Black Ownership is Back in Focus

The revised Codes, which will come into effect on 1 May 2015, could result in a company’s BEE Scorecard measurement dropping significantly.

There are many changes to the existing framework, but three key changes are highlighted:

1. Higher compliance targets across all elements of the Scorecard, which will lead to a drop in points earned;
2. A new sliding scale, which will make it more onerous to maintain existing contributor status; and
3. The introduction of priority elements, which require a minimum performance level to avoid stiff penalties.

Ownership is one of the new priority elements. Many companies have concentrated on elements of the BEE Scorecard other than Ownership.

With the proposed changes it will be difficult to achieve a level of BEE compliance without introducing at least 10% black ownership. The DTI has focused on the Ownership sub-minimum target in the Net Equity portion of the BEE Ownership Scorecard to ensure that real economic value is driven to black shareholders.

This ensures that a certain minimum net worth is created for the BEE participant. This is measured by the value of the equity held by black investors in the enterprise, less the related outstanding acquisition debt against net value targets, which escalate over time by a certain portion.

There are numerous options available to multinationals to address the Ownership element including:
– The DTI equity equivalent programme, which was created to assist wholly-owned subsidiaries of multinationals, which have a policy of not giving up shares in subsidiaries.

The DTI is revising this policy to assist companies that have not qualified in the past. The success of an application will depend on the development of a policy that meets the country’s developmental needs, often through the creation of black-owned businesses or industry development.

The introduction of a black shareholder, which could include a strategic partner, Employee Ownership Schemes, or the involvement of charitable foundations and trusts, with the objective of improving Socio Economic Development, Enterprise Development or job creation.

A sustainable transaction should drive value for the business by improving its customer relationships, increasing productivity through involving its workforce and providing opportunities in its supply chain for developing small, black-owned, local businesses.

The new legislation should help drive the DTI’s stated objective of creating black industrialists, new black-owned businesses, and improving job creation and stability in the South African economy.

Any intervention on the BEE Ownership Scorecard should be robust enough to stand the tests of BEE verification Agencies and the DTI, flexible enough to accommodate changes in legislation, BEE funding requirements or company strategy and, most importantly, meaningful. Only a meaningful participation in the transformation efforts of South Africa will ensure the long term success the BEE transaction and have positive effects on the reputation of the initiating entity.

To learn more about employee share ownership solutions get in touch with us, we can help determine the best solution for you.