AZOLA FUTSHANE: FOREIGN INVESTORS COULD CONSIDER EQUITY EQUIVALENT PROGRAMME AS BBBEE ALTERNATIVE
AZOLA FUTSHANE- 24 AUGUST 2022
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An equity-equivalent programme may entail a public or private programme, or a combination thereof, designed to fulfil the requirements of BBBEE ownership.
SA’s Broad-Based Black Economic Empowerment (B-BBEE) Act of 2003, as amended, was introduced to address existing racially-based income inequalities. The legislation is geared to enable the economic participation of citizens classified as Africans, coloureds or Indians ("black people”) who were excluded from participating in the SA economy during apartheid.
Noble as the BBBEE Act may be, international companies aiming to operate in the country may find it a challenge to meet some of the requirements of the legislation, particularly those relating to ownership, a requirement aimed at creating the opportunity for a business to bring in previously disadvantaged individuals as part-owners.
Broadly, BBBEE includes the sharing of ownership in entities and other economic benefits with designated persons in terms of the applicable law. However, it is not always possible for multinationals to bring in members of the designated groups to participate in the equity structure in the traditional manner. An alternative that foreign investors should consider is the equity equivalent programme.
The codes of good practice that are part of the legislation recognise that, in some instances, foreign entities may be unable to satisfy the ownership requirements. In this regard, contributions in lieu of a direct sale of equity may meet the requirements of the BBBEE Act. This applies only where a foreign-owned company is precluded from having any local ownership of its operations in a country outside its home base. If such local ownership is permitted in any country elsewhere, it must be permitted in SA and an equity-equivalent programme will not be applicable.
An equity-equivalent programme may entail a public or private programme, or a combination thereof, designed to fulfil the requirements of BBBEE ownership. An equity-equivalent programme may also involve activities that promote socioeconomic advancement or development within the SA economy. Such a programme needs to be approved by the trade, industry and competition minister to qualify for ownership points on the BBBEE scorecard.
An equity equivalent programme can take the following forms:
Enterprise creation programmes and initiatives that support enterprise development, such as the provision of seed or development capital.
Programmes that promote social advancement, such as the provision of training and/or mentoring to entities that are designated as beneficiaries of enterprise development, or to beneficiary communities.
Projects aimed at technology transfer/diffusion within the small, medium, and micro-enterprise sector of the local economy beyond the foreign entity’s core business activities.
Programmes that promote economic growth and employment creation through the development of technological innovation beyond the foreign entity’s core business activities.
Initiatives that must lead to sustainable job creation, such as the creation or development of capacity and expertise for beneficiary entities required to manufacture or produce goods and/or services previously not manufactured, produced or provided in SA.
Financial contributions to equity-equivalent programmes are measured in terms of the act’s codes of good practice as actual contributions measured against the value of the SA operations of the multinational, or the total revenue from the operations of the SA entity.
Ownership requirements in terms of the codes of good practice need neither operate in a burdensome manner nor deter foreign investors from pursuing investments in SA. The benefits of a satisfactory BBBEE scorecard may be exploited by investors that pay careful consideration to the regulatory landscape and make use of the available options while simultaneously bringing a mutual benefit to SA.
Equity-equivalent programmes are one such option and provide a viable alternative to the ownership requirements set out in the codes of good practice.
• Futshane is an associate in the corporate & commercial team at law firm CMS SA.
‘Disclaimer - The views expressed here are not necessarily those of the BEE CHAMBER’