Paul Janisch

What constitutes ownership for ICASA licences - option work

This is interesting.  There are draft regulations that state that individual licensees need to be a level 4 and have 30% ownership. I was contacted by Sakeliga who have told me that they are preparing litigation against these regulations.  This works for me.  We've seen the issue with Starlink in South Africa.  ICASA (read the government) would rather prevent people in the farflung  reaches of South Africa from accessing a fast and reliable network because they insist on a ridiculous ownership requirement.  It's the undoing of this government.  If you want to support the litigation then make contact Tian Alberts at Sakeliga.

However litigation takes a while and compliance may be the interim solution. 

The draft regulations were published in March 2021.  The regulations remain in draft format but in our experience the final gazetted regulations often look very similar to the draft.

There are two absolute requirements for individual licenses that need to be achieved between 36 and 48 months depending on the license or size of the applicant.  The licensee needs to be a level 4 with 30% equity held by black people.  The truth is that no company can achieve a level 4 unless they have a portion of black ownership.   If this requirement needs to take effect in the future then it’s best to comply with the 30% at the outset and work on the BEE levels over time.

What is black equity?
The definition states that each Individual Licensee must have a minimum of 30% of its ownership equity held by Black People.  Equity is further defined as the instrument by which a person holds rights of ownership in an entity.   Regulation 4(1) states that this equity must be derived through the Flow-Through Principle

The regulations are clear that any instrument of ownership will constitute ownership if verified by an accredited verification agency.  The ICT BEE codes consider a wide range of instruments - trusts, private equity, non-profit companies. warrants and options.  Most equity instruments will trigger a tax event and are quite dependent on the black shareholder meeting their repayment plans if they are indebted. 

Options are a compelling method of ownership compliance because if the option holder behaves as a shareholder whilst holding the option then the ownership is deemed to exist.  There is no Capital Gains Tax (CGT) until the option matures and most importantly the option holder is able to amass the necessary capital to purchase the shares through dividends that flow at the outset.
 
If you are looking at an ownership structure to comply with the ICASA regulations and would like to look at options please contact us and we’d happily set up a consultation with you at no charge.

If you would like to know more about this email or learn about our comprehensive solution, please contact us on [email protected]

Black ownership within 3 weeks, no interference only compliance

This is a repost.  There has been a problem with Feedblitz that has miraculously been solved.

The upshot is

1. BEE ownership in three weeks
2. Fully compliant with the codes (see below)
3. No shareholder interference
4. No Capital Gains Tax
5. If it needs to go through a verification (this will take longer than three weeks) you will get full recognition for ownership
6. Contact us to learn more

I am not the first to think about the concept of options or warrants. I won't tell you who did it first because theirs is too simplistic; focusing on white owned businesses and only QSEs or EMEs. I was talking to my old friend Rudolf Rautenbach who told me about Ownershield. Rudolf is a little cleverer than most in this industry. We lost Gerhardus Burger to Australia, Chris van Wyk to Mauritius and Kevin Lester to Anglo. These were three of the brightest minds in the BEE business. Rudolf has stepped up and filled the weighty shoes that Mr Burger filled by becoming THE BEE tax expert in South Africa. Part of Rudolf's experience lies in capital gains tax. This is a bugger because if you do an ownership transaction, uncle fascist SARS is going to want its undeserved piece of the pie in the form of CGT.

This is a problem and quite possibly a major deterrent to companies having to undergo a BEE transaction. This does somewhat highlight the punitive nature of the entire BEE system. I would tell the potential partner that they must pay the CGT otherwise no deal. I digress.

Rudolf says that options are a viable vehicle for BEE ownership not only because it doesn't attract CGT. He lists a few benefits

1. It's a top up method. If you have say 25% you could top it with 26% of options and you'll get your level two as an EME or QSE
2. It's a good option for larger companies as well. If this programme exists in the codes then it will pass a verification
3. It can be used by all companies.  The structures may differ slightly but it's widely applicable

I have selected the reference to options and warrants from the Financial Sector Code (the only code that was properly negotiated and drafted) , but the words are exactly the same in the generic codes.

8    OPTIONS AND SHARE WARRANTS

8.1    Exercisable voting rights and economic interest will be recognised where a participant holds an instrument granting the holder the right to acquire an equity instrument or part thereof at a future date, if the following requirements are met:

8.2    The exercisable voting rights attached to that instrument are irrevocably transferred to the holder for the option period and are exercisable by the holder before acquiring the equity instrument.

