Ownership and Net Value Transfer

Reference documents:

Revised B-BBEE Codes of Good Practice, Code Series 100 and Annexe 100 in Government Gazette 36928
B-BBEE Amendment Act number 53 of 2003
Government Gazette 38766 dated 06 May 2015

In this article we discuss the principles of net value with respect to the Ownership element of the B-BBEE Scorecard.

Ownership: a measured entity must achieve a minimum of 40% of the ‘Net Value’ points based on Code Series 100 of the revised Codes (i.e. 40% of the 8 points being 3.2 points) based on time graduation factor.

Entities that wish to claim B-BBEE points under the Net Value component of the Ownership scorecard, need to do so by applying the standard valuation methodology to all instruments underlying their B-BBEE ownership transactions.

Benefits:

The ownership net value points would increase, this may result in an increase in B-BBEE status level;
The increase in net value points may result in meeting the 40% sub-minimum for the net value priority element. The elimination of a level discount will result in an increase in points and the B-BBEE status level;
The increase in net value points may result in the achievement of the full net value points and in cases the achievement of all the criteria for recognition as a “51% Black Owned Status”;

Net Value Transfer (“NVT”) is measured according to two formulae. The lower result of the two determines a company’s NVT score.

The first step however is to calculate the Deemed Net Value.

Deemed Net Value: A = (B-C) / D

A: Deemed Net Value
B: Black shareholding percentage (Economic Interest in the hands of Black people) on measurement date
C: Value of acquisition debt (debt that the black shareholder is still owing on the shares) from Black participants
D: Value of the Entity on measurement date

Thereafter two formulae, as described below, must be used.

FORMULA A:

Requires companies to transfer a targeted portion of their Equity Value of the black shareholders unencumbered and free of debt over a period of eight years.

Equity Value held by black shareholders unencumbered by debt is measured as a percentage of the Equity Value of the company. This is called Deemed Value.

The target for Deemed Value is a stepped function increasing annually over a period of eight years (Time-Based Graduation Factor).

If the sub-minimum of 40% of the target is not achieved, the company will be discounted an empowerment level. In order to avoid being discounted an empowerment level, a company must transfer a minimum of 10% of the Equity Value in the company to black shareholders over an eight-year period unencumbered and debt-free.

Formula A is a step function with a target of transferring 25% of unencumbered Equity Value (Deemed Value) to black shareholders by the end of the eight-year period. The sub-minimum of 40% applies to this step function.

A = B x (1/(25% x C)) x 8

A: Result
B: Deemed Net Value
C: Time based graduation factor:

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 date.

FORMULA B:

Requires companies to transfer a targeted portion of their Equity Value of the black shareholders as a percentage of the ultimate target.

This target is 25% for companies subject to the Generic Scorecard. The target applies from the inception of the ownership transaction.

A = (B/C) x 8

A: Result
B: Black Economic Interest percentage
C: Target for Economic Interest in the Entity to which Black people are entitled (i.e. 25%)

After completing the calculation of Formula A and Formula B, the lower of the two results will be the points that will be awarded out of the total 8 points for the Net Value indicator.

How does the Time-Based Graduation Factor work?
The Time-Based Graduation Factor is a function that stipulates the proportion of the Equity Value of the Measured Enterprise (Deemed Value) that should have been transferred to black shareholders on an annual basis.

When does the eight-year Net Value Transfer period start?
The eight-year period starts at the date of inception of the first BEE Ownership transaction entered into by the company.

For further information about Ownership read the following article on our website: https://beeratings.com/equity-equivalent-programmes-for-multinationals-in-b-bbee-explained/

Government Gazette 38766 (specifically “Statement 102”) also explains in detail the requirements for equity equivalent transactions.

Leave a Reply