GUIDE – BROAD-BASED BLACK ECONOMIC EMPOWERMENT

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Contents

04 Introduction

06 OurFirm

07 OurFootprintInAfrica

08 RecentB-BBEEDeals

09 AnOverviewOfB-BBEEInSouthAfrica

12 TheMeasurementOfB-BBEE(AndanOverviewoftheElementsOfB-BBEE)

16 EMEs,Start-UpEnterprisesandQSEsUndertheCurrentCodesandtheNewCodes

18 AnOverviewoftheChangesIntroducedbytheNewCodes

21 SpecialFocus:OwnershipUndertheCurrentCodesandtheNewCodes

24 SpecialFocus:EnterpriseandSupplierDevelopmentUndertheCurrentCodesandtheNewCodes

27 TheMeasurementofOwnershipbyTrustsinTermsoftheCodes

30 B-BBEEFundingStructures

33 MonitoringofB-BBEECompliance

35 KeyContacts

Guide - Broad-Based Black Economic Empowerment

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Introduction

Broad-based black economic empowerment (B-BBEE) is a central part of the South African government’s economic transformation strategy. The formulation of policy and legislation to achieve B-BBEE has been driven by the Office of the Presidency together with the Department of Trade and Industry (DTI). A multi-faceted approach to B-BBEE has been adopted with a number of components which aim to increase the numbers of black people (being South African citizens who have been racially classified as African, Indian or Coloured) that manage, own and control the country’s economy, and to decrease racially based income inequalities.

InthisguideweprovideageneraloverviewofB-BBEEinSouthAfrica.Wealsodiscuss

themeasurementofB-BBEEandtheprincipaldifferencesbetweentheCodesofGoodPracticepublishedin2007(currentCodes)undertheBroad-BasedBlackEconomicEmpowermentAct53of2003(BEEAct)andtherevisedCodesofGoodPractice(newCodes),whichareexpectedtocomeintoeffecton30April2015.

Inaddition,weprovidetwospecialfocuspieces–(1)ownershipunderthecurrentCodesand

thenewCodes,and(2)enterpriseandsupplierdevelopmentunderthecurrentCodesandthenewCodes.WealsoprovideanoverviewofanumberofpertinentB-BBEEissuessuchasthemeasurementofownershipbytrustsunderthecurrentCodesandthenewCodes,financialassistanceforB-BBEEwithaparticularfocusonnotionalfundingstructures,andthemonitoringofB-BBEEcomplianceparticularlyinthecontextoftherecentamendmentstotheBEEAct,suchastheintroductionofenforcementmechanismsforthecombatingof“frontingpractices”.

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Guide - Broad-Based Black Economic Empowerment

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Our Firm

WithsevenofficesinfiveAfricancountriesandover400specialisedlawyers,we

drawonouruniqueknowledgeofthebusinessandsocio-politicalenvironmenttoadviseclientsonawiderangeoflegalissues.

Everywherewework,weofferclientsaservicethatuniquelyblendsexpertiseinthelaw,knowledgeofthelocalmarketandanunderstandingoftheirbusinesses.Ouraimistoassistthemtoachievetheirobjectivesassmoothlyandefficientlyaspossiblewhileminimisingthelegalandregulatoryrisks.

Ourclientsincludecorporates,multinationalsandstate-ownedenterprisesacrossarangeofindustrysectorsaswellasfinancialinstitutionsandgovernments.

Ourexpertiseisfrequentlyrecognisedbyindependentresearchorganisations.WewererankedfirstbydealvalueandsecondbydealcountinMergermarket’s2018Africaleaguetablesforlegaladvisors.WereceivedawardsinfiveoutofsixcategoriesattheDealmakersEastAfricaAwardsfor2018:toplegaladviserinM&Aforbothdealflowandvalue,toplegaladviserinGeneralCorporateFinanceforbothtransactionflowandvalue,andadvisedontheDealoftheYear.IntheDealmakers SouthAfricaAwardsfor2018,wewereplacedfirstfordealflowintheGeneralCorporateFinancecategory.

WewerenamedSouthAfricanLawFirmoftheYearfor2018intheChambersAfricaAwardsforExcellence.Wealsoreceivedthe2019awardsforTransportationandInfrastructureTeamoftheYearandTMTTeamoftheYearattheAfricanLegalAwardshostedbyLegal Week andtheCorporateCounselAssociationofSouthAfrica.

Bowmans exists to help our clients overcome legal complexity and unlock opportunity in Africa. Our track record of providing specialist legal services, both domestic and cross-border, in the fields of corporate law, banking and finance law and dispute resolution, spans over a century.

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Our Footprint in Africa

WeprovideintegratedlegalservicesthroughoutAfricafromsevenoffices

(CapeTown,DaresSalaam,Durban,Johannesburg,Kampala,MokaandNairobi)infivecountries(Kenya,Mauritius,SouthAfrica,TanzaniaandUganda).Weworkcloselywithouralliancefirm,AmanAssefa&AssociatesLawOffice,inEthiopia,andourbestfriendsinNigeriaandMozambique(UdoUdoma&Belo-OsagieandTacianaPeãoLopes&AdvogadosAssociados,respectively).WealsohavestrongrelationshipswithotherleadinglawfirmsacrosstherestofAfrica.WearerepresentativesofLexMundi,aglobalassociationwithmorethan160independentlawfirmsinallthemajorcentresacrosstheglobe.Thisassociationgivesusaccesstothebestfirmsineachjurisdictionrepresented.

Mozambique

Kenya

Tanzania

South Africa

Nigeria

Uganda

Mauritius

Best friends

Bowmans offices

Significant transaction or advisory experience

Alliance firms

Ethiopia

BowmanshasextensiveexperienceinadvisingandactingforclientsinallareasofB-BBEE.Wehavebeeninvolvedinseveralground-breakingB-BBEEtransactionsandhaveadvisedmajorinternationalcommercialandindustrialcorporations,mininghousesandbanksinmanyareasofeconomicactivityinthecountry.OurlawyersareuptodatewiththemostrecentdevelopmentsinB-BBEEandarewell-placedtoprovidecomprehensiveadviceandstrategiesforlastingandsustainabletransformation.

RecentB-BBEE-relatedM&Adealsincludeadvising:

• BP,inrelationtoitsblackeconomicempowermenttransactionintermsofwhichthefollowingtwonewB-BBEEpartnersacquiredordinarysharesintheusedsharecapitalofBPSouthernAfrica:(i)KapelaInvestmentsacquired20%plusoneshare;and(ii)theBPSAEducationFoundationacquired5%ofthetotalissuedshares.

• FLSmidth,inrelationtoabroad-basedblackeconomicempowermenttransactionintermsofwhichacommunitytrustformedforthebenefitofHDSAwillacquirea25.1%equitystakeinFLSmidthSouthAfrica.PPC,onitsZAR1.1billionempowermentandrestructuringdeal,whichresultedinsharesbeingissuedtoanemployeesharetrustestablishedforthebenefitofallPPC’sSouthAfricanemployees,strategicbusinesspartners,andtoabroad-basedtrustforthebenefitofvariousblackwomenintheregionsandareaswherePPCoperatesinSouthAfrica.Thetransactionresultedin20.8%percentdirectbroad-basedownershipbythebroadbasedentities,translatingintoaneffective26%B-BBEEownershipofPPC’soperationsinSouthAfrica.

