CLARITY IN B-BBEE OBLIGATIONS – A WELCOME DEVELOPMENT FOR PRIVATE EQUITY PLAYERS
On 18 May 2021, the Minister of Trade, Industry and Competition (Minister) published a Practice Note in terms of the Broad-Based Black Economic Empowerment Act 53 of 2003 (B-BBEE Act) on the Rules for Discretionary Collective Enterprises (Practice Note).
The Practice Note provides much needed clarity on the Minister’s interpretation of the requirements under the B-BBEE Act and the Codes of Good Practice (Codes) for broad-based black economic empowerment (B-BBEE) ownership through ‘discretionary collective enterprises’. Collective enterprises include broad-based black ownership schemes (BBOSs), employee share ownership schemes (ESOPs), trade unions, not-for-profit companies, co-operatives, and trusts.
The Minister’s Practice Note was issued against the background of the views that had been expressed by the B-BBEE Commission over the last few years on what is required for ‘Black’ people (as defined) to be recognised as holding rights of ownership for B-BBEE measurement purposes, particularly in the context of collective enterprises.
In many instances, the Commission’s views on what the B-BBEE rules require have differed from how the rules have been interpreted by other stakeholders, including measured entities themselves, advisors, and B-BBEE verification agencies.
The knock-on effect of this difference in interpretation meant that some parties were pulling back on making use of these broader based vehicles for B-BBEE ownership purposes given the uncertainty. Alternatively, they were structuring these vehicles and their terms, in ways that were different to what was commonly accepted in the market and, at times, not commercially sound.
For example the Commission previously indicated that beneficiaries of an ESOP Trust can only be named individuals (not a class) and must have the right to a specific percentage of economic interest as if they were shareholders in the underlying measured entity, which rights in the Commission’s view, could not be diluted or interfered in any way if based/linked on continued employment/service.
This was naturally at odds with standard considerations applicable to any employee share ownership scheme/program and the typical ‘good and bad leaver’ principles associated therein. This point has now been resolved/clarified.
Click here for a more detailed discussion on the Practice Note and some of the points it addresses/clarifies.
Whilst the Practice Note did not specifically deal with the B-BBEE rules under the Codes currently applicable to inter alia private equity (PE) fund managers per say, a number of transactions concluded within the PE industry, nevertheless still have a B-BBEE ownership element.
This is sometimes still partly satisfied/complied with, through the use of a BBOS or ESOP holding the shares for the ultimate benefit of Black participants.
It is not uncommon when structuring a PE investment that has B-BBEE ownership requirement to make use of an ESOP Trust as part of the investment in the underlying portfolio company, in order to hold a percentage of the shares for the benefit of the employees. This might be part of or separate to any structuring considerations as regards to the ‘carry interest’ applicable for management of the fund manager and/or the general partner, depending on the facts.
Accordingly, the clarity in the interpretation of the Codes specific to BBOSs and ESOPs is welcomed news in the PE community as well.