Key measurement principles for the Ownership element

In this article, we will discuss in detail the Ownership element of B-BBEE as per the Amended Codes of Good Practice implemented on 01 May 2015.

This element is a priority element for Large enterprises and QSE’s.

General Principles

An entity receives points for participation by black people in its rights of ownership, using the ownership scorecard.

Black people may hold their rights of ownership in a measured entity as direct participants or as participants through some form of entity such as: a company defined in the Companies Act, 2008 (as amended), a close corporation, a co-operative, a trust, a broad-based ownership scheme, an employee share ownership programme, a partnership or other association of natural persons and any form of juristic person recognised under South African law.

Sub-minimum requirements

A measured entity is required to achieve a minimum of 40% on Net Value Points (i.e. 8 points) based on the Time Graduation Factor formula. Non-compliance with this sub-minimum target will result in the achieved B-BBEE status level being discounted by one level in terms of the discounting principle.

Flow Through Principle

As a general principle, when measuring the rights of ownership of any category of Black people in a measured entity, only rights held by natural persons are relevant. If the rights of Ownership of Black people pass through a juristic person, then the rights of Ownership of Black people in that juristic person are measurable. This principle applies across every tier of Ownership in a multi-tiered chain of Ownership until that chain ends with a Black person holding rights of Ownership.

The method of applying the Flow-Through Principle across one or more intervening juristic persons set out in the Amended Codes. Due to limitations in length of this guide, the detail is not included herein.

Modified Flow Through Principle

A measured entity applying the Modified Flow-Through Principle cannot benefit from the Exclusion Principle.

The Modified Flow-Through Principle applies to B-BBEE owned or controlled company in the Ownership of the measured entity.

In calculating Exercisable Voting Rights in the entity in the hands of black people, and Economic Interest in the entity to which black people are entitled, (as per the Ownership scorecard) the following applies:

Where in the chain of Ownership, black people have a flow-through level of participation of at least 51%, and then only once in the entire ownership structure of the measured entity, such Black participation may be treated as if it were 100% Black.

The Modified Flow-Through Principle may only be applied in the calculation of the indicators in Exercisable Voting Rights in the entity in the hands of black people, and Economic Interest in the entity to which black people are entitled, (as per the Ownership scorecard). In all other instances, the Flow-Through Principle applies.

Exclusion of specified entities when determining ownership:

When determining ownership in a measured entity, ownership held by organs of state or public entities must be excluded, and this exclusion is effected before any other ownership discounting methods are to be applied.

In calculating their ownership score, measured entities must apply the exclusion principle to any portion of their ownership held by organs of state or public entities.

B-BBEE Facilitator Status

Despite the exclusions above, the Minister may by notice in the gazette, designate certain organs of state or public entities as B-BBEE facilitators.

In calculating their ownership score, measured entities must treat B-BBEE facilitators as having rights of ownership held: 100% by black people, 40% by black women, 20% by black designated groups, without any acquisition debts and without any third party rights.

Mandated Investments

When determining ownership in a measured entity, rights of ownership of mandated investments may be excluded, and the maximum % of the ownership of any measured entity that may be so excluded is 40%. Further detail on Mandated Investments are set out in detail in the Amended Codes.

Recognition of ownership after sale or loss of shares by black participants

A measured entity is allowed to recognise a portion of black ownership after a black participant has exited through the sale or loss of shares subject to the following criteria:

The black participant has held shares for a minimum period of 3 years.

Net value based on the Time Based Graduation Factor as per Annexe 100(E) of the Codes must have been created in the hands of black people.

Transformation has taken place within the measured entity using the B-BBEE recognition level from the period of entry of black participants to the exiting period.

Black participation arising from continued recognition of black ownership cannot contribute more than 40% of the score on the ownership scorecard.

In the case of a sale or loss of shares by the black participant, the following additional rules apply: A written tripartite agreement between the measured entity, the black participant and a lender must record the loan or security arrangement, unless the measured entity is a lender and the period over which the continued recognition points are allocated or recognised after sale or loss of shares will not exceed the period over which the shares were held.

The ownership points under this paragraph that are attributable to the measured entity will be calculated by multiplying the following elements:

The value created in the hands of black participants as a % of the total value of the black participants’ shareholding in the measured entity at the date of sale or loss of shares.