• Hulamin,inrespectofitsB-BBEEownershiptransactionincludingemployees,blackmanagementandlongstandingstrategicblackpartners,theMakanaConsortiumandtheImbewuConsortium.TheestimateddealvaluewasZAR103millionbasedonHulamin’smarketcapofZAR2.44billionon11December2014.

• NorthamPlatinum,inrelationtotheestablishmentofabroad-basedconsortiumofHistoricallyDisadvantagedSouthAfricans(HDSA),whichwillhold31.4%ofNortham’sissuedsharesthroughacombinationofasubscriptionfornewordinarysharesandtheacquisitionofordinarysharesfromthePublicInvestmentCorporation.UponimplementationofthisZAR6.6billiontransaction,Northam’stotaleffectiveHDSAownershiplevelwillincreasetoapproximately35.4%.

• Rothschild(SouthAfrica),inablackempowermenttransactioninwhichtheRothschildSouthAfricaFoundationacquired25.1%ofthesharesinRothschild(SouthAfrica).TheRothschildSouthAfricaFoundationisatrustestablishedtosupportHDSAinappropriateeducationprogrammesrelevanttothefinancialservicessector.

• StandardBank,inrelationtoitsUSD27.3millionsaleof10%ofitssharesinStandardBankNamibiatoemployeesofStandardBankNamibiaandacommunitytrust,incompliancewithregulatoryrequirementstoincreaselocalparticipationinthefinancialsector.

Recent B-BBEE Deals

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An Overview of B-BBEE in South Africa

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Guide - Broad-Based Black Economic Empowerment

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INTRODUCTION

TheBEEActistheprincipallegislationthroughwhichB-BBEEisregulated.Intermsofsection9oftheBEEAct,theMinisterofTrade&Industry(Minister)mayissuecodesofgoodpracticeonB-BBEE.Thesecodesmayinclude,amongotherthings,indicatorstomeasureB-BBEEandtheweightingtobeattachedtothoseindicators.IntermsoftheBEEAct,everyorganofstateandpublicentitymustapplyanyrelevantcodeofgoodpracticeissuedintermsoftheBEEActin:

• determiningqualificationcriteriafortheissuingoflicences,concessionsorotherauthorisationsinrespectofeconomicactivityintermsofanylaw;

• developingandimplementingapreferentialprocurementpolicy;

• determiningqualificationcriteriaforthesaleofstate-ownedenterprises;

• developingcriteriaforenteringintopartnershipswiththeprivatesector;and

• determiningcriteriafortheawardingofincentives,grantsandinvestmentschemesinsupportofB-BBEE.

CURRENT STATUS OF THE CODES

TheMinisterpublishedthecurrentCodes,whichsetoutthedetailsofthemeasurementprocessforB-BBEE,inFebruary2007.ThenewCodes,whichareexpectedtoreplacethecurrentCodesattheendofthetransitionalperiodi.e.30April2015,werepublishedon11October2013.FurtherproposedamendmentstotheCodeswerepublishedbytheMinisterforpubliccommentintheGovernment Gazetteon10October2014.Theseproposedamendmentsareinrespectof,amongstothers,theCodesforQualifyingSmallEnterprises(QSEs),theCoderegardingrecognitioninthesaleofassets,equityinstrumentsandotherbusiness,andtheCoderegardingrecognitionofequityequivalentsformultinationals.Thedeadlineforpubliccommentsontheseproposedamendments

was14November2014,althoughthiswassubsequentlyextendedto9December2014.TheMinisterhasalsopublishedvarioussectorspecificcodeswhichdetailthemannerinwhichB-BBEEmustbemeasuredforbusinessesoperatinginparticularsectors.Whereasectorspecificcodehasbeenissued,businessesinthatsectorarerequiredtoapplytherelevantsectorcoderatherthanthegeneralCodesofGoodPractice.ThegeneralCodesofGoodPracticeapplyonlywherethereisnosectorspecificcodealthough,ingeneral,thegeneralCodesofGoodPracticeandthesector-specificcodesapplythesamebroadprinciples.Sectorcodeshavebeenpublishedforthetourism,forestry,informationcommunicationandtechnology,charteredaccountancy,finance,construction,transport,andagriculturesectors.TheDTIhasindicatedthatitintendstoalignthevarioussectorcodeswiththenewCodesandthisprocessiscurrentlyunderway.Untilthesectorcodesareamended,theywillapplyintheircurrentform.

ARE COMPANIES REQUIRED TO ACHIEVE

SPECIFIC TARGETS?

Otherthanincertainstatelicensing,permittingandauthorisationprocesses,thereisno“hardlaw”requiringthatanyprivateentityinSouthAfricamustmeetspecificB-BBEEtargetsormustimplementaB-BBEEpolicy.TheBEEActdoesnotprovideforoffencesorpenaltiesrelatingtoB-BBEEperformancebutratherseeks,throughvariouseconomicmeasures,tofacilitateauniformapproachtoB-BBEEintheSouthAfricaneconomy.Inotherwords,theBEEAct,thecurrentCodesandthenewCodesdonotimposeanyrequirementthatacertainlevelofB-BBEEmustbeachievedorthatacertainpercentageofequityinabusinessmustbeheldbyblackpeopleandtherearenosanctionsfornon-compliance.

However,incertainsectors,suchasminingandtelecommunications,minimumequityrequirementsareormaybeimposedintermsofthesector-specificlegislationgoverningthosesectors.

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Fromapracticalperspective,althoughtherearenoabsoluterequirementsinrelationtoB-BBEE,anycompanywishingtodobusinessintheSouthAfricanenvironmentmustconsideranddevelopitsB-BBEEpositionas,inadditiontothepressuresfromgovernment,anentitythatdoesnothaveagoodB-BBEErating,ordoesnotstrivetoimproveitsB-BBEErating,maybehamperedintheconductofitsdayto-daybusinesswithgovernment,organsofstateandprivatesectorcustomers.MostprivatesectorbusinessestowhichservicesarerenderedorgoodsaresoldwillthemselveshaveB-BBEEprocurementtargetstomeetandsotheB-BBEEratingofentitiesfromwhichgoodsandservicesareprocuredwillbeafactorindeterminingwhomtodobusinesswith.

B-BBEE, GOVERNMENT BODIES AND

STATE-OWNED ENTERPRISES

IntermsoftheBEEAct,governmentbodiesandstate-ownedenterprises(SOEs)arerequiredtotakeprivatesectorparties’relativeB-BBEElevelsintoaccountwhentheyprocureanygoodsorservices,whentheyissueanylicenceorotherauthorisation,orenterintopartnershipswiththeprivatesector.Assuch,businessesthatinteractwithgovernmentby,forexample,sellingtogovernmentorthatrequirelicencestoperformtheirparticularactivities(e.g.telecommunications,broadcasting,mining,banking,transportation,etc.)areincentivisedtoincreasetheirlevelsofB-BBEE.

