionsandareaswherePPCoperatesinSouthAfrica.Thetransactionresultedin20.8%percentdirectbroad-basedownershipbythebroadbasedentities,translatingintoaneffective26%B-BBEEownershipofPPC’soperationsinSouthAfrica.
• Hulamin,inrespectofitsB-BBEEownershiptransactionincludingemployees,blackmanagementandlongstandingstrategicblackpartners,theMakanaConsortiumandtheImbewuConsortium.TheestimateddealvaluewasZAR103millionbasedonHulamin’smarketcapofZAR2.44billionon11December2014.
• NorthamPlatinum,inrelationtotheestablishmentofabroad-basedconsortiumofHistoricallyDisadvantagedSouthAfricans(HDSA),whichwillhold31.4%ofNortham’sissuedsharesthroughacombinationofasubscriptionfornewordinarysharesandtheacquisitionofordinarysharesfromthePublicInvestmentCorporation.UponimplementationofthisZAR6.6billiontransaction,Northam’stotaleffectiveHDSAownershiplevelwillincreasetoapproximately35.4%.
• Rothschild(SouthAfrica),inablackempowermenttransactioninwhichtheRothschildSouthAfricaFoundationacquired25.1%ofthesharesinRothschild(SouthAfrica).TheRothschildSouthAfricaFoundationisatrustestablishedtosupportHDSAinappropriateeducationprogrammesrelevanttothefinancialservicessector.
• StandardBank,inrelationtoitsUSD27.3millionsaleof10%ofitssharesinStandardBankNamibiatoemployeesofStandardBankNamibiaandacommunitytrust,incompliancewithregulatoryrequirementstoincreaselocalparticipationinthefinancialsector.
Recent B-BBEE Deals
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An Overview of B-BBEE in South Africa
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Guide - Broad-Based Black Economic Empowerment
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INTRODUCTION
TheBEEActistheprincipallegislationthroughwhichB-BBEEisregulated.Intermsofsection9oftheBEEAct,theMinisterofTrade&Industry(Minister)mayissuecodesofgoodpracticeonB-BBEE.Thesecodesmayinclude,amongotherthings,indicatorstomeasureB-BBEEandtheweightingtobeattachedtothoseindicators.IntermsoftheBEEAct,everyorganofstateandpublicentitymustapplyanyrelevantcodeofgoodpracticeissuedintermsoftheBEEActin:
• determiningqualificationcriteriafortheissuingoflicences,concessionsorotherauthorisationsinrespectofeconomicactivityintermsofanylaw;
• developingandimplementingapreferentialprocurementpolicy;
• determiningqualificationcriteriaforthesaleofstate-ownedenterprises;
• developingcriteriaforenteringintopartnershipswiththeprivatesector;and
• determiningcriteriafortheawardingofincentives,grantsandinvestmentschemesinsupportofB-BBEE.
CURRENT STATUS OF THE CODES
TheMinisterpublishedthecurrentCodes,whichsetoutthedetailsofthemeasurementprocessforB-BBEE,inFebruary2007.ThenewCodes,whichareexpectedtoreplacethecurrentCodesattheendofthetransitionalperiodi.e.30April2015,werepublishedon11October2013.FurtherproposedamendmentstotheCodeswerepublishedbytheMinisterforpubliccommentintheGovernment Gazetteon10October2014.Theseproposedamendmentsareinrespectof,amongstothers,theCodesforQualifyingSmallEnterprises(QSEs),theCoderegardingrecognitioninthesaleofassets,equityinstrumentsandotherbusiness,andtheCoderegardingrecognitionofequityequivalentsformultinationals.Thedeadlineforpubliccommentsontheseproposedamendments
was14November2014,althoughthiswassubsequentlyextendedto9December2014.TheMinisterhasalsopublishedvarioussectorspecificcodeswhichdetailthemannerinwhichB-BBEEmustbemeasuredforbusinessesoperatinginparticularsectors.Whereasectorspecificcodehasbeenissued,businessesinthatsectorarerequiredtoapplytherelevantsectorcoderatherthanthegeneralCodesofGoodPractice.ThegeneralCodesofGoodPracticeapplyonlywherethereisnosectorspecificcodealthough,ingeneral,thegeneralCodesofGoodPracticeandthesector-specificcodesapplythesamebroadprinciples.Sectorcodeshavebeenpublishedforthetourism,forestry,informationcommunicationandtechnology,charteredaccountancy,finance,construction,transport,andagriculturesectors.TheDTIhasindicatedthatitintendstoalignthevarioussectorcodeswiththenewCodesandthisprocessiscurrentlyunderway.Untilthesectorcodesareamended,theywillapplyintheircurrentform.
ARE COMPANIES REQUIRED TO ACHIEVE
SPECIFIC TARGETS?
Otherthanincertainstatelicensing,permittingandauthorisationprocesses,thereisno“hardlaw”requiringthatanyprivateentityinSouthAfricamustmeetspecificB-BBEEtargetsormustimplementaB-BBEEpolicy.TheBEEActdoesnotprovideforoffencesorpenaltiesrelatingtoB-BBEEperformancebutratherseeks,throughvariouseconomicmeasures,tofacilitateauniformapproachtoB-BBEEintheSouthAfricaneconomy.Inotherwords,theBEEAct,thecurrentCodesandthenewCodesdonotimposeanyrequirementthatacertainlevelofB-BBEEmustbeachievedorthatacertainpercentageofequityinabusinessmustbeheldbyblackpeopleandtherearenosanctionsfornon-compliance.
However,incertainsectors,suchasminingandtelecommunications,minimumequityrequirementsareormaybeimposedintermsofthesector-specificlegislationgoverningthosesectors.
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Fromapracticalperspective,althoughtherearenoabsoluterequirementsinrelationtoB-BBEE,anycompanywishingtodobusinessintheSouthAfricanenvironmentmustconsideranddevelopitsB-BBEEpositionas,inadditiontothepressuresfromgovernment,anentitythatdoesnothaveagoodB-BBEErating,ordoesnotstrivetoimproveitsB-BBEErating,maybehamperedintheconductofitsdayto-daybusinesswithgovernment,organsofstateandprivatesectorcustomers.MostprivatesectorbusinessestowhichservicesarerenderedorgoodsaresoldwillthemselveshaveB-BBEEprocurementtargetstomeetandsotheB-BBEEratingofentitiesfromwhichgoodsandservicesareprocuredwillbeafactorindeterminingwhomtodobusinesswith.
