Ownership Explained

Direct Ownership

Black individuals can hold their rights of ownership in a measured entity either directly or indirectly through a broad range of third-party intermediaries and other equity instruments.

Direct equity ownership is generally preferable as this allows Blacks to have both ownership and control of economic assets and resources. This cultivates an active interest in the sustainability and profitability of a measured business.

This needs one to have an active involvement in the strategic and operational affairs of a business. B-BBEE, with its emphasis on operational involvement, encourages Black investors to actively seek to gain sufficient operational knowledge of the business they have invested in, as this provides a sustainable and meaningful way of integrating Blacks into mainstream economy.

Indirect Equity and other forms of ownership

Indirect equity and other forms of ownership are recognisable under the equity ownership element of the B-BBEE Codes if they contribute towards increasing the number of Blacks who own, control and manage economic assets and resources in the mainstream economy.
For a measured business to earn ownership points from indirect equity and other forms of ownership contributions, it is required to abide by certain specific rules and standards elaborated in:
• Statements 000 and 004 of the Code series 000; 
• Statements 100, 102 and 103 of the Code series 100 and
• Statements 800 and 801 of the Code series 800.
These rules and standards are primarily intended to ensure that businesses that facilitate indirect equity and other forms of ownership initiatives result in the genuine transfer of economic benefits to Blacks.
Indirect equity and other forms of ownership contributions for B-BBEE
The following two broad categories of ownership/equity may be partially excluded in the calculation of a measured business’s ownership score:
• ownership held directly by government and 
• ownership held directly by mandated investments

Ownership held directly by government

Government (including organs of state and public entities) is neither Black nor White. Therefore, all equity held directly by government in a measured business is excluded in the calculation of the ownership score of that measured business. However, government may designate certain specific government entities as BEE Facilitators, which in terms of the ownership recognition points, are automatically deemed to be:
• 100% Black-owned; 
• 40% Black women-owned; 
• 10% Black designated groups-owned; 
• without any acquisition debts and 
• without any third-party rights.

Other forms of ownership

Notwithstanding this, the other category of ownership/equity that may be excluded in the calculation of a measured business’s ownership score is the value of non South African operations for both foreign-owned multinationals and South African- owned multinationals. As a general rule, the calculation of the rights of ownership for the purpose of determining the level of effective Black ownership in a measured business may be based exclusively on the value of South African operations. However, an offshore multinational that sells to South African Black investors shares in its offshore holding company or subsidiary may gain recognition points in its equity ownership scorecard.

In view of the favourable score attached to government entities designated as BEE Facilitators, a measured business with equity directly held by BEE Facilitators must include it in the calculation of its ownership score.

Specialised enterprises are those businesses whose equity ownership is considered to be neither Black nor White. As a result, the measurement of their contribution to B-BBEE uses either the adjusted generic scorecard or the adjusted QSE scorecard. Both the adjusted generic scorecard and the adjusted QSE scorecard exclude the equity ownership element.

Besides public entities and other enterprises wholly-owned by organs of state, the other entities that are classified as specialised enterprises are (i) companies limited by guarantee, (ii) higher education institutions, (iii) non-profit organisations, (iv) public benefit schemes and (v) section 21 companies.

In particular, both the adjusted generic and the adjusted QSE scorecards comprise six elements each. However, unlike the elements of the adjusted generic scorecard whose weightings are either 15 or 20 points each, all the elements of the adjusted QSE scorecard carry the weighting of 25 points each.

Specialised enterprises with an annual turnover of more than R35 million are required to use the adjusted generic scorecard when measuring their contributions to B-BBEE, specialised enterprises with an annual turnover of between R5 million and R35 million are required to use the adjusted QSE scorecard when measuring their contributions to B-BBEE.

While specialised enterprises with an annual turnover of more than R35 million are required to comply with all the six elements of the adjusted generic scorecard when measuring their contributions to B-BBEE, specialised enterprises with an annual turnover of between R5 million and R35 million are required to comply with any four of the six elements of the adjusted QSE scorecard when measuring their contributions to B-BBEE.
Ownership held directly by mandated investments

The other category of ownership/equity that may be partially excluded in the calculation of a measured business’s ownership score is mandated investments.