ThePreferentialProcurementPolicyFrameworkAct5of2000alsoprovidesthatB-BBEEmustbeconsideredbyanypublicsectorbodyinthecontextofitsprocurementpractices,anddetailsthemannerinwhichB-BBEEmustbetakenintoaccountbygovernmentdepartmentsandagenciesandSOEs.Inthisregard,inthetenderevaluationprocess,tendersforcontractswithavalueofuptoZAR1millionarescoredonthebasisthat80%oftheavailablepointsareforprice,and20%oftheavailablepointsareforB-BBEE.IntendersforcontractsaboveZAR1million,90%oftheavailablepointsarebasedonpriceand10%oftheavailable

pointsareforB-BBEE.ThenumberofpointsthatabidderwillscoreforB-BBEEdependsonitsB-BBEEstatuslevel.Forexample,abidderwhichhasaLevel1B-BBEEstatus(seepage10)willscorethefull10or20pointsforB-BBEEasthecasemaybe,dependingwhetherthe90/10or80/20systemisapplicable.AbidderwhichhasaLevel4B-BBEEstatuswillscoreeither5or12pointsasthecasemaybe.

B-BBEE AND THE PRIVATE SECTOR

AprivatesectorcompanycouldalsohaveitsownB-BBEErequirements.Forexample,abusinessmayadoptapolicythatitwillnotpurchasegoodsorservicesfromsuppliersthatdonotmeetcertainminimumB-BBEErequirements.TheserequirementscouldgobeyondthatwhichisprovidedforintheCodesofGoodPractice.Wherecustomersimposesuchrequirements,aprospectivesupplier’sB-BBEEmeasurementisacompetitiveassessmentofitsB-BBEEstatusrelativetothatofitscompetitors.

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The Measurement of B-BBEE

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SCORECARD APPROACH

InassessingB-BBEE,a“scorecard”approachisusedwherebythedifferentaspectsofB-BBEEareaccordedpointstoarriveattheB-BBEEscoreofacompany.AgeneralscorecardisincludedinthegeneralCodesofGoodPractice,whilesectorspecificscorecardsareincludedinthesectorcodesthatareapplicabletoparticularsectors.

Thescorecardsdetailthevariouselementsandsub-elementsofB-BBEEonwhichenterprisesaremeasuredandstipulatetargetstobeachievedforeachelementandsub-element.Thecloseranenterpriseistoreachingaparticulartarget,themorepointsitwillachieveforthatelementofB-BBEE.

B-BBEE RECOGNITION LEVELS

Themorepointsabusinessachievesintotalacrosseachoftheindividualelements,thehigheritsB-BBEEstatuslevelwillbe.EachB-BBEElevelalsotranslatesintoaprocurementrecognitionlevel.UnderboththecurrentCodesandthenewCodes:

• Level1isthehigheststatuslevel,whereabusinessachieves100pointsormoreonthescorecardunderthecurrentCodesandthenewCodes.

• Level8istheloweststatuslevel,whereabusinessachievesbetween30and40pointsonthescorecardunderthecurrentCodesandbetween40and55pointsunderthenewCodes.

• UnderthecurrentCodes,lessthan30pointsisconsideredtobe“non-compliant”.UnderthenewCodes,lessthan40pointsisconsideredtobe“non-compliant”.

Abusiness’sB-BBEEscorewillbedeterminedonthebasisofitsactivitiesduringthepreviousfinancialyearanditsownershipandmanagementstructuresandstaffprofileasatthedateofmeasurement.UnderboththecurrentCodesandthenewCodes,“ownership”ofanenterprisebyblackpeopleisonlyoneelementofB-BBEEwhichisevaluatedwhenassessingtheB-BBEEstatusofanenterprise.Ownershipcountsfor20points(andthreebonuspoints)underthecurrentCodesand25pointsunderthenewCodes.

Status recognition level Points under the current Codes Points under the new Codes

Level1B-BBEEstatus 100 100ormore

Level2B-BBEEstatus 85–100 95–100

Level3B-BBEEstatus 75–85 90–95

Level4B-BBEEstatus 65–75 80–90

Level5B-BBEEstatus 55–65 75–80

Level6B-BBEEstatus 45–55 70–75

Level7B-BBEEstatus 40–45 55–70

Level8B-BBEEstatus 30–40 40–55

Non-Compliant Lessthan30 Lessthan40

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Guide - Broad-Based Black Economic Empowerment

GENERIC SCORECARD

UnderthecurrentCodesandthenewCodes,theelementsofB-BBEEonwhichanenterprise’sB-BBEEscoreismeasuredandtheirrespectiveweightings(excludingbonuspoints)are:

A BRIEF OVERVIEW OF EACH OF THE

ELEMENTSOF B-BBEE

• Theownershipelementrelatestotheextenttowhichownershipinterests,i.e.votingrightsandeconomicinterest,inameasuredenterpriseareheldbyblackpeople,andtheextenttowhichsuchownershipinterestsareunencumberedbydebt.Sub-minimumrequirementsareimposedunderthenewCodesinrelationtoownership.

• Acompanycanincreaseitsscoreformanagementcontrolifitincreasesthenumberofblackmembersofitsboardofdirectorsand,inparticular,thenumberofblackwomenwhositonitsboard.UnderthenewCodes,thenumberofblackpeoplewhoparticipateinmanagementarealsomeasuredunderthemanagementcontrolelements.ManagementispresentlymeasuredunderemploymentequityunderthecurrentCodes.

• PointsarescoredontheemploymentequityelementunderthecurrentCodesforthe

numberofblackemployeesinmanagementroleswhoareemployedbytheorganisation.Assuch,themoreblackmanagersthatacompanyhas,thehigheritsB-BBEEscoreonthiselementwillbe.CompaniesaboveacertainsizealsohaveseparateobligationsintermsoftheEmploymentEquityAct,1998toprepareemploymentequityplansandtosubmitreturnsregardingtheirprogressonemploymentequitytotheDepartmentofLabour.EmploymentequityisnotaseparateelementunderthenewCodesbutismeasuredunderthemanagementcontrolelement.

• Companiescanscorepointsontheskillsdevelopmentelementfortheamountofmoneythattheyspendonskillsdevelopmentprogrammesfortheirblackemployees.Employersarerequiredto,bylaw,payanamountequaltoaprescribedpercentageofalltheiremployees’salariestotheNationalSkillsFundintermsoftheSkillsDevelopmentAct,1998andtheSkillsDevelopmentLeviesAct,1999.Companiescanalsoscorepointsforthenumberoflearnershipsthattheyfacilitate

Seven elements under thecurrent Codes Points Five elements under the new Codes Points

Ownership 20 Ownership 25

Managementcontrol 10 Managementcontrol 15

Employmentequity 15

Skillsdevelopment 15 Skillsdevelopment 20

Preferentialprocurement 20 Enterpriseandsupplierdevelopment

40

Enterprisedevelopment 15

Socio-economicdevelopment 5 Socio-economicdevelopment 5

TOTAL 100 TOTAL 105

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forblackpeople,blackwomenandblackdisabledpersons,theamountofmoneythattheyspendonbursaryprogrammes,andtheimplementationofmentorshipprogrammes.Sub-minimumrequirementsareimposedunderthenewCodesinrelationtoskillsdevelopment.

