The use of a B-BOS in B-BBEE ownership structures

The use of a B-BOS (broad-based ownership schemes) in B-BBEE ownership structures is common practice and in line with the objectives of the B-BBEE Act which specifically promote broad-based
black economic empowerment.

Businesses and beneficiaries of collective ownership programmes derive many benefits from collective ownership schemes to manage and house the wealth created through B-BBEE share ownership.

In a collective ownership scheme, the individuals of the scheme exercise those rights of ownership to the exclusive benefit of the beneficiaries.

The B-BBEE Commission has re-iterated that the objects of a B-BOS must be limited solely to promoting the ownership of assets by black people. More particularly, where a B-BOS is also a PBO (public benefit organisations), the Commission requires that the PBO limits its objects to promoting black ownership, if not the Commission’s view is that the PBO cannot contribute B-BBEE ownership points.

This approach is however not widely accepted and may result in a number of legal issues such as breach of contract, litigation, exit of the PBO from existing shareholdings and damages claims against the PBO. It goes without saying that B-BOS’s and PBO’s often provide contractual undertakings to the company and/or its co-shareholders regarding its compliance with the Codes and its contribution of B-BBEE ownership points.

More black people may benefit from the inclusion of a PBO in a B-BBEE ownership structure than in structures limited to individual black shareholders. Amendments to the Codes in 2015 provided and incentive for the use of a B-BOS by increasing the number of B-BBEE ownership points (from 1 to 3) that a company may score from including a B-BOS in its ownership structure.

Who qualifies as a B-BBEE beneficiary?

The B-BBEE Codes in essence provide for two main categories of collective programmes, i.e.

Broad- Based Ownership Schemes (BBOS) and Employee Share Ownership Programmes (ESOP).

The beneficiaries are defined as follows:

BBOS – the participation of specified and identifiable natural persons with benefits flowing from the rights of ownership. Those specified natural persons as beneficiaries are in most instances precluded from exercising voting rights on behalf of a collective programme.

ESOP – means a worker or employee scheme, similar to a contribution employee benefit plan or employee share incentive programme.

The Codes of Good Practice permit the use of Trusts, BBOS and ESOP to facilitate the transfer of ownership to multiple beneficiaries such as employees and community members, amongst others.

Below is an extract of the relevant info from the Gazette Number 36928 dated 11 October 2013.

An extensive list of rules and conditions must be met for B-BOS Schemes to be recognised.

ANNEXE 100 (B)

  1. Rules for Broad-Based Ownership Schemes

1.1 The following rules apply to Broad-Based Ownership Schemes:

1.1.1 the management fees of the scheme must not exceed 15%;
1.1.2 the constitution of the scheme must record the rules governing any portion of Economic Interest received and reserved for future distribution or application;
1.1.3 the constitution of the scheme must define the Participants and the proportion of their claim to receive distributions;
1.1.4 a written record of the name of the Participants or the use of a defined class of natural person satisfies the requirement for identification;
1.1.5 a written record of fixed percentages of claim or the use of a formula for calculating claims satisfies the need for defining proportion of benefit; and
1.1.6 the fiduciaries of the scheme must have no discretion on the above mentioned terms;
1.1.7 at least 85% of the value of benefits allocated by the scheme must accrue to Black people;
1.1.8 at least 50% of the fiduciaries of the scheme must be independent persons having no employment with or direct or indirect beneficial interest in the scheme;
1.1.9 at least 50% of the fiduciaries of the scheme must be Black people and at least 25% must be Black women;
1.1.10 the chairperson of the scheme must be independent;
1.1.11 the constitution, or other relevant statutory documents, of the scheme must be available, on request, to any Participant in an official language in which that person is familiar;
1.1.12 the scheme fiduciaries must present the financial reports of the scheme to Participants yearly at an annual general meeting of the scheme; and
1.1.13 on winding-up or termination of the scheme, all accumulated Economic Interest must be transferred to the beneficiaries or an entity with similar objectives.

  1. Additional criteria applicable to Broad-Based Ownership Schemes

2.1 for a Measured Entity to obtain the maximum points on its Ownership scorecard, the following additional requirements must be met by a Broad-Based Ownership Scheme:

2.1.1 a track-record of operating as a Broad-Based Ownership Scheme , or in the absence of such a track-record demonstrable evidence of full operational capacity to operate as a Broad-Based Ownership Scheme; and

2.2 operational capacity must be evidenced by suitably qualified and experienced staff in sufficient number, experienced professional advisors, operating premises, and all other necessary requirements for operating a business.

For the sake of comparison the requirements of Employee Share Ownership Programmes have been added too.

  1. ANNEXE 100 (C)

3.3 Rules for employee share ownership programmes

3.3.1 The following rules apply to Employee Share Ownership Programmes:

3.3.1.1 the constitution of the scheme must define the Participants and the proportion of their claim to receive distributions;
3.3.1.2 a written record of the name of the Participants or the use of a defined class of natural person satisfies the requirement for identification;
3.3.1.3 a written record of fixed percentages of claim or the use of a formula for calculating claims satisfies the need for defining proportion of benefit; and
3.3.1.4 the fiduciaries of the scheme must have no discretion on the above mentioned terms; and

3.4 The Participants must take part in:

3.4.1 appointing at least 50% of the fiduciaries of the scheme;
3.4.2 managing the scheme at a level similar to the management role of shareholders in a company having shareholding;
3.4.3 the constitution, or other relevant statutory documents, of the scheme must be available, on request, to any Participant in an official language in which that person is familiar;
3.4.4 the scheme fiduciaries must present the financial reports of the scheme to Participants yearly at an annual general meeting of the scheme; and
3.4.5 all accumulated Economic Interest of the scheme is payable to the Participants at the earlier of a date or event specified in the scheme constitution or on the termination or winding-up of the scheme.

As one can see, the requirements and criteria are extensive and not easily achieved if not properly implemented and managed.

The use of Trusts, B-BOS and ESOPs should be used to facilitate achievement of targets under any element of B-BBEE, being ownership (Statement 100), management control (Statement 200), skills development (Statement 300), enterprise & supplier development (Statement 400) and socio-economic development (Statement 500).

Keep in mind the rules applicable for that element will apply too.

Due to the complex nature of such transactions it is recommended that business utilise the services of professional B-BBEE consultants at all times.

Author Craig Tonkin

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