The B-BBEE status of the measured entity based on the balanced scorecard as at the date of measurement, and

The ownership points that were attributable to the measured entity on the date of sale or loss of shares.

Broad-based ownership schemes and employee share ownership programme

Black participants in Broad-based ownership schemes and employee share ownership programmes holding rights of ownership in a measured entity may contribute:

A maximum of 40% of the total points of ownership scorecard of the measured entity if they meet the qualification criteria set out in Annexe 100 (B): Rules for Broad-Based Ownership Schemes and Annexe 100 (C): Rules for Employee Share Ownership Programmes.

100% of the total points on the ownership scorecard of the measured entity if they meet the additional qualification criteria set out in Annexe 100 (B) and 100 (C).

Private Equity Funds

A measured entity may treat any of its Ownership arising from a Private Equity Fund as if that Ownership were held by Black people, where the Private Equity Fund meets the following criteria:

At least 51% of any of the Private Equity Managers’ Exercisable Voting Rights associated with the Equity Instruments through which the Private Equity Fund holds rights of Ownership, must be held by Black people.

At least 51% of the Private Equity Fund’s Executive Management and Senior Management must be Black people.

At least 51% of the profits made by the Private Equity Fund Manager after realising any investment made by it, must by written agreement, accrue to Black people.

The Private Equity Fund Manager must be a B-BBEE owned company (as defined).

The Amended Codes set out further aspects applicable to Private Equity Funds in detail.

In the case of Private Equity Funds that were fully invested prior to 11 October 2014, investments by the Fund Managers will be considered as being made by Black people if the Private Equity Fund Management entities meet the following criteria:

At least 51% of any of the Private Equity Fund Manager’s Exercisable Voting Rights associated with the Equity Instruments through which the Private Equity Fund holds rights of ownership in a Measured Entity, must be held by Black people.

At least 51% of the profits accruing to the Private Equity Fund Manager after realising any investment made by it, must by written agreement, accrue to Black people, and Private Equity Fund Manager must be a B-BBEE owned company.

Section 21 Companies and Companies Limited by Guarantee

A measured entity may elect to include or exclude Section 21 companies or companies limited by guarantee for the purposes of measuring ownership.

Such companies that house a Broad-based ownership scheme or an employee ownership scheme are subject to the provisions governing those types of schemes and not this paragraph.

Further detail on Section 21 Companies and Companies Limited by Guarantee is contained in the Amended Codes.

These companies are referred to as Non Profit Companies, in terms of the Companies Act. Please refer to our other articles written on this type of company.

Trusts

Black participants in a Trust holding rights of ownership in a measured entity may contribute:

A maximum of 40% of the total points on the ownership scorecard of the measured entity if the Trust meets the qualification criteria for Trusts set out in Rules for Trusts [Annexe 100 (D)].

100% of the total points on the ownership scorecard of the measured entity if the Trust meets the additional qualification criteria set out for Trusts in Annexe 100 (D).

Options and Share Warrants

Exercisable Voting Rights and Economic Interest will be recognised where a participant holds an instrument granting the holder the right to acquire an Equity Instrument or part thereof at a future date, if the following requirements are met:

The Exercisable Voting Rights attached to that instrument are irrevocably transferred to the holder for the option period and are exercisable by the holder before acquiring the Equity Instrument.

The Value of any Economic Interest is irrevocably transferred to the holder for the option period and paid to the holder of that instrument before the exercise of that right, and

The value of the instrument must be determined by using a Standard Valuation method for calculating Net Value.

Equity instruments carrying preference rights

An Equity Instrument carrying Preferential Rights is measurable in the same manner as an ordinary Equity Instrument.

Further detail on Equity Instruments carrying Preferential Rights is contained in the Amended Codes.

Annexes: Examples, Measurement and Rules

The amended Codes include five Annexes, detailing the following relating to the Ownership element:

Annexe 100 (A):       Examples of Mandated Investments

Annexe 100 (B):       Rules for Broad-Based Ownership Schemes

Annexe 100 (C):       Rules for Employee Share Ownership Programmes

Annexe 100 (D):       Rules for Trusts

Annexe 100 (E):       1. Measuring of Voting Rights

                                    2. Measurement of Economic Interest

                                    3. Calculation of deemed value

                                    4. Calculation of Net Value

                                    5. Calculation of the recognition of ownership after the sale or loss of shares by black Participants

Leave a Reply