• PointsforthepreferentialprocurementelementarescoredunderthecurrentCodesdependingontheextenttowhichcompaniesprocuregoodsandservicesfromblackempoweredsuppliers.Asindicatedabove,thepointsthatasupplieritselfscoresforB-BBEEtranslatesintoaprocurementrecognitionlevelwhichisexpressedasapercentagee.g.aLevel4B-BBEEcontributorhasarecognitionlevelof100%.Thismeansthattherelevantpercentageofacompany’sexpenditurewiththatsupplierisrecognisedasB-BBEEexpenditure.CompaniescanincreasetheirscoresonthiselementiftheyprocureagreaterpercentageofgoodsandservicesfromsupplierswithhigherB-BBEEratingsandfromsmallbusinesses.UnderthenewCodes,preferentialprocurementismeasuredunderenterpriseandsupplierdevelopment.Pointsarescoredforenterprisedevelopmentinrelationtothecontribution(bothmonetaryandnon-monetary)thatacompanymakestodevelopingbusinessesthatareownedbyblackpeople.Thetypesofcontributionsthatwillbemeasuredinclude,forexample,investinginbusinessesownedbyblackpeople,makingloanstobusinessesownedbyblackpeople,providingcreditguaranteestobusinessesownedbyblackpeople,providingpreferentialcredittermstobusinessesownedbyblackpeople,givingdiscounts,andprovidingtrainingormentoring.Thetargetsthatapplytoenterprisedevelopmentaresetasapercentageofthemeasuredcompany’snetprofitaftertax(NPAT).UnderthenewCodes,enterprisedevelopmentismeasuredunderenterpriseandsupplierdevelopment.Supplierdevelopmentisalsomeasuredunderenterpriseandsupplierdevelopment.

Thisreferstotheenterprisedevelopmentcontributionsthatacompanymakestoitsblack-ownedsuppliersand,inparticular,smallblack-ownedbusinesseswhoareitssuppliers.Sub-minimumrequirementsareimposedunderthenewCodesinrelationtotheenterpriseandsupplierdevelopmentelement.

• Pointsarescoredforsocio-economicdevelopment(SED)onthebasisofthecorporatesocialinvestment(CSI)contributionsthatabusinessmakes.

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Guide - Broad-Based Black Economic EmpowermentGuide - Broad-Based Black Economic Empowerment

EMEs, Start-up Enterprises and QSEs under the Current Codes and the New Codes

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Differentcriteriaapply,underboththecurrentCodesandthenewCodes,toanExemptedMicro-Enterprise(EME),aStart-upEnterpriseandaQualifyingSmallEnterprise(QSE).

EMEs

UnderthecurrentCodes,anyenterprisewithanannualtotalrevenueofZAR5millionorlessqualifiesasanEME.UnderthenewCodes,thethresholdforacompanytoqualifyasanEMEhasbeenincreasedtoZAR10million.EMEsaredeemedtohaveaLevel4B-BBEEstatus(havingaB-BBEEprocurementrecognitionof100%).UnderboththecurrentCodesandthenewCodes,EMEsareallowedtobemeasuredintermsoftheQSEscorecardshouldtheywishtomaximisetheirpointsandmovetothenextprocurementrecognitionlevel.

QSEs

AnyenterprisewithanannualtotalrevenueofbetweenZAR5millionandZAR35millionqualifiesasaQSEunderthecurrentCodes.UnderthenewCodes,thethresholdforacompanytoqualifyasaQSEhasbeenincreasedtoZAR50millionfromZAR35million.UnderthecurrentCodes,aQSEmustselectanyfourofthesevenelementsofB-BBEEforthepurposesofmeasurementundertheQSEscorecard.WhereaQSEdoesnotmakeaselection,itsfourbestelementscoreswillbeusedforthepurposesofmeasurement.UndertheproposedamendmentstothenewCodes,whichasdiscussedabovehavebeenpublishedforpubliccomment,aQSEwillberequiredtocomplywithalltheapplicableelementsofB-BBEEforthepurposesofmeasurementunderthescorecard.

START-UP ENTERPRISES

UnderboththecurrentCodesandthenewCodes,Start-upEnterprisesmustbemeasuredasEMEsforthefirstyearfollowingtheirformationorincorporation.ThisprovisionappliesregardlessoftheexpectedtotalrevenueoftheStart-upEnterprise.If,however,theytenderonlargeprojects,thentheymustsubmitascorecard.ThevalueofthetenderwilldeterminewhethertheyarerequiredtosubmitaQSEscorecardoragenericCodescorecard.

AnimportantchangeinthenewCodesisthatEMEsandQSEsthatare100%black-ownedwillbedeemedtohaveaLevel1B-BBEEstatusandEMEsandQSEsthatare51%black-ownedwillbedeemedtohaveaLevel2B-BBEEstatus.EMEsandQSEswillonlyneedaswornaffidavit,onanannualbasis,confirmingtotalannualrevenueandlevelofblackownership.Anymisrepresentationinthisregardisacriminaloffence.

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An Overview of the Changes Introduced by the new Codes

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When do the new Codes take effect?

ThenewCodesinitiallyprovidedforatransitionalperiodof12months,althoughthiswasextendedbytheMinisterforafurthersixmonths.Assuch,itisnowanticipatedthatthenewCodesmustbeappliedasfrom30April2015.WhiletherehasbeensomediscussioninthemarketthattheimplementationdateofthenewCodesmaybefurtherextendedtotheendoftheyear,therehasbeennoofficialconfirmationofsuchextension(asofthedateofpreparingthisbrochure).ThismeansthatwhentheB-BBEEscoreofanyenterpriseismeasuredbefore30April2015,theenterprisemayelecttobemeasuredonthebasisofeitherthecurrentCodesorthenewCodes(wherethereisnorelevantsectorcode).However,whentheB-BBEEscoreofanyenterpriseismeasuredafter30April2015,itwillbemeasuredonthebasisofthenewCodes(wherethereisnorelevantsectorcode).Further,if,forexample,anenterpriseisissuedwithitsnewB-BBEEcertificatescoredonthebasisofthecurrentCodeson29April2015,itwillonlyneedtoapplythenewCodeswhenitismeasuredagainin2016.

Key changes to the Codes

ThenewCodesaredifferentfromthecurrentCodesincertainkeyrespects.ImportantfeaturesofthenewCodesareasfollows:

• IntermsofthenewCodes,B-BBEEwillbemeasuredonthebasisoffiveelementsasopposedtosevenelements.TheseparateemploymentequityelementunderthecurrentCodeshasbeenremoved,withsomeoftheelementsbeingincludedundermanagementcontrol.Preferentialprocurementandenterprisedevelopment,whichareseparateelementsunderthecurrentCodes,havebeencombined.

• Thetotalpossiblepointsthatmaybescoredforownershipwillincreasefrom20pointsto25pointsunderthenewCodes.Participationbybroad-basedstructuressuchasemployeeownershipschemesandbroad-basedownershipschemeswillbemeasuredunderthemainscorecardratherthanbeingsomethingforwhichbonuspointscanbescored.

• ThetotalpossiblepointsthatmaybescoredontheentirescorecardunderthenewCodes,withbonuspoints,willincreaseto118points.

• Sub-minimumrequirementswillbeintroducedinthecontextoftheownership,skillsdevelopmentandenterpriseandsupplierdevelopmentelements.Ifthesub-minimumrequirements,i.e.40%oftherelevanttargets,arenotmet,ameasuredenterprisewillbedeemedtodrop,asapenalty,oneB-BBEElevel.If,forexample,abusinessscoressufficientpointstobeaLevel3B-BBEEcontributorbutfailstomeetoneofthesub-minimumrequirements,itwillbedeemedtobeaLevel4B-BBEEcontributor.