B-BBEE, GOVERNMENT BODIES AND
STATE-OWNED ENTERPRISES
IntermsoftheBEEAct,governmentbodiesandstate-ownedenterprises(SOEs)arerequiredtotakeprivatesectorparties’relativeB-BBEElevelsintoaccountwhentheyprocureanygoodsorservices,whentheyissueanylicenceorotherauthorisation,orenterintopartnershipswiththeprivatesector.Assuch,businessesthatinteractwithgovernmentby,forexample,sellingtogovernmentorthatrequirelicencestoperformtheirparticularactivities(e.g.telecommunications,broadcasting,mining,banking,transportation,etc.)areincentivisedtoincreasetheirlevelsofB-BBEE.
ThePreferentialProcurementPolicyFrameworkAct5of2000alsoprovidesthatB-BBEEmustbeconsideredbyanypublicsectorbodyinthecontextofitsprocurementpractices,anddetailsthemannerinwhichB-BBEEmustbetakenintoaccountbygovernmentdepartmentsandagenciesandSOEs.Inthisregard,inthetenderevaluationprocess,tendersforcontractswithavalueofuptoZAR1millionarescoredonthebasisthat80%oftheavailablepointsareforprice,and20%oftheavailablepointsareforB-BBEE.IntendersforcontractsaboveZAR1million,90%oftheavailablepointsarebasedonpriceand10%oftheavailable
pointsareforB-BBEE.ThenumberofpointsthatabidderwillscoreforB-BBEEdependsonitsB-BBEEstatuslevel.Forexample,abidderwhichhasaLevel1B-BBEEstatus(seepage10)willscorethefull10or20pointsforB-BBEEasthecasemaybe,dependingwhetherthe90/10or80/20systemisapplicable.AbidderwhichhasaLevel4B-BBEEstatuswillscoreeither5or12pointsasthecasemaybe.
B-BBEE AND THE PRIVATE SECTOR
AprivatesectorcompanycouldalsohaveitsownB-BBEErequirements.Forexample,abusinessmayadoptapolicythatitwillnotpurchasegoodsorservicesfromsuppliersthatdonotmeetcertainminimumB-BBEErequirements.TheserequirementscouldgobeyondthatwhichisprovidedforintheCodesofGoodPractice.Wherecustomersimposesuchrequirements,aprospectivesupplier’sB-BBEEmeasurementisacompetitiveassessmentofitsB-BBEEstatusrelativetothatofitscompetitors.
Guide - Broad-Based Black Economic Empowerment
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The Measurement of B-BBEE
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SCORECARD APPROACH
InassessingB-BBEE,a“scorecard”approachisusedwherebythedifferentaspectsofB-BBEEareaccordedpointstoarriveattheB-BBEEscoreofacompany.AgeneralscorecardisincludedinthegeneralCodesofGoodPractice,whilesectorspecificscorecardsareincludedinthesectorcodesthatareapplicabletoparticularsectors.
Thescorecardsdetailthevariouselementsandsub-elementsofB-BBEEonwhichenterprisesaremeasuredandstipulatetargetstobeachievedforeachelementandsub-element.Thecloseranenterpriseistoreachingaparticulartarget,themorepointsitwillachieveforthatelementofB-BBEE.
B-BBEE RECOGNITION LEVELS
Themorepointsabusinessachievesintotalacrosseachoftheindividualelements,thehigheritsB-BBEEstatuslevelwillbe.EachB-BBEElevelalsotranslatesintoaprocurementrecognitionlevel.UnderboththecurrentCodesandthenewCodes:
• Level1isthehigheststatuslevel,whereabusinessachieves100pointsormoreonthescorecardunderthecurrentCodesandthenewCodes.
• Level8istheloweststatuslevel,whereabusinessachievesbetween30and40pointsonthescorecardunderthecurrentCodesandbetween40and55pointsunderthenewCodes.
• UnderthecurrentCodes,lessthan30pointsisconsideredtobe“non-compliant”.UnderthenewCodes,lessthan40pointsisconsideredtobe“non-compliant”.
Abusiness’sB-BBEEscorewillbedeterminedonthebasisofitsactivitiesduringthepreviousfinancialyearanditsownershipandmanagementstructuresandstaffprofileasatthedateofmeasurement.UnderboththecurrentCodesandthenewCodes,“ownership”ofanenterprisebyblackpeopleisonlyoneelementofB-BBEEwhichisevaluatedwhenassessingtheB-BBEEstatusofanenterprise.Ownershipcountsfor20points(andthreebonuspoints)underthecurrentCodesand25pointsunderthenewCodes.
Status recognition level Points under the current Codes Points under the new Codes
Level1B-BBEEstatus 100 100ormore
Level2B-BBEEstatus 85–100 95–100
Level3B-BBEEstatus 75–85 90–95
Level4B-BBEEstatus 65–75 80–90
Level5B-BBEEstatus 55–65 75–80
Level6B-BBEEstatus 45–55 70–75
Level7B-BBEEstatus 40–45 55–70
Level8B-BBEEstatus 30–40 40–55
Non-Compliant Lessthan30 Lessthan40
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Guide - Broad-Based Black Economic Empowerment
GENERIC SCORECARD
UnderthecurrentCodesandthenewCodes,theelementsofB-BBEEonwhichanenterprise’sB-BBEEscoreismeasuredandtheirrespectiveweightings(excludingbonuspoints)are:
A BRIEF OVERVIEW OF EACH OF THE
ELEMENTSOF B-BBEE
• Theownershipelementrelatestotheextenttowhichownershipinterests,i.e.votingrightsandeconomicinterest,inameasuredenterpriseareheldbyblackpeople,andtheextenttowhichsuchownershipinterestsareunencumberedbydebt.Sub-minimumrequirementsareimposedunderthenewCodesinrelationtoownership.
• Acompanycanincreaseitsscoreformanagementcontrolifitincreasesthenumberofblackmembersofitsboardofdirectorsand,inparticular,thenumberofblackwomenwhositonitsboard.UnderthenewCodes,thenumberofblackpeoplewhoparticipateinmanagementarealsomeasuredunderthemanagementcontrolelements.ManagementispresentlymeasuredunderemploymentequityunderthecurrentCodes.