8.3    The value of any economic interest is irrevocably transferred for the option period and paid to the holder of that instrument before the exercise of that right.

8.4    The value of an instrument must be determined by using a standard valuation method for calculating the net value.

This is where Ownershield appears to be different to other companies. Most target white -owned business that turnover less than R50m. However Ownershield looks at it from the perspective of a prospective black shareholder as well. What if the prospective shareholder (who is black but I'm not going to repeat this) agrees to take an option for 36 months. They get the benefits of ownership because of the voting rights and dividends. They may be able to store up enough money because of that dividend flow to exercise the option when it matures. And they are gaining experience of ownership. Hell there may even be executive employment opportunities. We could call this a long date – where the two parties go out with each other and then decide to marry. As opposed to an arranged marriage at the outset (which is bound to fail).

Having noted that. The option route is still good for white owned companies. There are failsafe mechanisms in the structure that will protect all parties. We can't pretend that that ownership is easy. It's not. It's a hard slog. Different cultures and different expectations get in the way. There's one example of an English speaking white South African working in a very Afrikaans environment in some dorp somewhere and he can't fit in, it's a very poor cultural fit AND THEY ARE ALL WHITE. Also if either party decides this isn't working, cancel the option agreement. Everyone walks away.

I'm not a big believer in the ethical nature of BEE nor do I believe in the spirit of it, mostly because the government's bona fides is not genuine and they have messed it all up. But for some reason I think the option erm.... option is probably the closest to the spirit of these draconian codes.

This is a solution for all businesses, even CCs. Doesn't matter how big or small you are and doesn't' involve preferential shares and a dodgy law firm in Bloem. And the turn around time is quick there's no CIPRO or the master of the high court. None of that. Yes there are a number of documents and agreements that need to be signed, there's also compliance with the Companies Act. Rudolf has got all that sorted. In fact if you don't want to manage it at all, he'll doo that for you too.

You can contact Rudolf here. Hell if I'm nice to him he might include me in the meeting.

What is a participant then - and who do we work for?

A participant is defined as a natural person holding rights of ownership in a Measured Entity (got to love that term). Simply put it’s a living breathing black person.  That’s simple enough. Where this word appears it must refer to a natural person. For example

Black New Entrants” means Black participants who hold rights of ownership in a Measured Entity etc

This is the inspiration for this post. In my industry we are always trying to one-up each other.  Since Rudolf and I have start delivering our courses I have come across at least two people who I would recommend in a heartbeat – you know who you are Marc Thompson and Ricky de Souza.  But you also get VAs who try to argue because they think it’s a gunfight.  When it comes to verification we have one outcome – that is that the client gets the result they expect.  The VA needs to defend what they do with SANAS, so if they are able to do so then allocate the points.  Don’t argue for the sake of arguing.  In my case it’s my reputation.  I’m interested in cheap points.   Give them to me.

I digress.  One person refused to allocate the new entrant points because the trust was a new entrant. I think he delighted in rubbing my nose in it. 

Corporate SA is gatvol of BEE

Those aren’t words from my mouth, I would have used more choice words.  This came from a person who is a player in SA business.  I approached the person to ask their advice about certain skills projects we have going.

This is not a surprise at all.  The largest corporates have long paid lip service to the process.  Claiming that they are committed to transformation.  They “engage” with the government at every level.  And to what end?

Corruption, crime, potholes, electricity, infrastructure. Theft, incompetence,  duplicity, racism, blame, you name it.  We’ve all had enough of this.  And the government knows it.

Where does this leave us?  I can’t see that BEE is going to be canned in a hurry, but I do see that the desire to comply to the letter of the law is waning.  I don’t think we need worry about the BEE Commission.  They have probably  realised that they are toothless.  As for the DTIC I think we need worry – because the incompetence levels there are scary.  How’s this for a story

There is a company that dropped a level (multiple levels)  because they had lost their ownership.  They had completed  a YES programme and wanted to go from that skimpy level 8 to a 7.  I sent an email to someone whose name was on the DTIC’s website.  And I was given the name of a militant Millicent who would hear our case.   It was obvious that she had little time for two white people pleading their case.  She found fault with the fact that there had been a two year gap between certificates.  I informed her (and I know this as a fact) that there is no requirement to renew ever.  “Oh yes there is!” thundered Millie.  “The Verification manual requires it was well.”   Pity Millie didn’t know that the manual is only applicable to VAs.