• ThenumberofpointsonthescorecardthatwillberequiredtoachievethevariousB-BBEElevelshasincreased.Forexample,underthecurrentCodesbetween75and85pointsarerequiredtoachieveaLevel3B-BBEErating.UnderthenewCodes,between90and95pointswillberequiredtoachieveaLevel3B-BBEErating.

• Asdiscussedabove,thethresholdforacompanytoqualifyasaQSEhasbeenincreasedtoZAR50millionfromZAR35million.UnderthecurrentCodes,QSEsarescoredonadifferentbasisandareratedonthefourelementsofB-BBEEonwhichtheyscorebest.UndertheproposedamendmentstothenewCodes,whichasdiscussedabovehavebeenpublishedforpubliccomment,aQSEwillberequiredtocomplywithalltheapplicableelementsofB-BBEEforthepurposesofmeasurementunderthescorecard.

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• Themanagementcontrolelementmeasuresthenumberofblackandfemaleboardmembers,andmembersofexecutivemanagement,seniormanagement,middlemanagementandjuniormanagement.FewerpointsareavailableunderthenewCodesinrespectofthenumberofblackandblackfemaleemployeesinmanagementrolesatthevariouslevelsofmanagementcomparedtothecurrentCodes.

• Thetargetsforsenior,middleandjuniormanagementandskillsdevelopmentmustbebrokendowninproportiontotheracialsub-groupsinthecategoryofpersonswhoareclassedas“blackpeople”.Tocalculatethenumberofblackemployeesinmanagementpositionsameasuredentitymustrefertotheeconomicallyactivepopulation(EAP)compliancetargetssetintheregulations

publishedundertheEmploymentEquityAct,1998.TheEAPincludespeoplefrom15to64yearsofagewhoareeitheremployedorunemployedandseekingemployment.Forexample,thetargetforparticipationbyblackemployeesinmiddlemanagementis75%.Assuch,ameasuredentitymustexaminehowmanyAfricanmales,Africanfemales,Colouredmales,Colouredfemales,IndianmalesandIndianfemalesareemployedinmiddlemanagementpositionstodeterminehowcloseitistoreachingthe75%target.

Atpresent,acompanycanscoreatotalof20pointsforpreferentialprocurementandatotalof15pointsforenterprisedevelopmentunderthecurrentCodes.UnderthenewCodes,40pointsintotalcanbescoredforsupplierandenterprisedevelopment.Ofthese40points,25pointsarescoredforpreferentialprocurement.Thisincludes:procurementspendbasedonsuppliers’B-BBEElevels,procurementspendonQSEs,procurementspendonEMEs(beingbusinesseswithanannualturnoveroflessthanZAR5millionunderthecurrentCodesandlessthanZAR10millionunderthenewCodes),procurementspendonsuppliersthatareatleast51%blackownedandprocurementspendonsuppliersthatareatleast30%ownedbyblackwomen.Significantlymorepoints(9pointsunderthenewCodes,upfrom3pointsunderthecurrentCodes)areallocatedtoprocurementfromsuppliersthatare51%ownedbyblackpeople.Similarly,morepointsareallocatedtoprocurementfromQSEsandEMEsunderthenewCodes(7points)comparedtothecurrentCodes(3points).Inaddition,10pointsareallocatedtothenewcategoryof“supplierdevelopment”.5pointsarealsoallocatedtotheannualvalueofenterprisedevelopmentcontributionstonon-supplierbeneficiaries.Asdiscussedabove,ifameasuredcompanydoesnotachieve40%ofthetargetforeachoftheseelements,itwillbepenalisedandwilldroponeB-BBEElevel.

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Special focus: Ownership Under the Current Codes and the New Codes

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Guide - Broad-Based Black Economic Empowerment

21

TheownershipscorecardunderthecurrentCodescomparedtotheownershipscorecardunderthenewCodesisasfollows:

Ownership indicator Target Weighting points

Current New Current New

Voting Rights

Exercisablevotingrightsinthehandsofblackpeople

25%+1 25% + 1 3 4

Exercisablevotingrightsinthehandsofblackwomen 10% 10% 2 2

Economic interest

Economicinterestofblackpeopleintheenterprise 25% 25% 4 4

Economicinterestofblackwomenintheenterprise 10% 10% 2 2

Economicinterestofthefollowingblacknaturalpeopleintheenterprise:

2.5% 3% 1 2

• Blackdesignatedgroups;

• Blackparticipantsinemployeeownershipschemes;

• Blackbeneficiariesofbroad-basedownershipschemes;or

• Blackparticipantsinco-operatives

Economicinterestofnewentrants N/A 2% N/A 2

Realisation points

Ownershipfulfilment 1 N/A

Netvalue 7 8

Bonus points

Involvementintheownershipoftheenterpriseofblacknewentrants

10% N/A 2 N/A

Involvementintheownershipoftheenterpriseofblackparticipantsin:

10% N/A 1 N/A

• employeeownershipschemes;

• broad-basedownershipschemes;or

• co-operatives

UnderboththecurrentCodesandthenewCodes,thebasisonwhichpointsarescoredisthatif,forexample,acompanyachievesthetargetforaparticularindicatororifitexceedsthetargetforaparticularindicator,itwillachievethefullpointsforthatindicator.Forexample,if25%oftheeconomic

interestinrespectofthecompanyisheldbyblackpeople,itwillachievethefull4pointsforthatindicator.Ifonly15%oftheeconomicinterestinacompanyisheldbyblackpeople,thecompanywouldgetpointsinproportiontoitsachievementofthetargetie5%/25%x4=2.4points.

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FLOW-THROUGH PRINCIPLE

UnderboththecurrentCodesandthenewCodes,ownershipiscalculatedonaneffective,flow-throughbasis.Theflow-throughprinciplerequiresthatblackownershipcanbetracedbacktoaspecificblackindividual.Assuch,whenmeasuringtherightsofownershipofanycategoryofblackpeopleinameasuredentity,onlyrightsheldbynaturalpersonsarerelevant.Iftherightsofownershipofblackpeoplepassthroughajuristicperson,thentherightsofownershipofblackpeopleinthatjuristicpersonaremeasurable.Thisprincipleappliesacrosseverytierofownershipinamulti-tieredchainofownershipuntilthatchainendswithablackpersonholdingrightsofownership.However,forthepurposeofcalculatingthescoreinrespectofvotingrightsinthehandsofblackpeopleandtheeconomicinterestofblackpeople,oneentityintheownershipchainwhichhasmorethan50%ownershipbyblackpeoplemaybetreatedasifitis100%ownedbyblackpeople.Thisisreferredtoasthe“modifiedflowthroughprinciple”.NET VALUE

Realisationpointsarescoredinrelationtotheextenttowhichtheownershipinterestsheldbyblackpeopleinthecompanyareunencumbered(iedebt-free).Thenetvalueindicatorrelatestotheextenttowhichblackshareholdershavebeenreleasedfromfundingobligationsinrespectoftheiracquisitionofsharesandtheirshareholdingbecomesunencumbered.Thetargetforthepercentageofsharesthatshouldbedebt-freeincreasesovera10-yearperiodfromwhenblackshareholdersarefirstintroduced.Assuch,forexample,inyear1followingaB-BBEEtransaction,thetargetisthat2.5%ofthesharesinthecompanythatareheldbyblackpeopleshouldbedebt-free,i.e.assumingthatanacquisitionwasfullyfundedandthatnodiscountwasgiven,10%ofanydebtshouldbepaiddownbytheendofyear1.Byyear10,thefull25%targetshouldbedebt-freeie100%ofthedebtshouldbepaiddown.Ifonlyaportionoftheacquisitionpriceisfundedand/orsharesareacquiredbyblackpeopleatadiscount,thepercentageoftheacquisitiondebtthatwouldneedtobepaiddownineachyearfollowingthetransactiontomeetthetargetwouldbeadjusted.

