Many South African businesses are being pressured, not only to reach a high BEE level, but also for black ownership. This is a major concern for most white owned businesses, and where a business is not a major corporate entity it can create quite a headache.
The transition to the Amended Codes of Good Practice has increased the challenge for compliance, as Ownership is now a priority element for both Qualifying Small Enterprises (QSEs) and Generic Enterprises. The measured entity is required to achieve sub-minimum of 40% of the Net Value points, and non-compliance with the sub-minimum target requirement will result in the entity’s B-BBEE status being discounted by one level.
Why this change?
It is a very useful instrument for effecting the integration of black people into mainstream economy by increasing the number of black people who own, control and manage productive economic assets.
In terms of the Amended Codes of Good Practice, an Exempted Micro Enterprise (EME) that is 100% black owned will qualify for a level 1 contributor with a recognition level of 135%, whereas an EME with at least 51% black ownership will qualify as a level 2 contributor with a recognition level of 125%. The same applies to start-ups.
Often a business wishes to empower its employees who have been loyal, instead of giving away or selling shares to an individual. The Department of Trade and Industry (DTI) caused widespread uncertainty and confusion in its notice in the Government Gazette of 5 May 2015 which stated that black participants in broad-based and employee share ownership schemes could only contribute a maximum three points (out of the total available 25 BEE ownership points) to a firm’s BEE score in terms of the Amended Codes of Good Practice. In one stroke the Notice overturned accepted past practices and threatened many existing and planned BEE ownership transactions, which relied on such schemes.
On 15 May 2015, the DTI issued a further notice in the Government Gazette that withdrew the previous notice. It accordingly now states that the status quo has been restored and that broad-based and employee share ownership schemes are again eligible to contribute to all (and not just three) of the 25 available BEE ownership points in the Codes.
What are employee share schemes?
Employee share schemes fall under the definition of broad-based ownership schemes and are limited to 40% of the points available depending on certain factors:
- The scheme constitution must define the participants and the proportion of their claim to receive distributions.
- A written record of the name of the participants or the use of a defined class of natural person satisfies the requirement for identification.
- A written record of fixed percentages of claim or the use of a formula for calculating claims satisfies the need for defining proportion of benefit.
- The fiduciaries of the scheme must have no discretion on the above mentioned terms.
- The participants must take part in:
- Appointing at least 50% of the fiduciaries of the scheme.
- Managing the scheme at a level similar to the management role of shareholders in a company having shareholding.
- The constitution, or other relevant statutory documents, of the scheme must be available on request to any participant, in any official language in which that person is familiar.
- All accumulated Economic Interest of the scheme is payable to the participants at the earlier date or event specified in the scheme constitution or on the termination or winding-up of the scheme.
- The scheme fiduciaries must present the financial reports of the scheme to participants yearly at an annual general meeting of the scheme.
Businesses who insist on fighting the Ownership element will find that they are soon excluded from tenders, and if done correctly then black ownership could eliminate more stress than initially anticipated. The value of good communication with your SEESA legal advisor becomes crucial when considering a change in the ownership of your business and could mean the difference between losing business or preferential inclusion into contracts and tenders, which in turn could prove to be of great importance in the growth of one’s business.
ABOUT THE AUTHOR
Madelaine Loock is the SEESA BEE Provincial Manager at the Port Elizabeth office and has been with SEESA for 6 years. She completed her LLB degree and is currently in the process of completing an LLM degree in Labour Law. She is an admitted advocate of the High Court since April 2015.