The Minister of Trade, Industry and Competition has on Tuesday 18 May 2021 published a Practice Note on discretionary Collective Enterprises. The Minister confirms that the implementation of B-BBEE legislation should ensure broad and meaningful participation of black people in the economy. The Minister regards an ideal B-BBEE ownership transaction as one which empowers black people, black women, black designated groups, black participants in an ESOP, BBOS and Co-operatives; and that such a transaction should further empower entrepreneurs and investors, SMMEs and suppliers, employees, communities as well as other marginalised groups. Although it is not always possible to for all the groups above to be empowered in a single transaction, we note that the Minister expressly calls for both broad participation (eg through black participants in an ESOP, BBOS and Co-operatives) and active or operational participation (eg by entrepreneurs and investors).

The Practice Note also recognises that when structuring a BBOS, ESOP or trust, having a defined class of black beneficiaries as participants satisfies the ownership provisions under the Codes. In other words, beneficiaries need not be individually named or identified. The Minister states that meaningful broad-based ownership by black people, communities and workers is often best served by identifying a natural class of persons to benefit from the scheme as opposed to a list of individuals with vested rights.

Another point of contention has been around the discretion afforded to fiduciaries of a scheme to either (i) select individuals from the defined class of beneficiaries that would benefit out of distributions of the scheme, or (ii) determine the proportion of entitlement that a particular beneficiary will receive once he/she is selected out of the ‘defined class of natural person”. The Practice Note states that as long as fiduciaries do not have a discretion to distribute less than a fixed percentage to beneficiaries who are members of a “defined class of natural persons”, the requirement that fiduciaries have no discretion in relation to these terms is met. In addition, a formula which determines the proportion of claim of a defined class of persons or the entitlement of individuals selected out of that defined class complies with the rule that the fiduciaries “may have no discretion” on the terms of the scheme, provided of course that fiduciaries are not awarded a discretion to deviate from the formula.

The Practice Note states that as long as fiduciaries do not have a discretion to distribute less than a fixed percentage to beneficiaries who are members of a “defined class of natural persons”, the requirement that fiduciaries have no discretion in relation to these terms is met. In addition, a formula which determines the proportion of claim of a defined class of persons or the entitlement of individuals selected out of that defined class complies with the rule that the fiduciaries “may have no discretion” on the terms of the scheme, provided of course that fiduciaries are not awarded a discretion to deviate from the formula.

The Minister states that distributions made by Collective Enterprises such as broad-based schemes may be in cash or in kind. As an example, instead of making cash distributions to beneficiaries, these schemes often pay for skills development, education or training on behalf of beneficiaries who are a “defined class of natural persons”. The Practice Note confirms that this does not detract from the Economic Interest points claimable through these schemes.

The Practice Note recognises that such participants seldom have the right to vote directly at scheme meetings as their rights are represented by the fiduciaries who vote on their behalf. The Minister confirms that the Voting Rights of scheme participants are attributed to the race and gender of the participants, even though such vote is exercised by a fiduciary on behalf the participants. This can be firstly through the constitution or by a competent persons report.

We have implemented a number of Broad Based Ownership transactions for  leading multination and South African companies to the benefit of BEE black empowerment.

We can help you:

1. Evaluate whether your current scheme is complaint with the practice note and assist in rectification
2. Assist is evaluating whether a BBOS is a suitable Black Ownership structure for your business
3. Implement a BBOS as your BEE ownership structure

We have specialized solutions for Multinational and South African companies.