• PointsarescoredontheemploymentequityelementunderthecurrentCodesforthe
numberofblackemployeesinmanagementroleswhoareemployedbytheorganisation.Assuch,themoreblackmanagersthatacompanyhas,thehigheritsB-BBEEscoreonthiselementwillbe.CompaniesaboveacertainsizealsohaveseparateobligationsintermsoftheEmploymentEquityAct,1998toprepareemploymentequityplansandtosubmitreturnsregardingtheirprogressonemploymentequitytotheDepartmentofLabour.EmploymentequityisnotaseparateelementunderthenewCodesbutismeasuredunderthemanagementcontrolelement.
• Companiescanscorepointsontheskillsdevelopmentelementfortheamountofmoneythattheyspendonskillsdevelopmentprogrammesfortheirblackemployees.Employersarerequiredto,bylaw,payanamountequaltoaprescribedpercentageofalltheiremployees’salariestotheNationalSkillsFundintermsoftheSkillsDevelopmentAct,1998andtheSkillsDevelopmentLeviesAct,1999.Companiescanalsoscorepointsforthenumberoflearnershipsthattheyfacilitate
Seven elements under thecurrent Codes Points Five elements under the new Codes Points
Ownership 20 Ownership 25
Managementcontrol 10 Managementcontrol 15
Employmentequity 15
Skillsdevelopment 15 Skillsdevelopment 20
Preferentialprocurement 20 Enterpriseandsupplierdevelopment
40
Enterprisedevelopment 15
Socio-economicdevelopment 5 Socio-economicdevelopment 5
TOTAL 100 TOTAL 105
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14CONTENTS PAGE
forblackpeople,blackwomenandblackdisabledpersons,theamountofmoneythattheyspendonbursaryprogrammes,andtheimplementationofmentorshipprogrammes.Sub-minimumrequirementsareimposedunderthenewCodesinrelationtoskillsdevelopment.
• PointsforthepreferentialprocurementelementarescoredunderthecurrentCodesdependingontheextenttowhichcompaniesprocuregoodsandservicesfromblackempoweredsuppliers.Asindicatedabove,thepointsthatasupplieritselfscoresforB-BBEEtranslatesintoaprocurementrecognitionlevelwhichisexpressedasapercentagee.g.aLevel4B-BBEEcontributorhasarecognitionlevelof100%.Thismeansthattherelevantpercentageofacompany’sexpenditurewiththatsupplierisrecognisedasB-BBEEexpenditure.CompaniescanincreasetheirscoresonthiselementiftheyprocureagreaterpercentageofgoodsandservicesfromsupplierswithhigherB-BBEEratingsandfromsmallbusinesses.UnderthenewCodes,preferentialprocurementismeasuredunderenterpriseandsupplierdevelopment.Pointsarescoredforenterprisedevelopmentinrelationtothecontribution(bothmonetaryandnon-monetary)thatacompanymakestodevelopingbusinessesthatareownedbyblackpeople.Thetypesofcontributionsthatwillbemeasuredinclude,forexample,investinginbusinessesownedbyblackpeople,makingloanstobusinessesownedbyblackpeople,providingcreditguaranteestobusinessesownedbyblackpeople,providingpreferentialcredittermstobusinessesownedbyblackpeople,givingdiscounts,andprovidingtrainingormentoring.Thetargetsthatapplytoenterprisedevelopmentaresetasapercentageofthemeasuredcompany’snetprofitaftertax(NPAT).UnderthenewCodes,enterprisedevelopmentismeasuredunderenterpriseandsupplierdevelopment.Supplierdevelopmentisalsomeasuredunderenterpriseandsupplierdevelopment.
Thisreferstotheenterprisedevelopmentcontributionsthatacompanymakestoitsblack-ownedsuppliersand,inparticular,smallblack-ownedbusinesseswhoareitssuppliers.Sub-minimumrequirementsareimposedunderthenewCodesinrelationtotheenterpriseandsupplierdevelopmentelement.
• Pointsarescoredforsocio-economicdevelopment(SED)onthebasisofthecorporatesocialinvestment(CSI)contributionsthatabusinessmakes.
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Guide - Broad-Based Black Economic EmpowermentGuide - Broad-Based Black Economic Empowerment
EMEs, Start-up Enterprises and QSEs under the Current Codes and the New Codes
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Differentcriteriaapply,underboththecurrentCodesandthenewCodes,toanExemptedMicro-Enterprise(EME),aStart-upEnterpriseandaQualifyingSmallEnterprise(QSE).
EMEs
UnderthecurrentCodes,anyenterprisewithanannualtotalrevenueofZAR5millionorlessqualifiesasanEME.UnderthenewCodes,thethresholdforacompanytoqualifyasanEMEhasbeenincreasedtoZAR10million.EMEsaredeemedtohaveaLevel4B-BBEEstatus(havingaB-BBEEprocurementrecognitionof100%).UnderboththecurrentCodesandthenewCodes,EMEsareallowedtobemeasuredintermsoftheQSEscorecardshouldtheywishtomaximisetheirpointsandmovetothenextprocurementrecognitionlevel.
QSEs
AnyenterprisewithanannualtotalrevenueofbetweenZAR5millionandZAR35millionqualifiesasaQSEunderthecurrentCodes.UnderthenewCodes,thethresholdforacompanytoqualifyasaQSEhasbeenincreasedtoZAR50millionfromZAR35million.UnderthecurrentCodes,aQSEmustselectanyfourofthesevenelementsofB-BBEEforthepurposesofmeasurementundertheQSEscorecard.WhereaQSEdoesnotmakeaselection,itsfourbestelementscoreswillbeusedforthepurposesofmeasurement.UndertheproposedamendmentstothenewCodes,whichasdiscussedabovehavebeenpublishedforpubliccomment,aQSEwillberequiredtocomplywithalltheapplicableelementsofB-BBEEforthepurposesofmeasurementunderthescorecard.
START-UP ENTERPRISES
UnderboththecurrentCodesandthenewCodes,Start-upEnterprisesmustbemeasuredasEMEsforthefirstyearfollowingtheirformationorincorporation.ThisprovisionappliesregardlessoftheexpectedtotalrevenueoftheStart-upEnterprise.If,however,theytenderonlargeprojects,thentheymustsubmitascorecard.ThevalueofthetenderwilldeterminewhethertheyarerequiredtosubmitaQSEscorecardoragenericCodescorecard.
AnimportantchangeinthenewCodesisthatEMEsandQSEsthatare100%black-ownedwillbedeemedtohaveaLevel1B-BBEEstatusandEMEsandQSEsthatare51%black-ownedwillbedeemedtohaveaLevel2B-BBEEstatus.EMEsandQSEswillonlyneedaswornaffidavit,onanannualbasis,confirmingtotalannualrevenueandlevelofblackownership.Anymisrepresentationinthisregardisacriminaloffence.
