A quick guide to B-BBEE ownership transactions in South Africa

We briefly outline the potential B-BBEE ownership transactions available to companies seeking to secure a minimum level of ownership or otherwise improve their B-BBEE score, as well as the key principles and criteria that must be considered.

B-BBEE ownership measurement principles and calculations

Ownership is governed by Statement 100 of the Codes and measured against the following sub-elements: 

Voting Rights exercised by Black people and women;

• Economic Interest enjoyed by Black shareholders (for example, dividends and sale proceeds) (this includes in respect of Black people, Black women, Black Designated Groups, Black participants in ESOPs, BBOS or co-operatives); and
• Realisation or Net Value, which is the portion of ownership that is effectively free from debt, measured over a 10-year scale based on the above criteria and scores.

Ownership is measured in terms of the following principles:

• Flow-Through Principle: in terms of which Black ownership is recognised in proportion to direct ownership rights in a measured entity.
• Modified Flow-Through Principle: where an intermediary entity is imposed between the measured entity and a 51% Black-owned entity in the chain of ownership, 100% of the Black-owned entity’s ownership may be recognised (only once in the chain of ownership) as flowing to the measured entity’s shareholding. This is a tool that can be used for B-BBEE structuring.

The points in terms of the ownership element are broken down as follows:

Voting rights

• 25% + 1 vote target for exercisable voting rights in the hands of Black people (4 points); and
• 10% target for exercisable voting rights in the hands of Black women (2 points).

Economic interest

• 25% target in respect of economic interest to which Black people are entitled (4 points);
• 10% target in respect of economic interest to which Black women are entitled (2 points);
• 3% target in respect of economic interest to which Black Designated Groups, Black participants in an Employee Share Ownership Programme, Broad—Based Ownership Scheme, or Co-operatives (3 points); and
• 2% target in respect of economic interest to which New Entrants are entitled (2 points).

Realisation points

8 points in respect of Net Value. This is calculated according to a formula and is dependent on the scores obtained above.

Ownership is a priority element that requires 40% compliance in order to avoid the measured entity automatically dropping one B-BBEE level.

Types of B-BBEE ownership forms and transactions

Direct shareholding by black individuals/consortia

The most straightforward B-BBEE ownership transaction is through direct investment/acquisition of equity by a Black company/ies or individual. Crucially, however, this must confer real voting and economic rights to the Black investor.

Broad-Based Ownership Schemes (BBOS)

BBOS are collective ownership vehicles established for the benefit of a broad base of Black beneficiaries in communities. These typically include local communities, youth organisations, or educational initiatives. These schemes are often structured as trusts and are particularly prevalent in regulated sectors such as mining and telecommunications. To qualify under the Codes, BBOS structures must comply with Annexe 100(B), which sets out governance and operational requirements, including the requirement that 85% of the value of the benefits allocated by the scheme must accrue to Black people. Furthermore, if the BBOS is structured using a trust, specific rules in terms of Annexe 100(D) must be complied with for a trust to qualify for points under the Codes. Additionally, it is important to remember that any such structure must also comply with the Trust Property Control Act No. 57 of 1988.

Employee Share Ownership Plans (ESOPs)

ESOPs are, simply put, company share schemes for employees, with the majority of participants/beneficiaries being Black employees.

These schemes allocate shares or share-linked benefits (such as units) to qualifying employees either directly or through a vehicle such as a trust. To qualify for B-BBEE ownership recognition, ESOPs must comply with Annexure 100(C) of the Codes, which prescribes requirements such as the appointment of fiduciaries of the scheme (including the extent to which participants appoint the fiduciaries), rules of participation, and mechanisms for distributing economic interest. These ESOP structures can also use either a trust or a company structure.

Vendor/Notional financing transactions

Should direct financing not be available, vendor-financing or financial assistance by the seller of the equity interest/measured entity is also permitted to enable the Black investor to finance its ownership. Vendor finance can take the form of preference shares, deferred purchase arrangements, or notional vendor funding. To qualify under the Codes, it is particularly important that such arrangements confer genuine economic and voting rights upfront, despite deferring repayment. Vendor financing is typically assessed against the Net Value calculation in Annexe 100(E) of the Codes.

Statement 102 transactions

Statement 102 transactions are fairly niche and a relatively unknown form of ownership transaction. They provide an alternative form of ownership recognition where a transaction is regarded as a “qualifying transaction” which can include the sale of an asset, business, or Equity Instruments to Black people. “Equity Instruments” are instruments through which a Participant holds rights of ownership in an enterprise. As a result, such a company may get the equivalent recognition via a sale of assets to Black people. For a Statement 102 transaction to result in ownership points being achieved, the transaction must result in the creation of viable and sustainable businesses or business opportunities in the hands of Black people; and result in the transfer of critical or specialised skills, managerial skills, and productive capacity to Black people; involve a separately identifiable related business which has (i) no unreasonable limitations or conditions with regards to its clients or customers; (ii) clients, customers or suppliers other than the seller; and (iii) B-BBEE shareholders, or their successors if the B-BBEE shareholding is the same or improved, holding the asset for a minimum of 3 years.

Equity Equivalent Programmes (EEPs) and special rules for multinationals

EEPs as governed by Statement 103 of the Codes, are an alternative form of ownership transaction available to multinational companies that are unable or unwilling to dilute equity in their South African measured entity. Similar to Statement 102 transactions, EEPs present another form of deemed equity ownership. These programmes allow for recognition of ownership points through providing qualifying economic contributions to Black South Africans, equivalent in value to a direct equity sale. The contributions must be formally approved by the Department of Trade, Industry and Competition and can include foreign direct investment into an equity equivalent programme, enterprise creation, or investment in social advancement programmes. The value of the contribution is calculated at 25% of the value of the South African operation or 4% of its Total Revenue. However, these structures are quite difficult to implement in practice, given the requirements imposed in terms of Statement 103, and for the duration during which the programme must be in place and the expenses incurred.

Finally, in addition to the EEPs, there are also special “rules for multinationals” whereby equity held by South Africans in an offshore holding structure can be recognised, but the calculations and rules for recognition are complex and require detailed legal and commercial advice.

In short, a measured entity may be able to claim points under the ownership element of the B-BEE scorecard through the aforementioned transactions, provided that:

• all applicable provisions in the Codes are complied with;
• the investor holds exercisable voting rights and economic rights or recognised equivalent rights as set out above;
• the ownership is able to be calculated through the Flow-Through or Modified Flow-Through Principle; and
• the transaction is disclosed to the B-BBEE Commission should the value thereof equal or exceed R25,000,000.

Whilst ownership transactions can significantly enhance a company’s B-BBEE level, there are inherent risks which must be borne in mind by investors, including the possibility that the transaction constitutes a fronting practice, where there is a lack of genuine participation by Black shareholders. Evergreen debt structures present another risk, particularly in vendor funding transactions where debt remains indefinitely, thus preventing the achievement of Net Value thresholds required by the Codes and potentially causing the Black shareholder to be “locked in”. We advise that companies embarking on B-BBEE ownership transactions seek professional advice to ensure that any proposed transaction complies with the provisions of the Codes and is structured in a manner that is beneficial to all participants and encourages true and tangible transformation of the South African economy.