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Special focus: Enterprise and Supplier Development Under the Current Codes and the New Codes

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24

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ThenewCodeswillrequirecompaniestofundamentallyre-assesshowB-BBEEisimplemented,particularlyinthecontextofenterpriseandsupplierdevelopmentwhichcarriestheheaviestpointsweightingunderthenewCodes.Inessence,theenterpriseandsupplierdevelopmentelementunderthenewCodesmeasurestheextenttowhichentitiesbuygoodsandservicesfrom“empoweringsuppliers”(whichisdiscussedindetailbelow)withstrongB-BBEErecognitionlevels,andalsomeasurestheextenttowhichentitiescarryoutsupplierdevelopmentandenterprisedevelopmentinitiativesintendedtoassistandacceleratethegrowthandsustainabilityofblackenterprises.

UnderthecurrentCodes,acompanycanscoreatotalof20pointsforpreferentialprocurementandatotalof15pointsforenterprisedevelopment.UnderthenewCodes,40pointsintotalcanbescoredforenterpriseandsupplierdevelopment.Ofthese40points,25pointsarescoredforpreferentialprocurement,10pointsareallocatedtothenewcategoryof“supplierdevelopment”,and5pointsareallocatedtotheannualvalueofenterprisedevelopmentcontributionstonon-supplierbeneficiaries.EnterpriseandsupplierdevelopmentisalsoconsideredtobeapriorityelementunderthenewCodes,whichmeansthatthesub-minimumrequirementis40%,regardlessofwhetherornotacompanyhasmadegenuineeffortstocomplywiththiselement.Inotherwords,ameasuredentitymustachieveaminimumof40%ofthetargetsforeachofthethreecategorieswithintheenterpriseandsupplierdevelopmentelement,namelypreferentialprocurement,enterprisedevelopmentandsupplierdevelopment.Notmeetingthesetargetswillnegativelyaffectameasuredentity’sB-BBEEscorecardandwillresultinacompanydroppingaB-BBEElevel.

PREFERENTIAL PROCUREMENT

PointsforthepreferentialprocurementelementarescoredunderthecurrentCodesdependingontheextenttowhichcompaniesprocuregoodsandservicesfromblackempoweredsuppliers.CompaniescanincreasetheirscoresonthiselementiftheyprocureagreaterpercentageofgoodsandservicesfromsupplierswithhigherB-BBEEratingsandfromsmallbusinesses.UnderthenewCodes,however,preferentialprocurementismeasuredunderenterpriseandsupplierdevelopment.Thepreferentialprocurementcategoryofenterpriseandsupplierdevelopmentincludes:procurementspendbasedonsuppliers’B-BBEElevels,procurementspendonQSEs,procurementspendonEMEs(beingbusinesseswithanannualturnoveroflessthanZAR5millionunderthecurrentCodesandlessthanZAR10millionunderthenewCodes),procurementspendonsuppliersthatareatleast51%blackowned,andprocurementspendonsuppliersthatareatleast30%ownedbyblackwomen.Significantlymorepoints(9pointsunderthenewCodes,upfrom3pointsunderthecurrentCodes)areallocatedtoprocurementfromsuppliersthatare51%ownedbyblackpeople.Similarly,morepointsareallocatedtoprocurementfromQSEsandEMEsunderthenewCodes(7points)comparedtothecurrentCodes(3points).

UnderthenewCodes,pointsforpreferentialprocurementarescoreddependingontheextenttowhichcompaniesprocuregoodsandservicesfrom“empoweringsuppliers”.Therequirementsforqualifyingasanempoweringsupplierincludebeing(1)a“B-BBEEcompliantentity”,(2)whichisa“goodcitizenSouthAfricanentity”,(3)whichcomplieswith“allregulatoryrequirements”ofSouthAfrica,and(4)whichmeetsatleastthreeofthefollowingcriteria(oroneifitisaQSE)

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relatingtothedevelopmentoflocalproduction,jobcreation,localisationofbusinessactivitiesandskillstransfertosmallblackbusinesseswhoseannualturnoverislessthanZAR50million:

• atleast25%ofcostofsalesexcludinglabourcostanddepreciationmustbeprocuredfromlocalproducersorlocalsuppliersinSouthAfrica;

• 50%ofjobscreatedareforblackpeople;• atleast25%transformationofrawmaterial

orbeneficiationwhichincludeslocalmanufacturing,productionand/orassembly,and/orpackaging;and

• atleastspend12daysperyearofproductivitydeployedinassistingblackEMEsandQSEsbeneficiariestoincreasetheiroperationorfinancialcapacity.

NopreferentialprocurementpointswillbeobtainedunderthenewCodesifasupplierdoesnotcomplywiththeserequirements(althoughEMEsandStart-upEnterpriseswillautomaticallyqualifyasempoweringsuppliers).Theprocessofverifyingwhetherasupplierisanempoweringsupplierwilllikelyinvolveextraadministration,managementtimeandcosts.

ENTERPRISE AND SUPPLIER DEVELOPMENT

UnderthecurrentCodes,pointsarescoredforenterprisedevelopmentinrelationtothecontribution(bothmonetaryandnon-monetary)thatacompanymakestodevelopingbusinessesthatareownedbyblackpeople.Thetypesofcontributionsthatwillbemeasuredinclude,forexample,investinginbusinessesownedbyblackpeople,makingloanstobusinessesownedbyblackpeople,providingcreditguaranteestobusinessesownedbyblackpeople,providingpreferentialcredittermstobusinessesownedbyblackpeople,givingdiscounts,andprovidingtrainingormentoring.Thetargetsthatapplytoenterprisedevelopmentaresetasapercentageofthemeasuredcompany’snetprofitaftertax(NPAT).UnderthecurrentCodes,itisconsideredtoberelativelyeasytoscorepointsunderthiselement,andalsoallowscompaniestotakeanarms-lengthapproachtoenterprisedevelopment.

UnderthenewCodes,bothenterprisedevelopmentandsupplierdevelopmentaremeasured,togetherwithpreferentialprocurement,undertheenterpriseandsupplierdevelopmentelement.IntermsofthenewCodes,1%ofanentity’snetprofitaftertaxshouldbespentonenterprisedevelopment,while2%ofanentity’snetprofitaftertaxshouldbespentonsupplierdevelopment.BeneficiariesofsupplierdevelopmentandenterprisedevelopmentmustbeEMEsorQSEswhichareatleast51%blackownedoratleast51%blackwomenowned.Further,whilesupplierdevelopmentreferstotheenterprisedevelopmentcontributionsthatacompanymakestoitsblack-ownedsuppliersand,inparticular,smallblack-ownedbusinesseswhoareitssuppliers,enterprisedevelopmentreferstocontributionstonon-supplierbeneficiaries.Examplesofenterprisedevelopmentandsupplierdevelopmentcontributionsinclude,amongstothers,investmentsinbeneficiaryentities,loansmadetobeneficiaryentities,guaranteesgivenorsecurityprovidedonbehalfofbeneficiaries,creditfacilitiesmadeavailabletobeneficiaryentities,etc.