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An Overview of the Changes Introduced by the new Codes
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BOWMANS
When do the new Codes take effect?
ThenewCodesinitiallyprovidedforatransitionalperiodof12months,althoughthiswasextendedbytheMinisterforafurthersixmonths.Assuch,itisnowanticipatedthatthenewCodesmustbeappliedasfrom30April2015.WhiletherehasbeensomediscussioninthemarketthattheimplementationdateofthenewCodesmaybefurtherextendedtotheendoftheyear,therehasbeennoofficialconfirmationofsuchextension(asofthedateofpreparingthisbrochure).ThismeansthatwhentheB-BBEEscoreofanyenterpriseismeasuredbefore30April2015,theenterprisemayelecttobemeasuredonthebasisofeitherthecurrentCodesorthenewCodes(wherethereisnorelevantsectorcode).However,whentheB-BBEEscoreofanyenterpriseismeasuredafter30April2015,itwillbemeasuredonthebasisofthenewCodes(wherethereisnorelevantsectorcode).Further,if,forexample,anenterpriseisissuedwithitsnewB-BBEEcertificatescoredonthebasisofthecurrentCodeson29April2015,itwillonlyneedtoapplythenewCodeswhenitismeasuredagainin2016.
Key changes to the Codes
ThenewCodesaredifferentfromthecurrentCodesincertainkeyrespects.ImportantfeaturesofthenewCodesareasfollows:
• IntermsofthenewCodes,B-BBEEwillbemeasuredonthebasisoffiveelementsasopposedtosevenelements.TheseparateemploymentequityelementunderthecurrentCodeshasbeenremoved,withsomeoftheelementsbeingincludedundermanagementcontrol.Preferentialprocurementandenterprisedevelopment,whichareseparateelementsunderthecurrentCodes,havebeencombined.
• Thetotalpossiblepointsthatmaybescoredforownershipwillincreasefrom20pointsto25pointsunderthenewCodes.Participationbybroad-basedstructuressuchasemployeeownershipschemesandbroad-basedownershipschemeswillbemeasuredunderthemainscorecardratherthanbeingsomethingforwhichbonuspointscanbescored.
• ThetotalpossiblepointsthatmaybescoredontheentirescorecardunderthenewCodes,withbonuspoints,willincreaseto118points.
• Sub-minimumrequirementswillbeintroducedinthecontextoftheownership,skillsdevelopmentandenterpriseandsupplierdevelopmentelements.Ifthesub-minimumrequirements,i.e.40%oftherelevanttargets,arenotmet,ameasuredenterprisewillbedeemedtodrop,asapenalty,oneB-BBEElevel.If,forexample,abusinessscoressufficientpointstobeaLevel3B-BBEEcontributorbutfailstomeetoneofthesub-minimumrequirements,itwillbedeemedtobeaLevel4B-BBEEcontributor.
• ThenumberofpointsonthescorecardthatwillberequiredtoachievethevariousB-BBEElevelshasincreased.Forexample,underthecurrentCodesbetween75and85pointsarerequiredtoachieveaLevel3B-BBEErating.UnderthenewCodes,between90and95pointswillberequiredtoachieveaLevel3B-BBEErating.
• Asdiscussedabove,thethresholdforacompanytoqualifyasaQSEhasbeenincreasedtoZAR50millionfromZAR35million.UnderthecurrentCodes,QSEsarescoredonadifferentbasisandareratedonthefourelementsofB-BBEEonwhichtheyscorebest.UndertheproposedamendmentstothenewCodes,whichasdiscussedabovehavebeenpublishedforpubliccomment,aQSEwillberequiredtocomplywithalltheapplicableelementsofB-BBEEforthepurposesofmeasurementunderthescorecard.
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• Themanagementcontrolelementmeasuresthenumberofblackandfemaleboardmembers,andmembersofexecutivemanagement,seniormanagement,middlemanagementandjuniormanagement.FewerpointsareavailableunderthenewCodesinrespectofthenumberofblackandblackfemaleemployeesinmanagementrolesatthevariouslevelsofmanagementcomparedtothecurrentCodes.
• Thetargetsforsenior,middleandjuniormanagementandskillsdevelopmentmustbebrokendowninproportiontotheracialsub-groupsinthecategoryofpersonswhoareclassedas“blackpeople”.Tocalculatethenumberofblackemployeesinmanagementpositionsameasuredentitymustrefertotheeconomicallyactivepopulation(EAP)compliancetargetssetintheregulations
publishedundertheEmploymentEquityAct,1998.TheEAPincludespeoplefrom15to64yearsofagewhoareeitheremployedorunemployedandseekingemployment.Forexample,thetargetforparticipationbyblackemployeesinmiddlemanagementis75%.Assuch,ameasuredentitymustexaminehowmanyAfricanmales,Africanfemales,Colouredmales,Colouredfemales,IndianmalesandIndianfemalesareemployedinmiddlemanagementpositionstodeterminehowcloseitistoreachingthe75%target.
Atpresent,acompanycanscoreatotalof20pointsforpreferentialprocurementandatotalof15pointsforenterprisedevelopmentunderthecurrentCodes.UnderthenewCodes,40pointsintotalcanbescoredforsupplierandenterprisedevelopment.Ofthese40points,25pointsarescoredforpreferentialprocurement.Thisincludes:procurementspendbasedonsuppliers’B-BBEElevels,procurementspendonQSEs,procurementspendonEMEs(beingbusinesseswithanannualturnoveroflessthanZAR5millionunderthecurrentCodesandlessthanZAR10millionunderthenewCodes),procurementspendonsuppliersthatareatleast51%blackownedandprocurementspendonsuppliersthatareatleast30%ownedbyblackwomen.Significantlymorepoints(9pointsunderthenewCodes,upfrom3pointsunderthecurrentCodes)areallocatedtoprocurementfromsuppliersthatare51%ownedbyblackpeople.Similarly,morepointsareallocatedtoprocurementfromQSEsandEMEsunderthenewCodes(7points)comparedtothecurrentCodes(3points).Inaddition,10pointsareallocatedtothenewcategoryof“supplierdevelopment”.5pointsarealsoallocatedtotheannualvalueofenterprisedevelopmentcontributionstonon-supplierbeneficiaries.Asdiscussedabove,ifameasuredcompanydoesnotachieve40%ofthetargetforeachoftheseelements,itwillbepenalisedandwilldroponeB-BBEElevel.