As a general rule, when measuring the rights of ownership held by mandated investments on behalf of Blacks in a measured business, you either:
• include all mandated investments or
• exclude all mandated investments

It is important to note that a measured business may not include some mandated investments and exclude others. That is, if a measured business decides to include mandated investments in the calculation of its ownership score, then all mandated investments must be included.
Likewise, if a measured business decides to exclude mandated investments in the calculation of its ownership score, then all mandated investments must be excluded.

A measured business that opts to include the equity owned by mandated investments in the calculation of its ownership score must understand that:
• the ownership recognised in the scorecard may only be based on the actual Black ownership of equity and the contribution of such equity may not, as a general rule, receive more than 40% (i.e. 8 points) of the total points available under the generic equity ownership scorecard.

A measured business that opts to exclude the equity owned by mandated investments in the calculation of its ownership score must understand that:
• the exclusion of such equity is limited to a maximum of 40% and the rest, if mandated investments hold more than 40% ownership in the measured business, will be treated as non-Black equity.

Ownership held directly by Section 21 companies and/or companies limited by guarantee
Section 21 companies and companies limited by guarantee may hold equity in a measured business on behalf of their Black beneficiaries.
A measured business with equity held by a section 21 company and/or company limited by guarantee on behalf of its Black beneficiaries may either include or exclude such equity in the calculation of its ownership score.

A measured business that opts to include such equity in the calculation of its ownership score must understand that:
• it must either treat all such equity as non-Black or obtain a competent person’s report estimating the Blacks’ rights of ownership emanating from such equity.

Section 21 companies or companies limited by guarantee that house broad-based ownership schemes or employee ownership schemes are subject to the conditions discussed below if they desire such equity to be recognised in the calculation of a measured business’s ownership score.

Likewise, a measured business that opts to exclude such equity in the calculation of its ownership score must understand that:
• up to a maximum of 40% of the equity held by a section 21 company or company limited by guarantee may be excluded in the calculation of a measured business’s ownership score.

Ownership held directly by broad-based ownership and employee ownership schemes
Broad-based ownership schemes and employee share ownership schemes may hold equity in a measured business on behalf of their Black beneficiaries.

A measured business with equity held by broad-based ownership schemes may recognise up to a maximum of 40% of the total points available under the ownership scorecard from such equity, provided that the broad- based ownership schemes meet the following minimum requirements:
• the management fees of the scheme do not exceed 15% of the total revenue;
• the constitution of the scheme records the rules governing any portion of economic interest received and reserved for future distribution or application;
• at least 85% of the value of benefits allocated by the scheme accrue to Blacks;
• at least 50% of the fiduciaries of the scheme are independent persons having no employment with or direct or indirect beneficial interest in the scheme;
• at least 50% of the fiduciaries of the scheme are Blacks and at least 25% are Black women;
• the chairperson of the scheme is independent and • on the winding-up or termination of the scheme, all accumulated economic interest is transferred to beneficiaries or an entity with similar objective.

Both the generic and the QSE equity ownership scorecards provide for the recognition and measurement of equity held by co-operatives in a measured business. However, the Codes do not indicate the rules or procedures to be followed in measuring the rights of ownership held by co-operatives on behalf of their Black beneficiaries. A close look at the way different types of co-operatives operate or ought to operate indicates that co-operatives resemble broad-based ownership schemes. If there is consensus on this characterisation of co-operatives, then it is appropriate to use the rules applicable to broad-based ownership schemes when measuring the rights of ownership held by co-operatives on behalf of their Black beneficiaries

In view of the current trend of including White employees within the B-BBEE employee share ownership schemes, rights of ownership belonging to Blacks in employee share ownership schemes need to be correctly calculated.

