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South Africa: B-BBEE – New practice note on discretionary collective enterprises

19 May 2021
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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 have been expressed by the B-BBEE Commission over the last few years on what is required for Black people 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 main sticking point with the Commission when measured entities have introduced B-BBEE ownership through collective enterprises has been that the Commission has insisted that individual beneficiaries of these enterprises must themselves be treated as the shareholders in the underlying company in which the collective vehicle holds shares, and must have all the rights that a shareholder has, including the right to dispose of their ownership interests when they wish.

On this basis, the Commission has indicated that beneficiaries can only be named individuals, must have the right to a specific percentage of economic interest as if they were shareholders in the underlying measured entity, and must have the right to determine the manner in which voting  rights attaching to the collective enterprise’s shareholding in the underlying company are exercised.

Discretionary collective entities such as BBOSs (for example, education trusts), ESOPs and family trusts are not usually set up in this way. In most instances, discretionary collective enterprises are set up to benefit a class of people (such as Black women studying engineering at a particular university, or staff below a particular employment grade), rather than named individuals.

In addition, individual beneficiaries in the relevant class do not have a fixed and perpetual entitlement to benefits from the collective vehicle. The collective vehicle is the shareholder (and has all the rights of a shareholder). The beneficiaries do not themselves have the rights of shareholders.

The Minister has now confirmed that these types of collective vehicles that are common in the market are acceptable vehicles through which Black people can participate in ownership, and accordingly through which B-BBEE ownership points can be derived. The Minister affirmed that such vehicles have an important role in facilitating broad-based ownership, in particular.

The publication of the Practice Note will hopefully eliminate the confusion that has resulted from the Commission’s position on collective enterprises. For companies that are considering implementing B-BBEE transactions involving collective enterprises, the Practice Note provides confirmation that the Minister, who is responsible for making B-BBEE policy and who is the lawmaker for B-BBEE matters, thinks that such vehicles are a good way to facilitate B-BBEE ownership.

For companies that have engaged with the B-BBEE Commission in the context of major B-BBEE transactions and have been criticised by the Commission for the collective enterprises they have introduced, as well as their B-BBEE verification agencies, the Practice Note should provide some comfort that the lawmaker does not regard such vehicles as being impermissible.

Companies will now be able to point to the Practice Note in their ongoing engagements with the Commission. The Practice Note should also make it clear to B-BBEE verification agencies that, in line with the Minister’s interpretation of the Codes, they are able to recognise ownership by Black people through collective enterprises, notwithstanding the views expressed by the Commission.

The Practice Note can be accessed here.