She then went onto to insist on evidence that the verification agency would have taken into account.  Why would you do this?  It  sounds like a personal agenda.  And you know you are powerless because she’s clueless and militant.  Where’s the reward for doing YES?  It doesn't exist.

It all talks back to the government.  They are not to be trusted.  This article came out a few weeks ago and I wholly agree with it.  The author concludes with

The biggest hurdle, in my view, to making the undermining of BEE more common is not the risk of legal jeopardy, but the sentiment harboured by too many South Africans that they owe the South African government a duty of obedience in conscience. Once this hurdle has been scaled – and it is becoming easier to scale as government’s incompetence and incapacity gets more pronounced by the day – BEE will all but collapse under the weight of noncompliance.

We aren’t there yet but it’s coming.  As this awful government starts losing power so will the revolt gain momentum.  If we become a coalition government then it’ll move quicker.  There’ll be so much infighting that governance is bound to suffer.

Ownershield is geared for this change.  It’ll be cost effective and non-invasive.  Like the things we’ve been offering over the last few years, we have expanded beyond ownership and intraternships.  Budgets are tight and BEE was only invented for the good times. Perhaps that’s the point.  We’ve been taken for complete and utter fools for 30 years.   If you want compliance that talks to your internal requirements then we can help you.  If you want to spend a lot of money then we’ll have to turn you down.

And why do you want to spend huge amounts of money on this ludicrous programme.

The difference between Broad-based Ownership Schemes (BBOS)/Employee Share Ownership Programmes (ESOP) and Trusts

Most people involved in the BEE world, including law firms are of the opinion that a Trust deed needs to fulfil all the requirements contained in Annexure B – D of the ownership code.  These are the annexures that cover BBOS, ESOPs and Trusts.  There are a number of problems with this approach

• All amendments to a trust deed including the replacement of trustees needs to be lodged with the Master of the High Court’s office
• The Master’s office is in a shambles it could take more than a year to get the updated Letter of Authority
• Annexures B (BBOS) and C (ESOPs) do not refer to Trustees and Trust Deeds. They specifically refer to Fiduciaries and a Constitution of the programmes.
• Annexure D refers directly to Trusts.

Studocu.com observes the following

While all trustees are fiduciaries, not all fiduciaries are trustees. Trustees specifically refer to individuals or entities managing assets in a trust, while fiduciaries have a broader scope and can include other roles where a duty of loyalty and care is required.

This is further corroborated by the 2008 Verification Manual that requires verification agents to interview trustees or “equivalent representative of scheme”.

It makes sense to have two documents when it comes to BBOS or ESOPs.  The first is the Trust Deed.  The requirements for the trust deed are far simpler than those of the BBOS.  In fact there is no racial requirement for Trustees at all.  This document should be broadly drafted to accommodate BEE requirements as well as the standard essentialia of a trust deed.  What it should do as well is refer to the Constitution of the Broad-based Ownership Scheme or ESOP.

A Constitution is a far more fluid and adaptable document.  It does not need to go to the master’s court and also does not have to be unnecessarily complex.  One of the requirements is that the Constitution must be made available to beneficiaries in a language that they are familiar with. 

Contact us for a  free consultation

Anyone who has a trust and have gone through a verification knows how complicated it is.  It can substantially simplified with a constitution.  Please contact us to discuss to understand what a BBOS or ESOP Constitution should look like and how to go about drafting this document.

Rudolf Rautenbach	Paul Janisch
083 759 0374	083 227 1375
[email protected]	[email protected]

Ownershield has launched a Whatsapp Group for BEE advice

Click on the link and join us.  It's broadcast only but if you have any questions we'll take emails

We have a number of really good products coming out.  We don't think that the market has seen these products before and many of them transcend BEE compliance.  We'll keep you posted

Ownershield's website is live - a shameless plug. Please go and visit

Thanks to Howard and his team at Syncrony Digital.

Ownershield is a unique ownership advisory company.  It sticks to these rules

Sustainability.

Ownership is an emotional topic, but if a company is going to go down that route then the solution must be able to weather BEE norms and interpretations

Tax efficiency.

As compelling as it is to extend shareholding to a connected individual, company, trust or any other corporate vehicle; the company selling the shares is going to be subject to extra taxation, like Capital Gains Tax

Participation of new entrants.

All of us know how to own things, but few of us know how to own an asset that will grow in value. This is an extension of entrepreneurship and can be learned, but it also needs to be mentored and nurtured.

Reversibility.