Similarly, a measured business with equity held by employee share ownership schemes may recognise up to a maximum of 40% of the total points available under the equity ownership scorecard from such equity, provided that the employee share ownership schemes meet the following minimum requirements:
• the constitution of the scheme defines the participants and the proportion of their claim to receive distribution (a written record of the name of the participants or the use of a defined class of natural person satisfies the requirement of identification, and a written record of fixed percentage of claim or the use of a formula for calculating claims satisfies the need for defining proportion of benefit);
• the fiduciaries of the scheme have no discretion as to the identity of participants or the proportion of their benefits;
• the participants take part in the appointment of at least 50% of the fiduciaries of the schemes;
• the par ticipants take par t in management of the scheme at a level similar to the management role of shareholders in a company having shareholding;
• the constitution or other relevant statutory documents of the constitution or other relevant statutory documents of the scheme are available on request to any participant in an official language in which that person is familiar;
• all accumulated economic interest of the scheme is payable to the participants at the earlier of a date or event specified in the scheme’s constitution or on the termination or winding-up of the scheme and • the scheme fiduciaries do present the financial reports of the scheme to participants yearly at an annual general meeting of the scheme.

If a measured business with equity held by employee share ownership schemes wishes to recognise 100% of the total points available under the ownership scorecard from such equity, the employee share ownership schemes must, in addition to meeting all the minimum requirements previously outlined:
• demonstrate a track-record of operating as an employee share ownership scheme or, in the absence of such a track-record, demonstrable evidence of full operational capacity to operate as an employee share ownership scheme.
If a measured business with equity held by broad-based ownership schemes wishes to recognise 100% of the total points available under the equity ownership scorecard from such equity, the broad-based ownership schemes must, in addition to meeting all the minimum requirements previously outlined:
• demonstrate 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.

Ownership held directly by private equity funds
While private equity funds may be owned by investors who are non-Black, the Codes do allow equity held by a private equity fund in a measured business to be recognised as Black-owned for the purpose of calculating that measured business’s ownership score.
Broad-based ownership schemes that wish to have their participation recognised for 100% of the total points available under the ownership scorecard must ensure that priority groupings (Black women and Black designated groups) are properly represented in order to maximise their points.

In respect of both broad-based ownership schemes and employee share ownership schemes, operational capacity is proven by suitably qualified and experienced staff in sufficient number, experienced professional advisors, operating premises and all other necessary requirements for operating a business.

A private equity fund is a ‘third-party fund through which investments are made on behalf of the actual owner of the funds pursuant to a mandate given by that person to the private equity fund’10.

However, a measured business may only recognise such equity as Black-owned if:
• more than 50% of any exercisable voting rights associated with the equity instruments through which the private equity fund holds right of ownership are in the hands of Blacks;
• more than 50% of profits made by the private equity fund manager after realising any investment made by it accrues to Blacks through a written agreement;
• the private equity fund manager is a BEE-owned company and
• more than 50% of the value of funds invested by any private equity fund is at all times invested in Black- owned enterprises that have at least 25% direct Black shareholding.

While there may be common characteristics between mandated investments and private equity funds, the latter is not regulated by legislation and may therefore not be regarded as mandated investment.

The more than 50% target of the value of private equity funds invested in enterprises that have at least 25% direct Black shareholding is expected to be achieved over a ten- year period starting from the date of the gazetting of the Codes (09 February 2007), as detailed below:
• within one year from the commencement date, more than 5% of the value of the funds invested must at all times be invested in companies that have at least 25% direct Black shareholding;
• within two years from the commencement date, more than 10% of the value of the funds invested must at all times be invested in companies that have at least 25% direct Black shareholding;
• between the first day of the 3rd year and the last day of the 4th year, more than 20% of the value of the funds invested must at all times be invested in companies that have at least 25% direct Black shareholding;
• between the first day of the 5th year and the last day of the 6th year, more than 30% of the value of the funds invested must at all times be invested in companies that have at least 25% direct Black shareholding;
Should the target company not meet the 25% Black direct shareholding before the investment by a private equity fund, then the private equity fund investment must enable the measured business to have at least 25% Black direct shareholding.
• between the first day of the 7th year and the last dayof the 8th year, more than 40% of the value of the funds invested must at all times be invested in companies that have at least 25% direct Black shareholding and
• between the first day of the 9th year and the last day of the 10th year, more than 50% of the value of the funds invested must at all times be invested in companies that have at least 25% direct Black shareholding.

