Sanity prevails as long-awaited clarification is provided on Broad Based BEE Schemes

By Stephan van der Walt – 19 May 2021

The Minister of Trade, Industry and Competition, Minister Patel, gazetted a long-awaited explanatory memorandum (the “Explanatory Memorandum”) on
18 May 2021 which clarifies material rules in respect of the B-BBEE ownership recognition for so called discretionary collective enterprises (“Collective Enterprises”) which includes Broad-Based Schemes, Employee Share Ownership Programmes (“ESOPs”), Trade Unions, Not for Profit Companies, Co-operatives and Trusts.

This Explanatory Memorandum clarifies, amongst other things, that:

  • a defined class of black beneficiaries satisfies the ownership provisions under the Codes and not necessarily a list of names of beneficiaries;
  • evergreen ESOPs, which provide perpetual benefit to workers of the company, satisfies the ownership provisions under the Codes;
  • minors are not restricted from ownership calculations and may be included as participants in or beneficiaries of Collective Enterprises;
  • distributions can be in cash or in kind and both can be claimed under Economic Interest on the ownership scorecard;
  • the Codes allow for discretion to be applied by the Fiduciaries on the value or portion of Economic Interest distributions to beneficiaries or participants; and
  • the Codes allow for voting rights to be measured through the Fiduciaries voting on behalf of the beneficiaries or participants.

These principles are not new and have been specifically catered for in the revised Codes which came into effect on 1 May 2015, well in advance of the establishment of the B-BBEE Commission.

The use of Collective Enterprises has however been under attack from within the DTI since 2015, in what may be perceived by some as factions within the department driving the case for individual inclusion and enrichment. On 5 May 2015, days after the revised Generic Codes came into effect, without consultation the DTI issued a “clarification notice” which resulted in an immediate and justified outcry by Collective Enterprises and various advisors. Three days later, on 8 May, the DTI issued a media statement to clarify the earlier clarification notice and stated that the lower ownership points would only apply to transactions implemented after 1 May 2015. Then, four days later, the DTI made an about-turn and withdrew the clarification on ownership and issued a new “Revised Notice of Clarification” which appeared in the Government Gazette, signed by then minister Rob Davies.

In his address to the Portfolio Committee on Trade and Industry in Parliament on 19 May 2015, Mr Davis acknowledged the DTI had made a mistake in sending out a message that Collective Enterprises were not encouraged, when in fact the opposite was the case.

The uncertainty was then reintroduced in 2019 by Zodwa Ntuli, the B-BBEE Commissioner, when several letters were issued to various Collective Enterprises which has resulted in a difference of opinion between the B-BBEE commissioner and industry stakeholders which include the major law firms, corporate advisors, verification agencies and major entities in the B-BBEE space. This friction related amongst others to how Collective Enterprises, which provide for some discretion in respect of the distribution of proceeds to beneficiaries, should be considered for ownership purposes under the Codes.

In our experience, the policy uncertainty introduced by the B-BBEE Commissioner in 2019 resulted in material delays in the implementation of empowerment transactions. Not only have empowerment transactions involving Collective Enterprises been delayed due to this ambiguity in policy, but empowerment transactions in general were placed on the back burner awaiting clearer direction. The statements released by the B-BBEE Commissioner effectively meant that black individual investors had to postpone their estate planning (compared to their white counterparts) and deprived many young black people and communities from benefiting from B-BBEE in terms of sustainable broad-based schemes. In addition to this the B-BBEE Commissioner effectively took the view that minor children of black investors (whom themselves take on considerable risk when participating in B-BBEE transactions) could not benefit from B-BBEE ownership transactions. From our perspective, this appears groundless.

In what can only be described as a direct and transparent Explanatory Memorandum, Minister Patel has hopefully brought to a close the unwarranted onslaught on legitimate B-BBEE transactions involving Collective Enterprises. Although long overdue, Minister Patel can be commended for providing such clear and concise confirmation regarding Collective Enterprises which will undoubtably result in greater policy certainty and the enablement of sustainable B-BBEE ownership of which the ultimate benefits can now flow to where real and sustainable empowerment is required.

The Explanatory Memorandum makes it clear that “Government policy has been to promote broad-based empowerment, which embraces a number of aspects, including facilitating ownership by groupings of designated persons through vehicles such as cooperatives, women’s investment vehicles, youth empowerment structures, trade union investment vehicles and community welfare projects. These arrangements differ from the traditional model of share ownership being held directly or indirectly to the name and for the account of individuals from the designated groups.

Sanity has prevailed!

Emmy Award and Golden Globe Award winner Tim Burton once stated that “One person’s craziness is another person’s reality.” It cannot be more accurate in this instance where the business model of Collective Enterprises has effectively been sterilised, solely the result of unfounded views by the regulator itself. In a country which desperately needs economic growth, policy certainty is critical to build confidence, enable businesses to grow and create employment for the benefit of all.

One can only hope that this development set the scene for more positive changes that would create an environment where government and business can work together to build a prosperous South Africa.

Stephan van der Walt is the managing director of Pallidus. Pallidus is an independent corporate finance advisory, investment banking and investment management firm based in South Africa and acts as trusted corporate finance advisors to corporates, multi-nationals and high-net worth individuals, for amongst others listings, equity or debt capital raisings, empowerment (BEE) transactions, mergers or acquisitions.