THE
BEECHAMBER

OWNERSHIP CHOOSE YOUR PRINCIPLE WISELY
2022
Amended General B-BBEE Codes of Good Practice
Ownership
OWNERSHIP
CHOOSE YOUR PRINCIPLE WISELY
In issue 23 of TFM Magazine, we unpacked definitions linked
to the Ownership Scorecard published as Gazette #36928, an
amendment to the Generic Codes of Good Practice (Codes). In
this overview, emphasis was on potential valuation methodologies
available. The chosen methodology used to value an organisation
is critical to the Net Value component, which awards the most
points on the Ownership Scorecard, not forgetting the Discounting
Principle for not meeting the 40% sub-minimum requirement.
In this issue, we delve into the Ownership Scorecard, focusing on
the Exclusion Principle and its effect during a B-BBEE Verification.
To fully articulate this principle, one must firstly recognise the
difference between a ‘Form’ of Ownership versus a ‘Principle’
of Ownership when applying the Exclusion Principle during a
B-BBEE Verification.
The ability to recognise what differentiates a ‘Form’ vs a
‘Principle’ of Ownership lies in the definitions held in Schedule 1,
published as Gazette # 42496 in 2019. It is the point of reference
for interpretations and definitions within the Codes. Interpretation
of the Codes must be according to the following three provisions
unless the context requires a different meaning:
1 In interpreting the provisions of the Codes, any reasonable
interpretation consistent with the objectives of the B-BBEE
Act (Act) and an organisation’s B-BBEE Strategy must
take precedence.
2 Words importing persons shall, where the context requires
or admits, include individuals, firms, partnerships, trusts,
corporations, governmental bodies, authorities, agencies,
unincorporated bodies of persons or associations and any
organisation having legal capacity.
3 The Schedules and Annexes are a point of reference to
the Codes The definitions featuring in Schedule 1 apply to the Exclusion
Principle, which is an allowance in the Ownership Scorecard: “Equity
Instrument”
means the instrument by which a Participant
holds Rights of Ownership in an Entity.
“Exercisable
Voting Right”
means a voting right of a Participant that is
not subject to any limit.
“Mandated
Investments”
means any investments made by or through
any third party regulated by legislation on
behalf of the actual owner of the funds,
pursuant to a mandate given by the owner to
a third party, which mandate is governed by
that legislation. Some examples of domestic
mandated investments and the portions of
those investments subject to the exclusion
principle are contained in Annexe 100A
attached to statement 100.
“Current
Equity
Interest Date”
means the later occurring of the date of
commencement of statement 100 and the
date upon which the transaction undertaken
by the Measured Entity in order to achieve
‘Black’ rights of ownership became effective
and unconditional.
“Participant” means a natural person holding rights of
ownership in a Measured Entity.
“Private
Equity Fund”
means a third-party fund through which
investments are made on behalf of the actual
owner of the funds pursuant to a mandate
given by that person to the private equity
fund.
“Qualifying
Transaction”
means a sale of a business, valuable business
assets or shares, that result in the creation
of sustainable business opportunities and
transfer of specialised skills or productive
capacity to ‘Black’ people.
All the definitions mentioned above filter through to "Rights of
Ownership", which is the differentiating factor between a 'Form'
and a 'Principle' according to the Ownership scorecard.
“Rights of
Ownership”
is a collective term for the right to Economic
Interest and the right to Exercisable Voting
Rights A ‘Form’ of Ownership links to Economic Interest and the effective
Voting Rights applicable to a physical share. In short, it is about
the control of an organisation. The Codes allow other avenues
to achieve an organisation’s objectives and targets. However, all
Forms of Ownership incorporate equity, which means discarding
the Voting Right and the Economic Interest associated with such
disposal. Forms of Ownership may include but are not limited to:
> Direct and Indirect Equity Share Transactions between
individuals and entities;
> Implementation of Trusts which house a type of scheme,
namely an Employee Ownership Scheme or a Broad-Based
Ownership Scheme;
> Trading and Family Trusts;
> The Sale of an Asset - further information appears on page 32;
> Private Equity;
> Equity Equivalents;
> Mandated Investments;
> Section 21 Companies or Companies Limited by Guarantee; and
> Options and Share Warrants.
A ‘Principle’ of Ownership is a concept that facilitates or promotes a
‘Form’ of ownership. The theory is the Principle links to commercial
regulation complexities and how such commercial requirements
impact a ‘Form’ of ownership. For example, Mandated Investments
add to the complexity due to the mandates, owners and controlling
parties associated with such investments. Consequently, determining
the effective ‘Black’ Ownership percentage of an organisation with
shareholding through this equity instrument is extremely difficult to
calculate, due to the restrictions imposed on a Mandated Investment
by Private Equity Fund Managers. Again, in terms of Private Equity
Fund Managers and their commercial rights, determining the effective
‘Black’ Ownership is difficult or may not even be possible in terms of
the B-BBEE legislative requirements. Hence, the B-BBEE framework
made a provision to incorporate such complexities that would align
with the objectives of the Act.