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Special focus: Ownership Under the Current Codes and the New Codes
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TheownershipscorecardunderthecurrentCodescomparedtotheownershipscorecardunderthenewCodesisasfollows:
Ownership indicator Target Weighting points
Current New Current New
Voting Rights
Exercisablevotingrightsinthehandsofblackpeople
25%+1 25% + 1 3 4
Exercisablevotingrightsinthehandsofblackwomen 10% 10% 2 2
Economic interest
Economicinterestofblackpeopleintheenterprise 25% 25% 4 4
Economicinterestofblackwomenintheenterprise 10% 10% 2 2
Economicinterestofthefollowingblacknaturalpeopleintheenterprise:
2.5% 3% 1 2
• Blackdesignatedgroups;
• Blackparticipantsinemployeeownershipschemes;
• Blackbeneficiariesofbroad-basedownershipschemes;or
• Blackparticipantsinco-operatives
Economicinterestofnewentrants N/A 2% N/A 2
Realisation points
Ownershipfulfilment 1 N/A
Netvalue 7 8
Bonus points
Involvementintheownershipoftheenterpriseofblacknewentrants
10% N/A 2 N/A
Involvementintheownershipoftheenterpriseofblackparticipantsin:
10% N/A 1 N/A
• employeeownershipschemes;
• broad-basedownershipschemes;or
• co-operatives
UnderboththecurrentCodesandthenewCodes,thebasisonwhichpointsarescoredisthatif,forexample,acompanyachievesthetargetforaparticularindicatororifitexceedsthetargetforaparticularindicator,itwillachievethefullpointsforthatindicator.Forexample,if25%oftheeconomic
interestinrespectofthecompanyisheldbyblackpeople,itwillachievethefull4pointsforthatindicator.Ifonly15%oftheeconomicinterestinacompanyisheldbyblackpeople,thecompanywouldgetpointsinproportiontoitsachievementofthetargetie5%/25%x4=2.4points.
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FLOW-THROUGH PRINCIPLE
UnderboththecurrentCodesandthenewCodes,ownershipiscalculatedonaneffective,flow-throughbasis.Theflow-throughprinciplerequiresthatblackownershipcanbetracedbacktoaspecificblackindividual.Assuch,whenmeasuringtherightsofownershipofanycategoryofblackpeopleinameasuredentity,onlyrightsheldbynaturalpersonsarerelevant.Iftherightsofownershipofblackpeoplepassthroughajuristicperson,thentherightsofownershipofblackpeopleinthatjuristicpersonaremeasurable.Thisprincipleappliesacrosseverytierofownershipinamulti-tieredchainofownershipuntilthatchainendswithablackpersonholdingrightsofownership.However,forthepurposeofcalculatingthescoreinrespectofvotingrightsinthehandsofblackpeopleandtheeconomicinterestofblackpeople,oneentityintheownershipchainwhichhasmorethan50%ownershipbyblackpeoplemaybetreatedasifitis100%ownedbyblackpeople.Thisisreferredtoasthe“modifiedflowthroughprinciple”.NET VALUE
Realisationpointsarescoredinrelationtotheextenttowhichtheownershipinterestsheldbyblackpeopleinthecompanyareunencumbered(iedebt-free).Thenetvalueindicatorrelatestotheextenttowhichblackshareholdershavebeenreleasedfromfundingobligationsinrespectoftheiracquisitionofsharesandtheirshareholdingbecomesunencumbered.Thetargetforthepercentageofsharesthatshouldbedebt-freeincreasesovera10-yearperiodfromwhenblackshareholdersarefirstintroduced.Assuch,forexample,inyear1followingaB-BBEEtransaction,thetargetisthat2.5%ofthesharesinthecompanythatareheldbyblackpeopleshouldbedebt-free,i.e.assumingthatanacquisitionwasfullyfundedandthatnodiscountwasgiven,10%ofanydebtshouldbepaiddownbytheendofyear1.Byyear10,thefull25%targetshouldbedebt-freeie100%ofthedebtshouldbepaiddown.Ifonlyaportionoftheacquisitionpriceisfundedand/orsharesareacquiredbyblackpeopleatadiscount,thepercentageoftheacquisitiondebtthatwouldneedtobepaiddownineachyearfollowingthetransactiontomeetthetargetwouldbeadjusted.
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Special focus: Enterprise and Supplier Development Under the Current Codes and the New Codes
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ThenewCodeswillrequirecompaniestofundamentallyre-assesshowB-BBEEisimplemented,particularlyinthecontextofenterpriseandsupplierdevelopmentwhichcarriestheheaviestpointsweightingunderthenewCodes.Inessence,theenterpriseandsupplierdevelopmentelementunderthenewCodesmeasurestheextenttowhichentitiesbuygoodsandservicesfrom“empoweringsuppliers”(whichisdiscussedindetailbelow)withstrongB-BBEErecognitionlevels,andalsomeasurestheextenttowhichentitiescarryoutsupplierdevelopmentandenterprisedevelopmentinitiativesintendedtoassistandacceleratethegrowthandsustainabilityofblackenterprises.
UnderthecurrentCodes,acompanycanscoreatotalof20pointsforpreferentialprocurementandatotalof15pointsforenterprisedevelopment.UnderthenewCodes,40pointsintotalcanbescoredforenterpriseandsupplierdevelopment.Ofthese40points,25pointsarescoredforpreferentialprocurement,10pointsareallocatedtothenewcategoryof“supplierdevelopment”,and5pointsareallocatedtotheannualvalueofenterprisedevelopmentcontributionstonon-supplierbeneficiaries.EnterpriseandsupplierdevelopmentisalsoconsideredtobeapriorityelementunderthenewCodes,whichmeansthatthesub-minimumrequirementis40%,regardlessofwhetherornotacompanyhasmadegenuineeffortstocomplywiththiselement.Inotherwords,ameasuredentitymustachieveaminimumof40%ofthetargetsforeachofthethreecategorieswithintheenterpriseandsupplierdevelopmentelement,namelypreferentialprocurement,enterprisedevelopmentandsupplierdevelopment.Notmeetingthesetargetswillnegativelyaffectameasuredentity’sB-BBEEscorecardandwillresultinacompanydroppingaB-BBEElevel.