Where both parties can instigate termination proceedings without having to undergo an expensive and lengthy process.

Fully managed.

There are no extra administrative costs or processes with Ownershield. All ownership vehicles are managed by Ownershield, this includes all the BEE entities involved in the transaction.

Ownershield offers a dynamic range of ownership solutions that cater for all sizes of companies operating in South Africa. All solutions are based on a subscription model without a set up fee.

OWNERSHIELD FOCUSES ONLY ON OWNERSHIP SOLUTIONS. By engaging with us you can be assured that we will not regard you as fodder for other products.

 

Presenting other ownership options

Always a pun. I am not the first to think about the concept of options or warrants. I won't tell you who did it first because theirs is too simplistic; focusing on white owned businesses and only QSEs or EMEs. I was talking to my old friend Rudolf Rautenbach who told me about Ownershield. Rudolf is a little cleverer than most in this industry. We lost Gerhardus Burger to Australia, Chris van Wyk to Mauritius and Kevin Lester to Anglo. These were three of the brightest minds in the BEE business. Rudolf has stepped up and filled the weighty shoes that Mr Burger filled by becoming THE BEE tax expert in South Africa. Part of Rudolf's experience lies in capital gains tax. This is a bugger because if you do an ownership transaction, uncle fascist SARS is going to want it's undeserved piece of the pie in the form of CGT.

This is a problem and quite possibly a major deterrent to companies having to undergo a BEE transaction. This does somewhat highlight the punitive nature of the entire BEE system. I would tell the potential partner that they must pay the CGT otherwise no deal. I digress.

Rudolf says that options are a viable vehicle for BEE ownership not only because it doesn't attract CGT. He lists a few benefits

1. It's a top up method. If you have say 25% you could top it with 26% of options and you'll get your level two as an EME or QSE
2. It's a good option for larger companies as well. If this programme exists in the codes then it will pass a verification
3. It can be used by all companies.  The structures may differ slightly but it's widely applicable

I have selected the reference to options and warrants from the Financial Sector Code (the only code that was properly negotiated and drafted) , but the words are exactly the same in the generic codes.

8    OPTIONS AND SHARE WARRANTS

8.1    Exercisable voting rights and economic interest will be recognised where a participant holds an instrument granting the holder the right to acquire an equity instrument or part thereof at a future date, if the following requirements are met:

8.2    The exercisable voting rights attached to that instrument are irrevocably transferred to the holder for the option period and are exercisable by the holder before acquiring the equity instrument.

8.3    The value of any economic interest is irrevocably transferred for the option period and paid to the holder of that instrument before the exercise of that right.

8.4    The value of an instrument must be determined by using a standard valuation method for calculating the net value.

This is where Ownershield appears to be different to other companies. Most target white -owned business that turnover less than R50m. However Ownershield looks at it from the perspective of a prospective black shareholder as well. What if the prospective shareholder (who is black but I'm not going to repeat this) agrees to take an option for 36 months. They get the benefits of ownership because of the voting rights and dividends. They may be able to store up enough money because of that dividend flow to exercise the option when it matures. And they are gaining experience of ownership. Hell there may even be executive employment opportunities. We could call this a long date – where the two parties go out with each other and then decide to marry. As opposed to an arranged marriage at the outset (which is bound to fail).

Having noted that. The option route is still good for white owned companies. There are failsafe mechanisms in the structure that will protect all parties. We can't pretend that that ownership is easy. It's not. It's a hard slog. Different cultures and different expectations get in the way. There's one example of an English speaking white South African working in a very Afrikaans environment in some dorp somewhere and he can't fit in, it's a very poor cultural fit AND THEY ARE ALL WHITE. Also if either party decides this isn't working, cancel the option agreement. Everyone walks away.

I'm not a big believer in the ethical nature of BEE nor do I believe in the spirit of it, mostly because the government's bona fides is not genuine and they have messed it all up. But for some reason I think the option erm.... option is probably the closest to the spirit of these draconian codes.

This is a solution for all businesses, even CCs. Doesn't matter how big or small you are and doesn't' involve preferential shares and a dodgy law firm in Bloem. And the turn around time is quick there's no CIPRO or the master of the high court. None of that. Yes there are a number of documents and agreements that need to be signed, there's also compliance with the Companies Act. Rudolf has got all that sorted. In fact if you don't want to manage it at all, he'll doo that for you too.

You can contact Rudolf here. Hell if I'm nice to him he might include me in the meeting.