Introducing the Exclusion Principle: It is not associated with the
physical disposal of a share, its Voting Right and Economic Interest,
but rather a concept of recalculating an organisation’s total ‘Black’
shareholding. The Codes allow an organisation to exclude portions
of shareholding. However, applying the Exclusion Principle may
impact the remaining forms of Ownership.
The Exclusion Principle automatically applies to organs of state
and Public Entities, whereby these exclusions take preference
over other avenues of Ownership. A Mandated Investment, for
example, may not exceed 40% of the total exclusions derived in the
Ownership score.
Before applying the Exclusion Principle, organisations must
consider their fundamental requirements and the objectives. To
determine the validity of a Mandated Investment and its subsequent
inclusion or exclusion from the Ownership calculation, a B-BBEE
Rating Agency must obtain recognition in a report form, compiled
by a Competent Person. A B-BBEE Rating Agency will: > Confirm all Mandated Investments held by an organisation;
> Inspect the share register for all Mandated Investments
held by Collective Investment Schemes; for example,
Pension Funds and Unit Trusts to name a few;
> Recalculate the Ownership taking the exclusion of
Mandated Investments into account to ensure that it does
not exceed 40%.
Applying the Exclusion Principle to Mandated Investments
does not allow the application of the Modified Flow-Through
Principle (MFTP). Applying the Exclusion Principle will impact
the remainder of the Ownership Scorecard. The reason is
that the Deemed Net Value calculation makes provision for a
denominator which measures:
> The value of an organisation’s measurable ‘portion’ on the
date of an organisation’s B-BBEE Verification in contrast
to the ‘value’. The result of the Deemed Value, taking the
‘portion’ and ‘value’ into account, has a direct impact
on the Net Value calculation and the subsequent points
awarded on the Ownership Scorecard. The following
illustrates the calculation of the Exclusion Principle during a
B-BBEE Verification. Formula A: Net Value Calculation
B is the Deemed Value for all ‘Black’ Participants in
the Measured Entity determined using the Deemed
Value Formula
C is the Time-Based Graduation Factor of the
Economic Interest compliance, the target of which is:
> 10% for the first year after the current equity
interest date.
> 20% for the second year after the current
equity interest date.
> 40% from the first day of the third year after the
current equity interest date to the last day of the
fourth year after the current equity interest date.
> 60% from the first day of the fifth year after the
current equity interest date to the last day of the
sixth year after the current equity interest date.
> 80% from the first day of the seventh year after the
current equity interest date to the last day of the
eighth year after the current equity interest date.
> 100% from the first day of the ninth year after the
current equity interest date to the last day of the
tenth year after the current equity interest data. Formula B: Equity Instruments Calculation
Modified
Flow-Through Principle Example
B is the percentage Economic Interest in the
Measured Entity of ‘Black’ Participants
C is the target for the Ownership indicator in paragraph
2.3.1 of the Ownership scorecard Another common principle that relates to the Ownership
Scorecard is the MFTP that applies to B-BBEE owned
or controlled companies. Essentially, it seeks to promote
transformation whilst allowing the participation of non-’Black’
Participants at the first tier of ownership. The Codes unpack the
principle, as:
> Where in the chain of Ownership ‘Black’ People have a
flow-through level of participation of at least 51%, only then,
once in the entire ownership structure of an organisation,
may such ‘Black’ participation be treated as if it were 100%
‘Black’-owned.
In the following illustration, ABC Traders has 51% ‘Black’
Ownership when applying the Flow-Through Principle (FTP).
Using the same illustration but applying the MFTP, it deems
an organisation to have 100% ‘Black’ Ownership. Therefore,
applying the MFTP, the effective ‘Black’ shareholding is 26%, in
contrast to 13,36% when applying FTP. What this means for the
Measured Entity is that they would more than likely achieve total
points for indicators 2.1.1 and 2.2.1 on the Ownership scorecard. Applying a single principle allowed on the Ownership calculation
acts as a reward for transforming, thus showing an organisation’s
willingness to transform. The application of the Exclusion
Principle generally occurs in Complex Ownership Structures.
However, once another principle like the MFTP is applied,
the option of the Exclusion Principle falls away. The rationale
behind the principle is employed to promote a specific Form
of Ownership. An organisation may not benefit from multiple
principles allowed in the Ownership Scorecard, as doing that
would result in misrepresentation of its ownership status.
Therefore, an organisation can have various Ownership vehicles;
however, it may only apply one principle. Put another way,
applying a principle effectively inflates an organisation’s ownership
score, in line with the expectations of the Codes.
In conclusion, the Ownership Scorecard is multi-faceted and
complex. As the consequences for not accurately forecasting the
outcome are so high, organisations must ensure that both the
legal and B-BBEE boxes are ticked by those wholly versed in the
B-BBEE space. Levanya Reddy is a Director at MSCT BEE
Services, a SANAS accredited B-BBEE
Rating Agency. She has an in-depth
understanding of the Codes; with her
experienced team, MSCT conducts B-BBEE
Verifications according to the standards
outlined in the R47-03 document. Following
an honours degree and subsequent career in
Biotechnology, her shift to the B-BBEE space
was borne from new opportunities and a
desire to put herself at the forefront of a
transforming South Africa. As B-BBEE is the
catalyst for change, the move was a good fit.