PREFERENTIAL PROCUREMENT
PointsforthepreferentialprocurementelementarescoredunderthecurrentCodesdependingontheextenttowhichcompaniesprocuregoodsandservicesfromblackempoweredsuppliers.CompaniescanincreasetheirscoresonthiselementiftheyprocureagreaterpercentageofgoodsandservicesfromsupplierswithhigherB-BBEEratingsandfromsmallbusinesses.UnderthenewCodes,however,preferentialprocurementismeasuredunderenterpriseandsupplierdevelopment.Thepreferentialprocurementcategoryofenterpriseandsupplierdevelopmentincludes:procurementspendbasedonsuppliers’B-BBEElevels,procurementspendonQSEs,procurementspendonEMEs(beingbusinesseswithanannualturnoveroflessthanZAR5millionunderthecurrentCodesandlessthanZAR10millionunderthenewCodes),procurementspendonsuppliersthatareatleast51%blackowned,andprocurementspendonsuppliersthatareatleast30%ownedbyblackwomen.Significantlymorepoints(9pointsunderthenewCodes,upfrom3pointsunderthecurrentCodes)areallocatedtoprocurementfromsuppliersthatare51%ownedbyblackpeople.Similarly,morepointsareallocatedtoprocurementfromQSEsandEMEsunderthenewCodes(7points)comparedtothecurrentCodes(3points).
UnderthenewCodes,pointsforpreferentialprocurementarescoreddependingontheextenttowhichcompaniesprocuregoodsandservicesfrom“empoweringsuppliers”.Therequirementsforqualifyingasanempoweringsupplierincludebeing(1)a“B-BBEEcompliantentity”,(2)whichisa“goodcitizenSouthAfricanentity”,(3)whichcomplieswith“allregulatoryrequirements”ofSouthAfrica,and(4)whichmeetsatleastthreeofthefollowingcriteria(oroneifitisaQSE)
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relatingtothedevelopmentoflocalproduction,jobcreation,localisationofbusinessactivitiesandskillstransfertosmallblackbusinesseswhoseannualturnoverislessthanZAR50million:
• atleast25%ofcostofsalesexcludinglabourcostanddepreciationmustbeprocuredfromlocalproducersorlocalsuppliersinSouthAfrica;
• 50%ofjobscreatedareforblackpeople;• atleast25%transformationofrawmaterial
orbeneficiationwhichincludeslocalmanufacturing,productionand/orassembly,and/orpackaging;and
• atleastspend12daysperyearofproductivitydeployedinassistingblackEMEsandQSEsbeneficiariestoincreasetheiroperationorfinancialcapacity.
NopreferentialprocurementpointswillbeobtainedunderthenewCodesifasupplierdoesnotcomplywiththeserequirements(althoughEMEsandStart-upEnterpriseswillautomaticallyqualifyasempoweringsuppliers).Theprocessofverifyingwhetherasupplierisanempoweringsupplierwilllikelyinvolveextraadministration,managementtimeandcosts.
ENTERPRISE AND SUPPLIER DEVELOPMENT
UnderthecurrentCodes,pointsarescoredforenterprisedevelopmentinrelationtothecontribution(bothmonetaryandnon-monetary)thatacompanymakestodevelopingbusinessesthatareownedbyblackpeople.Thetypesofcontributionsthatwillbemeasuredinclude,forexample,investinginbusinessesownedbyblackpeople,makingloanstobusinessesownedbyblackpeople,providingcreditguaranteestobusinessesownedbyblackpeople,providingpreferentialcredittermstobusinessesownedbyblackpeople,givingdiscounts,andprovidingtrainingormentoring.Thetargetsthatapplytoenterprisedevelopmentaresetasapercentageofthemeasuredcompany’snetprofitaftertax(NPAT).UnderthecurrentCodes,itisconsideredtoberelativelyeasytoscorepointsunderthiselement,andalsoallowscompaniestotakeanarms-lengthapproachtoenterprisedevelopment.
UnderthenewCodes,bothenterprisedevelopmentandsupplierdevelopmentaremeasured,togetherwithpreferentialprocurement,undertheenterpriseandsupplierdevelopmentelement.IntermsofthenewCodes,1%ofanentity’snetprofitaftertaxshouldbespentonenterprisedevelopment,while2%ofanentity’snetprofitaftertaxshouldbespentonsupplierdevelopment.BeneficiariesofsupplierdevelopmentandenterprisedevelopmentmustbeEMEsorQSEswhichareatleast51%blackownedoratleast51%blackwomenowned.Further,whilesupplierdevelopmentreferstotheenterprisedevelopmentcontributionsthatacompanymakestoitsblack-ownedsuppliersand,inparticular,smallblack-ownedbusinesseswhoareitssuppliers,enterprisedevelopmentreferstocontributionstonon-supplierbeneficiaries.Examplesofenterprisedevelopmentandsupplierdevelopmentcontributionsinclude,amongstothers,investmentsinbeneficiaryentities,loansmadetobeneficiaryentities,guaranteesgivenorsecurityprovidedonbehalfofbeneficiaries,creditfacilitiesmadeavailabletobeneficiaryentities,etc.
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The Measurement of Ownership by Trusts in Terms of the Codes
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Guide - Broad-Based Black Economic Empowerment
ThecurrentCodesandthenewCodessetoutcertainminimumqualifyingcriteriafordifferenttypesoftrusts,suchasbroad-basedownershipschemes(BBOS),employeeshareownershipprogrammes(ESOPs)andothertrustssuchasfamilyorbusinesstrusts.Ifthesecriteriaaremet,thetrustconcernedmaycontributeamaximumof40%ofthetotalpointsontheownershipscorecardofthemeasuredentityconcerned.Ifcertainadditionalcriteriaaremetforeachtypeoftrust,thetrustmaythencontributeupto100%ofthetotalpointsonthemeasuredentity’sownershipscorecard.
Theownershipscorecardhasbeensetupinsuchawaytoencouragebroad-basedBEEownershipandtheestablishmentofanESOPorBBOSisonewaytoachievethis.
BROAD-BASED BLACK OWNERSHIP SCHEMES
UnderthecurrentCodes,aBBOSisaschemethatmeetsthesevenlistedrequirements.Iftheserequirementsaremet,theBBOScancontributeupto40%ofthetotalpointsavailableontheownershipscorecardofthemeasuredentityconcerned:
• themanagementfeesoftheschememaynotexceed15%;
• theconstitutionoftheschememustrecord• therulesgoverninganyportionofeconomic
interestreceivedandreservedforfuturedistributionorapplication;
• atleast85%ofthevalueofthebenefitsallocatedbytheschememustaccruetoblackpeople;
• atleast50%ofthefiduciariesoftheschememustbeindependentpersonshavingnoemploymentwithordirectorindirectbeneficialinterestinthescheme.Thetrusteesofatrustareitsfiduciaries;
• atleast50%ofthefiduciariesoftheschememustbeblackpeopleandatleast25%mustbeblackwomen;
• thechairpersonoftheschememustbeindependent;and
• onthewindinguporterminationofthescheme,allaccumulatedeconomicinterestmustbetransferredtobeneficiariesoranentitywithsimilarobjectives.