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The Measurement of Ownership by Trusts in Terms of the Codes

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Guide - Broad-Based Black Economic Empowerment

ThecurrentCodesandthenewCodessetoutcertainminimumqualifyingcriteriafordifferenttypesoftrusts,suchasbroad-basedownershipschemes(BBOS),employeeshareownershipprogrammes(ESOPs)andothertrustssuchasfamilyorbusinesstrusts.Ifthesecriteriaaremet,thetrustconcernedmaycontributeamaximumof40%ofthetotalpointsontheownershipscorecardofthemeasuredentityconcerned.Ifcertainadditionalcriteriaaremetforeachtypeoftrust,thetrustmaythencontributeupto100%ofthetotalpointsonthemeasuredentity’sownershipscorecard.

Theownershipscorecardhasbeensetupinsuchawaytoencouragebroad-basedBEEownershipandtheestablishmentofanESOPorBBOSisonewaytoachievethis.

BROAD-BASED BLACK OWNERSHIP SCHEMES

UnderthecurrentCodes,aBBOSisaschemethatmeetsthesevenlistedrequirements.Iftheserequirementsaremet,theBBOScancontributeupto40%ofthetotalpointsavailableontheownershipscorecardofthemeasuredentityconcerned:

• themanagementfeesoftheschememaynotexceed15%;

• theconstitutionoftheschememustrecord• therulesgoverninganyportionofeconomic

interestreceivedandreservedforfuturedistributionorapplication;

• atleast85%ofthevalueofthebenefitsallocatedbytheschememustaccruetoblackpeople;

• atleast50%ofthefiduciariesoftheschememustbeindependentpersonshavingnoemploymentwithordirectorindirectbeneficialinterestinthescheme.Thetrusteesofatrustareitsfiduciaries;

• atleast50%ofthefiduciariesoftheschememustbeblackpeopleandatleast25%mustbeblackwomen;

• thechairpersonoftheschememustbeindependent;and

• onthewindinguporterminationofthescheme,allaccumulatedeconomicinterestmustbetransferredtobeneficiariesoranentitywithsimilarobjectives.

ThenewCodesretainthesevenbasicrequirementstoqualifyasaBBOS,butaddthefollowingthreeadditionalrequirements.Ifthesetenrequirementsaremet,thenunderthenewCodestheBBOScancontributeupto40%ofthetotalpointsavailableundertheownershipelement:

• thetrustdeedmustbeavailable,onrequest,toanyparticipantinanofficiallanguageinwhichthatpersonisfamiliar;

• thetrusteesmustpresentthefinancialreportsoftheschemetoparticipantsyearlyatanannualgeneralmeetingofthetrust;and

• thetrustdeedmustdefinetheparticipantsandtheproportionoftheirclaimtoreceivedistributions(andthetrustees“musthavenodiscretion”inrelationtothese).

UnderboththecurrentCodesandthenewCodes,inordertoobtainallofthepointsontheownershipscorecardforownershipthroughaBBOS,thefollowingadditionalcriteriamustalsobemet:

• theschememusthaveatrackrecordofoperatingasaBBOS;and

• orintheabsenceofsuchatrackrecord,theremustbedemonstrableevidencethattheBBOShasfulloperationalcapacitytooperateasaBBOS.Thescheme’soperationalcapacitymustbeevidencedbysuitablyqualifiedandexperiencedstaffinsufficientnumber,experiencedprofessionaladvisors,operatingpremisesandallothernecessaryrequirementsforoperatingabusiness.

EMPLOYEE SHARE OWNERSHIP PROGRAMMES

UnderboththecurrentCodesandthenewCodes,anESOPmustmeetthefollowingminimumqualifyingcriteriatocontributeamaximumof

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40%ofthetotalpointsavailableontheownershipscorecardofthemeasuredentityconcerned:

• thetrustdeedmustdefinetheparticipantsandtheproportionoftheirclaimtoreceivedistributions(andthetrustees“musthavenodiscretion”inrelationtothese);

• theparticipantsmusttakepartinappointingatleast50%ofthefiduciaries;

• theparticipantsmusttakepartinmanagingtheschemeatalevelsimilartothe

• managementroleofshareholders;thetrustdeedmustbeavailable,onrequest,toanyparticipantinanofficiallanguageinwhichthatpersonisfamiliar;

• thetrusteesmustpresentthefinancialreportsoftheschemetoparticipantsyearly

atanannualgeneralmeetingofthetrust;and

• andonthewindinguporterminationofthescheme,allaccumulatedeconomicinterestispayabletotheparticipantsattheearlierofthedateoreventspecifiedinthedeedoronterminationorwindingupofthescheme.

UnderboththecurrentCodesandthenewCodes,inordertoobtainallofthepointsontheownershipscorecardforownershipthroughanESOP,itmustbeshownthattheschemehasatrackrecordofoperatingorithasfulloperationalcapacityforESOPs.ThisisdemonstratedonthesamebasisastheoperationaltrackrecordofaBBOS(asdiscussedabove)(plusabonuspointif10%achieved),andunderthenewCodesis3%.

Current Codes New Codes

Exercisable voting rights 6points 6points

Economic interest 5points 6points

Ownership by BBOS and ESOP 1point(+1bonuspoint)

3points

Ownership by black new entrants

Net Value 8points(includingownershipfulfilment)

8points

Total points: Potentially21outof23(effectively21outof20)

Potentially23outof25

A summary of the points that ownership by BBOS and ESOPs can contribute

ThetargetedlevelsofBBOSandESOPownershipunderthecurrentCodesis2.5%(plusabonuspointif10%achieved),andunderthenewCodesis3%.

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B-BBEE Funding Structures

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Preference Share Traditional Loan Notional Vendor Funding

Preferencesharefunding Loanfunding(vendororthirdparty)

Sharesacquiredfornominalvalue,separatenotionalfundingprovided

Preferencesharesissuedtofunder:funderhaspreferentialrighttodividends

OrdinarysharesissuedtoB-BBEEpartner

OrdinarysharesissuedtoB-BBEEpartner

B-BBEEpartnerhasvotingrights

B-BBEEpartnerhasvotingrights

B-BBEEpartnerhasvotingrights

Dividendsfromthemeasuredentityusedtoservicepreferencesharedividends

Dividendsfromthemeasuredentityusedtoserviceloan

B-BBEEpartnerwaivesdividendrightsorholdsadifferentclassofshareswithvotingrightsandtherearenoorlimiteddividendrightsuntilthefundingis“repaid”

Preferencesharesredeemedafteraperiod(usuallybetween7and10years)

EncumbrancesonB-BBEEpartner’ssharesfallawayiftheloanisrepaid

Formulaappliedtodetermine:

• howmanysharestheB-BBEEpartnerretainsandareconvertedtoordinaryshares

• howmanysharesarerepurchasedbythecompany/measuredentityattheendofthetermatnominalvalue

B-BBEEinvestorsoftendonothaveaccesstosufficientcapitaltoacquireequity.Assuch,BEEtransactionsareoftenstructuredinsuchawaytofacilitatethepurchaseoftheequitybytheB-BBEEinvestor.Itistypical,however,fortheB-BBEEinvestortopayaportionofthepurchasepricei.e.“skininthegame”whichservesthedualpurposeofincentivisingtheB-BBEEinvestorandassistingthemeasuredentityinachievinginitialnetvaluepoints.

