The Department of Trade Industry and Competition (DTIC) recently published Practice Note 1 of 2021: Rules for Discretionary Collective Enterprises, together with an explanatory memorandum. This Practice Note provides clarity on how the ownership by entities such as Broad-Based Schemes, Employee Share Ownership Programmes, Trade Unions, Not for Profit Companies, Co-Operatives, and Trusts (referred to as “Collective Enterprises” in the Practice Note) should be interpreted under the B-BBEE Codes of Good Practice (the Codes).
Section 14(2) of the Broad-Based Black Economic Empowerment (“B-BBEE") Amendment Act 46 of 2013 (“Act”), states that the Minister may by notice in the Gazette issue guidelines and practice notes relating to the interpretation and application of this Act. Therefore, once a Minister has issued a Practice Note, it serves as a non-binding clarification of existing legislation.
RATIONALE FOR THE PUBLICATION OF THE PRACTICE NOTE
The B-BBEE Act and the Codes were enacted to address the inequalities of apartheid with the aim of promoting greater black economic participation in the economy, thereby empowering those who were previously disadvantaged.
The Practice Note recognises the significant contribution by Collective Enterprises in promoting Black ownership in the economy. As such, the Practice Note seeks to provide market certainty for those Measured Entities that have, or intend to put in place, a Collective Enterprise in terms of the requirements of the Codes, in that such scheme will be regarded as satisfying the requirements for Black ownership in terms of the Codes.
THE SALIENT POINTS
The Practice Note recognises that Collective Enterprises, such as Broad-Based Ownership Schemes, typically in the form of an Education Trust or Community Fund, or an Employee Share Ownership Programme in the form of an Employee Trust, are valid vehicles for furthering B-BBEE participation and are in line with the objectives the Act. The Codes expressly recognise this form of ownership by Black people in the Measured Entity.
The Practice Note recognises that the use of a defined class of natural person meets the requirements under the Codes and that it is not necessary to list individual beneficiaries of the Scheme.
The Practice Note also accepts that the beneficiaries of such Schemes may have a “hope” to participate in the income and capital of the scheme but would not necessarily have a vested right to such income or capital. These schemes would typically allow the trustees or fiduciaries to exercise a discretion to select individuals from a defined class of natural persons as beneficiaries of the Scheme, and to determine the proportion of the entitlement to be awarded to each beneficiary in accordance with the formula recorded in the constitutional documents of the Scheme, or by determining the proportion of the entitlement of that particular beneficiary once selected from the defined class of natural persons. These schemes would comply with the requirements of the Codes.
A good example of the application of this aspect of the Practice Note is the discretionary powers granted to the trustees of a bursary scheme. The trust deed would identify the class of natural persons of the Scheme, for example “black female students intending to study law at a tertiary institution”. The trustees will only be able to select beneficiaries from this defined class. In addition, the trust deed may grant to the trustees a discretion in terms of the value of the distribution to be awarded to each beneficiary. Once the trustees have determined to make an award, then 100% of the award should be paid to the beneficiary or on behalf of the beneficiary. Based on the Practice Note, this Scheme would meet the requirements under the Codes.
The Practice Note specifically recognises that distributions can be made in cash or in kind. This clarity will provide comfort to those Schemes which have traditionally made distributions directly to third-party providers on behalf of the beneficiaries, for example, payments directly to the relevant educational institutions or skills development providers on behalf of the beneficiaries.
Another issue which required clarification, was the recognition of minor beneficiaries of Schemes. The Practice Note is now clear that minor Black beneficiaries are not restricted from being participants or beneficiaries of any Scheme, provided that such minor beneficiary forms part of the defined class of natural persons in the constitutional documents. A good example of this, is a scheme which provides for early childhood development, education and/or feeding programs.
In some instances, where the Measured Entity was unable to declare a dividend to its shareholders in circumstances where it did not meet the requirements of solvency and liquidity in terms of the Companies Act, or that it had elected to withhold the dividend for commercial reasons, the Measured Entity was penalised under the Ownership Element of the Scorecard. The Practice Note has now clarified the position stating that the Economic Interest (dividend) attaches to the right to receive a dividend (or similar right), and not to the distribution itself.
Often, the B-BBEE verification agencies or the B-BBEE Commission may request certain documentation from the Collective Enterprise or the Measured Entity in order to verify the Black ownership. The Practice Note clearly stipulates that the constitutional documents are key in interpreting the evidentiary requirements. If the constitutional document, for example the trust deed, is clear on the race and gender composition of a defined class of beneficiaries, then the constitutional document or trust deed will serve as the written record of those facts. If this is not clear from the face of the constitutional documents, then reliance may be placed on an independent competent person’s report estimating the rights of Black ownership in the Scheme.
Finally, the Practice Note makes it clear that the voting rights exercised by the trustees, or the fiduciaries of a Scheme, will be attributed to the race and gender of the beneficiaries of the Scheme and not to the trustees themselves.
B-BBEE Manager, Johannesburg
*Article originally published in De Rebus