ThenewCodesretainthesevenbasicrequirementstoqualifyasaBBOS,butaddthefollowingthreeadditionalrequirements.Ifthesetenrequirementsaremet,thenunderthenewCodestheBBOScancontributeupto40%ofthetotalpointsavailableundertheownershipelement:
• thetrustdeedmustbeavailable,onrequest,toanyparticipantinanofficiallanguageinwhichthatpersonisfamiliar;
• thetrusteesmustpresentthefinancialreportsoftheschemetoparticipantsyearlyatanannualgeneralmeetingofthetrust;and
• thetrustdeedmustdefinetheparticipantsandtheproportionoftheirclaimtoreceivedistributions(andthetrustees“musthavenodiscretion”inrelationtothese).
UnderboththecurrentCodesandthenewCodes,inordertoobtainallofthepointsontheownershipscorecardforownershipthroughaBBOS,thefollowingadditionalcriteriamustalsobemet:
• theschememusthaveatrackrecordofoperatingasaBBOS;and
• orintheabsenceofsuchatrackrecord,theremustbedemonstrableevidencethattheBBOShasfulloperationalcapacitytooperateasaBBOS.Thescheme’soperationalcapacitymustbeevidencedbysuitablyqualifiedandexperiencedstaffinsufficientnumber,experiencedprofessionaladvisors,operatingpremisesandallothernecessaryrequirementsforoperatingabusiness.
EMPLOYEE SHARE OWNERSHIP PROGRAMMES
UnderboththecurrentCodesandthenewCodes,anESOPmustmeetthefollowingminimumqualifyingcriteriatocontributeamaximumof
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40%ofthetotalpointsavailableontheownershipscorecardofthemeasuredentityconcerned:
• thetrustdeedmustdefinetheparticipantsandtheproportionoftheirclaimtoreceivedistributions(andthetrustees“musthavenodiscretion”inrelationtothese);
• theparticipantsmusttakepartinappointingatleast50%ofthefiduciaries;
• theparticipantsmusttakepartinmanagingtheschemeatalevelsimilartothe
• managementroleofshareholders;thetrustdeedmustbeavailable,onrequest,toanyparticipantinanofficiallanguageinwhichthatpersonisfamiliar;
• thetrusteesmustpresentthefinancialreportsoftheschemetoparticipantsyearly
atanannualgeneralmeetingofthetrust;and
• andonthewindinguporterminationofthescheme,allaccumulatedeconomicinterestispayabletotheparticipantsattheearlierofthedateoreventspecifiedinthedeedoronterminationorwindingupofthescheme.
UnderboththecurrentCodesandthenewCodes,inordertoobtainallofthepointsontheownershipscorecardforownershipthroughanESOP,itmustbeshownthattheschemehasatrackrecordofoperatingorithasfulloperationalcapacityforESOPs.ThisisdemonstratedonthesamebasisastheoperationaltrackrecordofaBBOS(asdiscussedabove)(plusabonuspointif10%achieved),andunderthenewCodesis3%.
Current Codes New Codes
Exercisable voting rights 6points 6points
Economic interest 5points 6points
Ownership by BBOS and ESOP 1point(+1bonuspoint)
3points
Ownership by black new entrants
Net Value 8points(includingownershipfulfilment)
8points
Total points: Potentially21outof23(effectively21outof20)
Potentially23outof25
A summary of the points that ownership by BBOS and ESOPs can contribute
ThetargetedlevelsofBBOSandESOPownershipunderthecurrentCodesis2.5%(plusabonuspointif10%achieved),andunderthenewCodesis3%.
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B-BBEE Funding Structures
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Preference Share Traditional Loan Notional Vendor Funding
Preferencesharefunding Loanfunding(vendororthirdparty)
Sharesacquiredfornominalvalue,separatenotionalfundingprovided
Preferencesharesissuedtofunder:funderhaspreferentialrighttodividends
OrdinarysharesissuedtoB-BBEEpartner
OrdinarysharesissuedtoB-BBEEpartner
B-BBEEpartnerhasvotingrights
B-BBEEpartnerhasvotingrights
B-BBEEpartnerhasvotingrights
Dividendsfromthemeasuredentityusedtoservicepreferencesharedividends
Dividendsfromthemeasuredentityusedtoserviceloan
B-BBEEpartnerwaivesdividendrightsorholdsadifferentclassofshareswithvotingrightsandtherearenoorlimiteddividendrightsuntilthefundingis“repaid”
Preferencesharesredeemedafteraperiod(usuallybetween7and10years)
EncumbrancesonB-BBEEpartner’ssharesfallawayiftheloanisrepaid
Formulaappliedtodetermine:
• howmanysharestheB-BBEEpartnerretainsandareconvertedtoordinaryshares
• howmanysharesarerepurchasedbythecompany/measuredentityattheendofthetermatnominalvalue
B-BBEEinvestorsoftendonothaveaccesstosufficientcapitaltoacquireequity.Assuch,BEEtransactionsareoftenstructuredinsuchawaytofacilitatethepurchaseoftheequitybytheB-BBEEinvestor.Itistypical,however,fortheB-BBEEinvestortopayaportionofthepurchasepricei.e.“skininthegame”whichservesthedualpurposeofincentivisingtheB-BBEEinvestorandassistingthemeasuredentityinachievinginitialnetvaluepoints.
Thechoiceofafundingstructurewilldependonanumberoffactorsincluding,butnotlimitedto:availabilityandsourceoffunding(e.g.vendororthirdparty),theamountoffundingrequired,taximplicationsandpotentialtaxefficiencies,theabilityoftheB-BBEE
investortopayaportionofthepurchaseorsubscriptionprice,thetypeandcompositionoftheproposedB-BBEEinvestor(e.g.atrust,ESOP,BBOS,specialpurposevehicle,etc),thekeyparties’B-BBEEstrategy,thesectorinwhichthemeasuredentityoperates,thesectortowhichthemeasuredentitysupplies,andanyexistingorongoingcontractualcommitmentsregardingB-BBEEratingand/orownership.