Thechoiceofafundingstructurewilldependonanumberoffactorsincluding,butnotlimitedto:availabilityandsourceoffunding(e.g.vendororthirdparty),theamountoffundingrequired,taximplicationsandpotentialtaxefficiencies,theabilityoftheB-BBEE

investortopayaportionofthepurchaseorsubscriptionprice,thetypeandcompositionoftheproposedB-BBEEinvestor(e.g.atrust,ESOP,BBOS,specialpurposevehicle,etc),thekeyparties’B-BBEEstrategy,thesectorinwhichthemeasuredentityoperates,thesectortowhichthemeasuredentitysupplies,andanyexistingorongoingcontractualcommitmentsregardingB-BBEEratingand/orownership.

Thereareanumberofdifferentpossiblefundingarrangementsincluding:atraditionalloanstructure(vendororthirdparty),notionalvendorfinance(NVFstructure),orapreferencesharestructure(vendororthirdparty).Thegeneralfeaturesofthedifferentfundingarrangementsareasfollows:

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Notionalvendorfinancestructureshavebeenusedinlistedcompanies’B-BBEEtransactionssuchasSABZenzele,VodacomYeboYethu,KumbaIronOreandMTNZakheleLimited.Notionalvendorfundingachievesthesameeconomiceffectasatraditionalloanstructure,butwithoutanyactualflowoffunds,hencetheterm“notional”:

• Inatraditionalloanstructure,thevendororthirdpartywouldadvancealoantoaB-BBEEpartnertoacquiretheshares.Thisloanamountwouldusuallyincurinterest.TheB-BBEEpartnerwouldusesomeorallofthedividendstopaydowntheloan.Iftheloanisnotrepaid,thesharesmaybesoldtosettletheoutstandingdebt,ortheloanmayberefinanced.

Inanotionalvendorfundingstructure,theB-BBEEpartnerwouldacquireordinarysharesorsharesofadifferentclassfornominalvalue.Theparties,i.e.thevendorandtheB-BBEEpartner/s,wouldnegotiateandagreeonthetermsthatwillapplytotheproposedB-BBEEtransaction,includinganotionalvendorfundingformula,whicheffectivelyreplicatesatraditionalloanstructure.Inthisregard,thenotionalfundingamountwouldbeagreed(e.g.themarketvalueoftheshares),thatamountwouldbeincreasedoveranotionalfundingperiodbyanotionalinterestfactor,andtheamountwouldbedecreasedbythenotionalvalueofdividendattributabletotheB-BBEEpartner’sshares.Itshouldbenotedthatthisisnotregardedasaloan,asnofundsareactuallyadvancedtotheB-BBEEpartnerorowedbytheB-BBEEpartner.Further,theB-BBEEpartnerwilleitherwaiveanydividendrights(ifordinaryshareshavebeenacquired)orwillholdadifferentclassofshareswithvotingrightsbutwithnoorlimiteddividendrightsuntilthefundingis“repaid”i.e.theendofalock-inperiod.

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Monitoring of B-BBEE Compliance and Fronting Practices

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Guide - Broad-Based Black Economic Empowerment

B-BBEE audits and B-BBEE ratings

WhereabusinesspresentsanyinformationinrelationtoitsB-BBEEscore,forexampleinthecontextofatenderresponse,thismustbesupportedbyacertificateissuedbyanaccreditedverificationagency.Thecertificatesissuedbytheverificationagenciesarevalidfortwelvemonths.Accordingly,businessesgenerallyperformaB-BBEE“audit”onanannualbasis.Abusiness’sB-BBEEscorewillbedeterminedonthebasisofitsactivitiesduringthepreviousfinancialyearanditsownershipandmanagementstructuresandstaffprofileasatthedateofmeasurement.

Variousverificationandratingsagencieshavebeenestablishedtomeasureenterprises’B-BBElevels.Theseagenciesissuecertificatesonanannualbasiscertifyinganenterprise’slevelsofB-BBEE.AsfromOctober2011,onlyB-BBEEcertificatesissuedbyaccreditedverificationagenciesandauditorsthathavebeenapprovedtocertifyB-BBEElevels,arevalid.

Fronting practices

TheCodesofGoodPracticeprovidethat,whenmeasuringB-BBEElevels,substanceappliesoverlegalform.Thisisanattempttolimitinstancesof“fronting”byenterpriseswhichmakerepresentationsthattheyhaveadoptedparticularB-BBEEinitiativesinordertoscorepointswhen,insubstance,theinitiativeshavenotbeenadopted.IntermsofamendmentstotheBEEAct,whichcameintoeffecton24October2014,itisnowacriminaloffencetoengageina“frontingpractice”ortomakedeliberatemisrepresentationsinrelationtoanenterprise’strueB-BBEEstatus.TheBEEActdefinesa“frontingpractice”as“atransaction,arrangementorotheractorconductthatdirectlyorindirectlyunderminesorfrustratestheachievementoftheobjectivesof[theBEEAct]ortheimplementationofanyoftheprovisionsof[theBEEAct]”.

IntermsoftheBEEAct,frontingpracticesinclude,butarenotlimitedto,practicesinconnectionwithaB-BBEEinitiative:

• intermsofwhichblackpersonswhoareappointedtoanenterprisearediscouragedorinhibitedfromsubstantiallyparticipatinginthecoreactivitiesofthatenterprise;

• intermsofwhichtheeconomicbenefitsreceivedasaresultoftheB-BBEEstatusofanenterprisedonotflowtoblackpeopleintheratiospecifiedintherelevantlegaldocumentation;

• involvingtheconclusionofalegalrelationshipwithablackpersonforthepurposeofthatenterpriseachievingacertainlevelofB-BBEEcompliancewithoutgrantingthatblackpersontheeconomicbenefitsthatwouldreasonablybeexpectedtobeassociatedwiththestatusorpositionheldbythatblackperson;or

• involvingtheconclusionofanagreementwithanotherenterpriseinordertoachieveorenhanceB-BBEEstatusincircumstancesinwhich(1)therearesignificantlimitations,whetherimplicitorexplicit,ontheidentityofsuppliers,serviceproviders,clientsorcustomers;(2)themaintenanceofbusinessoperationsisreasonablyconsideredtobeimprobable,havingregardtotheresourcesavailable;or(3)thetermsandconditionswerenotnegotiatedatarm’slengthandonafairandreasonablebasis.

B-BBEE Commission

From24October2014,theBEEActwasalsoamendedtoprovidefortheestablishmentofaB-BBEECommissionwhichwillberesponsiblefor,amongstotherthings,investigatingalleged“fronting”practicesandreferringthemforprosecution.WhiletheB-BBEECommissionhasnotyetbeenestablished,weunderstandthattheintentionisfortheB-BBEECommissiontobeestablishedby31March2015.IntermsoftheBEEAct,finesforfrontingmaybeupto10%ofacompany’sannualturnover.

B-BBEE Reporting

Finally,intermsoftheamendmentstotheBEEAct,listedcompaniesarenowrequiredtoreportannuallyontheirlevelsofB-BBEEandB-BBEEtransactionsaboveacertainthreshold,asdeterminedbytheMinisterbynoticeintheGovernmentGazette,arerequiredtobereportedtotheB-BBEECommission.However,thisthresholdhasnotyetbeenprescribedbytheMinister.

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