Ownership held directly by Trusts
Trusts may hold equity in a measured business on behalf of their Black beneficiaries12.
A measured business with equity held by trusts may recognise up to a maximum of 40% of the total points available under the ownership scorecard from such equity, provided that the trusts meet the following minimum requirements:
• the trust deed defines the beneficiaries and the proportion of their entitlement to receive distributions (a written record of the names of the beneficiaries or the use of a defined class of natural person satisfies the requirement for identification and a written record of fixed percentage of entitlement or the use of a formula for calculating entitlement satisfies the need for defining proportion of benefit);
• the trustees have no discretion as to the identity of beneficiaries or the proportion of their benefit and
• on winding-up or termination of the trust,all accumulated economic interest is transferred to the beneficiaries or to an entity representing the interest of the participants or class of beneficiaries.

If a measured business with equity held by trusts wishes to recognise 100% of the total points available under the equity ownership scorecard from such equity, the trusts must:
• possess a certificate issued by a competent person indicating that the trust was created for a legitimate commercial reason which must be fully disclosed and
• the terms of the trust do not directly or indirectly seek to circumvent the provisions of the B-BBEE Codes and the BEE Act of 2003.

For the purpose of allocating recognition points for the rights of ownership, the regulation of trusts is similar to the regulation of broad-based ownership schemes and employee ownership schemes. This is so because broad-based ownership schemes and employee ownership schemes are usually incorporated through a trust.

Ownership held through options, share warrants and preference shares
Options and share warrants that facilitate the acquisition of rights of ownership for Blacks may be recognised in the calculation of the ownership score of a measured business. In par ticular, the Codes allow this if the Black ‘par ticipant holds an instrument granting the holder the right to acquire an equity instrument or part thereof at a future date.’

However, before the rights of ownership held through an option are recognisable, the following minimum conditions must be met:
• the exercisable voting rights attached to the instrument are irrevocably transferred to the holder for the duration of the option period and are exercisable by the holder before acquiring the equity instrument;
• thevalueofeconomicinterestisirrevocablytransferred for the duration of the option period and paid to the holder of that instrument before the exercise of that right and
• thevalueoftheinstrumentisestablishedusingastandard valuation method for calculating the net value.

The Codes consider preference shares and other hybrid schemes with the characteristic of debt as an ordinary loan and therefore not recognisable for ownership points.

However, in situations where preference shares or any hybrid schemes have the characteristics of debt and of equity, then only the portion that represents debt is treated as an ordinary loan and the remainder is treated as an ordinary equity recognisable for ownership points.

Equity equivalents and the multinationals
A foreign-owned multinational with a global policy that prohibits it from selling equity in all its global operations may implement an equity equivalent programme in lieu of a sale of equity to Blacks.
However, a foreign-owned multinational that is not restricted by any policy to sell equity in countries in which it operates is expected to sell equity in its South African operations in support of the ownership objectives of the B-BBEE policy.
For equity equivalent programmes to earn ownership points in the scorecard of a multinational, they must:
• be approved by the Minister of Trade and Industry and • support the implementation of government’s priority policies in skills development, enterprise development, socio-economic advancement and other critical policy intervention areas of priority.
Examples of equity equivalent programmes in the skills development area include initiatives to support the:
• AcceleratedandSharedGrowthInitiativeforSouthAfrica (ASGI-SA);
• Joint Initiative for Priority Skills Acquisition (JIPSA) and • National Skills Development Strategy.
Examples of equity equivalent programmes in the enterprise creation and development area include initiatives to suppor t:
• co-operatives; • small, micro and medium sized-enterprises; • enterprises that are more than 50% Black-owned;
• enterprisesthataremorethan50%Blackwomen-owned and
• enterprises that are owned by more than 50% of members of Black designated groups.
Equity equivalent programmes that support enterprise creation and development must meet the following conditions to earn ownership points in a multinational’s ownership scorecard:
• they must involve interest free loans, donations or human capital investment (these contributions, when quantified to a Rand value, must equal 50% of the new enterprise’s projected operational cost for its first three years of operation);
• they must comply with the requirements for a sale of assets as discussed in section 11 below;
• the new enterprise they help to create must be a value- adding enterprise and
• they must not earn enterprise development recognition points.
Although the Codes do not provide examples of equity equivalent programmes in the socio-economic development area, these must meet the following conditions for them to earn ownership points in a multinational’s ownership scorecard:
• they must comply fully with the requirements of the socio-economic development element of the B-BBEE Codes, as discussed in chapter 8 and
• they must not earn recognition points under the socio- economic development element of the B-BBEE Codes.