Thereareanumberofdifferentpossiblefundingarrangementsincluding:atraditionalloanstructure(vendororthirdparty),notionalvendorfinance(NVFstructure),orapreferencesharestructure(vendororthirdparty).Thegeneralfeaturesofthedifferentfundingarrangementsareasfollows:
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Notionalvendorfinancestructureshavebeenusedinlistedcompanies’B-BBEEtransactionssuchasSABZenzele,VodacomYeboYethu,KumbaIronOreandMTNZakheleLimited.Notionalvendorfundingachievesthesameeconomiceffectasatraditionalloanstructure,butwithoutanyactualflowoffunds,hencetheterm“notional”:
• Inatraditionalloanstructure,thevendororthirdpartywouldadvancealoantoaB-BBEEpartnertoacquiretheshares.Thisloanamountwouldusuallyincurinterest.TheB-BBEEpartnerwouldusesomeorallofthedividendstopaydowntheloan.Iftheloanisnotrepaid,thesharesmaybesoldtosettletheoutstandingdebt,ortheloanmayberefinanced.
Inanotionalvendorfundingstructure,theB-BBEEpartnerwouldacquireordinarysharesorsharesofadifferentclassfornominalvalue.Theparties,i.e.thevendorandtheB-BBEEpartner/s,wouldnegotiateandagreeonthetermsthatwillapplytotheproposedB-BBEEtransaction,includinganotionalvendorfundingformula,whicheffectivelyreplicatesatraditionalloanstructure.Inthisregard,thenotionalfundingamountwouldbeagreed(e.g.themarketvalueoftheshares),thatamountwouldbeincreasedoveranotionalfundingperiodbyanotionalinterestfactor,andtheamountwouldbedecreasedbythenotionalvalueofdividendattributabletotheB-BBEEpartner’sshares.Itshouldbenotedthatthisisnotregardedasaloan,asnofundsareactuallyadvancedtotheB-BBEEpartnerorowedbytheB-BBEEpartner.Further,theB-BBEEpartnerwilleitherwaiveanydividendrights(ifordinaryshareshavebeenacquired)orwillholdadifferentclassofshareswithvotingrightsbutwithnoorlimiteddividendrightsuntilthefundingis“repaid”i.e.theendofalock-inperiod.
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Monitoring of B-BBEE Compliance and Fronting Practices
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B-BBEE audits and B-BBEE ratings
WhereabusinesspresentsanyinformationinrelationtoitsB-BBEEscore,forexampleinthecontextofatenderresponse,thismustbesupportedbyacertificateissuedbyanaccreditedverificationagency.Thecertificatesissuedbytheverificationagenciesarevalidfortwelvemonths.Accordingly,businessesgenerallyperformaB-BBEE“audit”onanannualbasis.Abusiness’sB-BBEEscorewillbedeterminedonthebasisofitsactivitiesduringthepreviousfinancialyearanditsownershipandmanagementstructuresandstaffprofileasatthedateofmeasurement.
Variousverificationandratingsagencieshavebeenestablishedtomeasureenterprises’B-BBElevels.Theseagenciesissuecertificatesonanannualbasiscertifyinganenterprise’slevelsofB-BBEE.AsfromOctober2011,onlyB-BBEEcertificatesissuedbyaccreditedverificationagenciesandauditorsthathavebeenapprovedtocertifyB-BBEElevels,arevalid.
Fronting practices
TheCodesofGoodPracticeprovidethat,whenmeasuringB-BBEElevels,substanceappliesoverlegalform.Thisisanattempttolimitinstancesof“fronting”byenterpriseswhichmakerepresentationsthattheyhaveadoptedparticularB-BBEEinitiativesinordertoscorepointswhen,insubstance,theinitiativeshavenotbeenadopted.IntermsofamendmentstotheBEEAct,whichcameintoeffecton24October2014,itisnowacriminaloffencetoengageina“frontingpractice”ortomakedeliberatemisrepresentationsinrelationtoanenterprise’strueB-BBEEstatus.TheBEEActdefinesa“frontingpractice”as“atransaction,arrangementorotheractorconductthatdirectlyorindirectlyunderminesorfrustratestheachievementoftheobjectivesof[theBEEAct]ortheimplementationofanyoftheprovisionsof[theBEEAct]”.
IntermsoftheBEEAct,frontingpracticesinclude,butarenotlimitedto,practicesinconnectionwithaB-BBEEinitiative:
• intermsofwhichblackpersonswhoareappointedtoanenterprisearediscouragedorinhibitedfromsubstantiallyparticipatinginthecoreactivitiesofthatenterprise;
• intermsofwhichtheeconomicbenefitsreceivedasaresultoftheB-BBEEstatusofanenterprisedonotflowtoblackpeopleintheratiospecifiedintherelevantlegaldocumentation;
• involvingtheconclusionofalegalrelationshipwithablackpersonforthepurposeofthatenterpriseachievingacertainlevelofB-BBEEcompliancewithoutgrantingthatblackpersontheeconomicbenefitsthatwouldreasonablybeexpectedtobeassociatedwiththestatusorpositionheldbythatblackperson;or
• involvingtheconclusionofanagreementwithanotherenterpriseinordertoachieveorenhanceB-BBEEstatusincircumstancesinwhich(1)therearesignificantlimitations,whetherimplicitorexplicit,ontheidentityofsuppliers,serviceproviders,clientsorcustomers;(2)themaintenanceofbusinessoperationsisreasonablyconsideredtobeimprobable,havingregardtotheresourcesavailable;or(3)thetermsandconditionswerenotnegotiatedatarm’slengthandonafairandreasonablebasis.
B-BBEE Commission
From24October2014,theBEEActwasalsoamendedtoprovidefortheestablishmentofaB-BBEECommissionwhichwillberesponsiblefor,amongstotherthings,investigatingalleged“fronting”practicesandreferringthemforprosecution.WhiletheB-BBEECommissionhasnotyetbeenestablished,weunderstandthattheintentionisfortheB-BBEECommissiontobeestablishedby31March2015.IntermsoftheBEEAct,finesforfrontingmaybeupto10%ofacompany’sannualturnover.
B-BBEE Reporting
Finally,intermsoftheamendmentstotheBEEAct,listedcompaniesarenowrequiredtoreportannuallyontheirlevelsofB-BBEEandB-BBEEtransactionsaboveacertainthreshold,asdeterminedbytheMinisterbynoticeintheGovernmentGazette,arerequiredtobereportedtotheB-BBEECommission.However,thisthresholdhasnotyetbeenprescribedbytheMinister.
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