Equity equivalent programmes may be developed as part of a Sector Code or a multinational may, after sufficient consultation with its government line ministry, premiers and other stakeholders in the local and provincial governments, develop its equity equivalent programme.

A qualifying multinational that wishes to implement an equity equivalent programme must apply to the Minister of Trade and Industry and provide the following details in its application:
• full description of the objectives and projected outcomes of the programme;
• qualification criteria for participation in the programme;
• timelines for implementation and delivery, together with targets against which progress will be measured and 
• details of the measured business that will be implementing the initiative.

Besides equity equivalent programmes, a multinational may earn ownership points in its scorecard by selling to Black investors equity in its offshore holding company or its subsidiary.

A multinational opting for this method of ownership must realise that the rights of ownership held by Blacks in the offshore holding company or subsidiary will be measured using the equity ownership scorecard of the B-BBEE Codes.

Measurement of equity equivalent contributions
The measurement of equity equivalent contributions is guided by the general principle underpinning the recognition of enterprise development and socio- economic development contributions.

The Department of Trade and Industry (BEE Unit) has developed an application form to be completed by any measured business that wishes to implement an equity equivalent programme.

A multinational has a choice to meet the target of either:
• 25% of the value of the South African operations of the multinational or
• 4% of the total revenue of South African operations annually over the period of continued measurement.
The formula for calculating the annual turnover-based equity equivalent contributions and the formula for calculating the market value-based equity equivalent contributions respectively are shown in the below:
A = B/C x 20
Where: 
A is the ownership points of the Multinational arising from its equity equivalent contributions; 
B is the total value of contributions made and 
C is the financial value of the target, which is 4% of the annual total revenue of the South African operations, measured over the period of continued measurement.
A = B/C x (1/25% x D) x 20
A is the ownership points of the Multinational arising from its equity equivalent contributions; 
B is the value of total contributions made prior to the date of measurement;
C is the financial value of 25% of the South African operations of the Multinational or the ten year value of contributions to be made over a period of ten years and Dis the time-based graduation factor determined as follows:
• 10% for the first year after the commencement date; • 20% for the second after the commencement date; • 40% from the first day of the 3rd year after the commencement date and the last day of the 4th year after the commencement date; 
• 60% from the first day of the 5th year after the commencement date and the last day of the 6th year after the commencement date;
• 80% from the first day of the 7th year after the commencement date and the last day of the 8th year after the commencement date and • 100% from the first day of the 9th year after the commencement date and the last day of the 10th year after the commencement date.

Ownership arising from the sale of assets, business and equity instruments to an associated enterprise
A measured business may earn ownership points in the scorecard through the sale of its assets, equity instruments or business to an associated enterprise.

This provides an alternative to selling the rights of ownership to Black investors within the measured business itself and enables a measured business to treat Black equity ownership in an associated enterprise as if it were Black equity ownership within the measured business itself.
To ensure that a measured business does not sell an unsustainable asset, equity instrument or business to an associated enterprise, the Codes have introduced specific conditions that must be met before such a sale qualifies for recognition as an ownership equivalency capable of generating recognition points under the equity ownership scorecard.

The term ‘associated enterprise’, instead of BEE Company, is used in the Codes because the sale of assets is often made to businesses that are not exclusively owned by Blacks. These conditions, which are detailed below:
• define what constitutes a qualifying (recognisable) sale of asset, equity instrument or business to an associated enterprise within the context of B-BBEE and
• specify the calculation, for the purpose of allocating recognition points to a measured business, of the value of the asset/business/equity instrument over a period of time.
Qualifying sale of assets, equity instrument and business to an associate enterprise
For the sale of assets, equity instruments or business to be recognised for ownership points, the transaction must:
• involve a separate associated enterprise which has no unreasonable limitations as to its clients or customers;
• involveclients,customersorsuppliersotherthanthe seller;
• result in the creation of sustainable business or business opportunities in the hands of Blacks and
• resultinthetransferofspecialisedskillsorproductive capacity to Blacks.
Any operation outsourcing arrangements between the seller and the associated enterprise must be negotiated at arms-length on a fair and reasonable basis. The following types of transaction do not qualify for recognition as sale of assets, equity instruments or business:
• transfers of business rights by way of licence lease or other similar legal arrangements not conferring unrestricted ownership and
• sales of franchises by franchisors to franchisees but include sales of franchises from franchisees to other franchisees or to new franchisees.
A measured business that claims ownership points for the sale of assets may not claim points under the enterprise development score for the sale of the same asset to Black investors.
Measurement of qualifying transactions
The calculation of ownership points arising from the sale of assets, equity instruments or business is guided by the same principles underpinning the recognition and measurement of equity ownership contributions between a measured business and direct BEE investors.
In addition, the Codes have introduced, in the case of the recognition and measurement of ownership points emanating from the sale of assets, equity instrument or business, the concept of equivalency percentage.
The equivalency percentage measures the proportion of the value of equity instruments held by Blacks in assets sold to an associated enterprise in relation to the value of the measured business.

The four main principles underpinning the measurement of the rights of ownership of Blacks are the flow-through principle, modified flow-through principle, exclusion principle and the continuing consequences principle. With the exception of the exclusion principle that is discussed under section 4 above, the other 3 principles are discussed in section 4 of chapter one, which covers the principles and rules pertaining to the recognition and measurement of direct equity ownership contributions for B-BBEE.
It applies only in the calculation of the voting rights and economic interest indicators of the scorecard using the formula shown in the box below:
Economic interest and voting rights measurement A = B/C x D
Where: 
A is the equivalency percentage for voting rights and economic interest indications of the equity ownership scorecard; 
B is the value of the qualifying transaction to the associated enterprise determined using a standard valuation method; 
C is the value of the seller determined using a standard valuation method; 
D is the indicator percentages of the Associated Enterprise using the actual percentage compliance criteria for each indicator.
In the measurement of recognition points, a measured business (seller) treats the equivalency percentages as if those percentages result from Black participation in its rights of ownership.
To compute the equivalency percentage, one divides the value of the asset sold to an associated enterprise by the value of the measured business (seller) and multiplies that by the percentage of Black ownership in an associated enterprise.
The final score is then calculated by dividing the equivalency percentage by the target and multiplying that by the weighting points.
The equivalency percentage does not apply in the calculation of the net value indicator, which is based on the following:
• thevalueoftheequityinstrumentheldbyBlacksinthe associated enterprise determined by using a standard valuation method;
• the carrying value of the acquisition debt of Blacks in the associated enterprise determined by using a standard valuation method and
• thecurrentvalueofthetransactiondeterminedusing a standard valuation method.
These values are factored in the calculation of the ownership points relating to the net value indicator using exactly the same formula as discussed in chapter one above.

The measured business (seller) may only claim the ownership fulfilment point once the seller and the associated enterprise have complied with requirements for the award of that point.
The step by step approach illustrated on the following page is recommended for calculating the equivalency percentage in an associated enterprise.

In this case net value measures the level of indebtedness incurred by Blacks in the acquisition of rights of ownership in an associated enterprise.
A measured business may only be awarded the 1 point for ownership fulfillment after the full 7 points for net value have been achieved and Black investors have been released from all third party obligations resulting from the financing of their ownership rights in the measured business.

Ownership equivalency percentage measurement:
Step One - Determine the value of the asset being sold to the associated enterprise.
Step Two - Determine the total value of the selling entity (measured business).
Step Three - Divide the result of step 1 by the result of step 2 to get the value of the asset being sold relative to the entire value of the selling entity. (The result should be a decimal figure between 0 and 1).
Step four - Determine the percentage of Black ownership of the associated enterprise.
Step five - Multiply the result of step 3 by the result of step 4 to arrive at the ownership equivalency percentage.