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. 

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'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.

 

Transformation or a smokescreen - the BEE codes are more of the latter

This is a post that I have been wanting to write for a long time.  I eventually wrote it as an article for Moneyweb, who published it on Friday and syndicated it to the Citizen (now I'm really famous).  I have been mulling this over for a long time.  Why is it that these BEE codes are more focused on driving a change of ownership than the broad-based emphasis they purport to advocate?  It's patently obvious that everything broad-based is a falsehood.  I found the answer in bolshie bob's Youth Employment Service practice note, specifically paragraph 1.13

1.13 EMEs and at least 51% Black Owned or more QSEs that participate within the Y.E.S Initiative will be verified against the Qualifying Small Enterprise Scorecard and the B-BBEE Certificate will be issued by an Accredited SANAS B-BBEE Verification Agency. This is also applicable to Sector Codes of Good Practice utilising the respective QSE Scorecard.

Here is the article.  It was cleaned up a bit by a MoneyWeb editor. You'll notice that I haven't referred to bolshie bob or the awesome awdoz.  Their real names are Rob Davies and Zodwa Ntuli (uppercase is an exception on this blog)

There is a very interesting clause in the practice note for the Youth Employment Service (YES) document that appears to defy any form of logic. 

The YES programme is now linked to the black economic empowerment (BEE) scorecard and promises to promote companies up to two levels if they employ unemployed black youth for a period of 12 months.

The clause states that exempted micro enterprises (EMEs) or 51% black-owned qualifying small enterprises (QSEs) that wish to claim this benefit need to get measured on the full scorecard before they can benefit from the YES promotion.

For the uninitiated, an EME turns over less than R10 million per year and a QSE between R10 million and R50 million. EMEs with less than 51% black ownership are level 4 BEE contributors, 51%+ black-owned EMEs are automatically level 2, and 100% black-owned businesses are level 1 – which is the top of the BEE pile. The same levels apply to 51% black-owned and 100% black-owned QSEs. All other QSEs need to go through the rigorous, onerous and expensive process of implementing a BEE scorecard and taking the level that this process delivers.

It must be stressed that the process is costly, complicated and unlikely to deliver great results if your company has little (10% or less) or no black ownership. In my experience, a level 8 (which is the entry level to the scorecard) is pretty much what most companies would have to settle for without black ownership.

Why?

This begs the question – why would an exempt micro enterprise that is automatically a level 4 go through a verification to get to a level 7 or 8 and then embark on the YES programme to be promoted to a level 5 when they are already a level 4?

Similarly, why would a 51% black-owned QSE want to get verified in the hope that they come up with a level 3 and then go through the YES process to get to a level 1, when they are automatically a level 2?

And why would a 100% black-owned company even bother with YES?

Herein lies the conundrum. Minister of trade and industry Rob Davies has been forced to exclude smaller businesses from his YES programme even though they are the most likely employers of black youth under the YES programme.

The only logical reason he has done this is because a level 4 can get to a level 2 within a year just by employing a number of people that the business might actually need. But then this would pose a threat to black-owned level 2 and 1 businesses when it comes to state procurement.

There is a five and six preference point advantage, depending on the value of the tender, between a level 4 and a level 2 under the 2017 Preferential Procurement Policy Frameworks Act (PPPFA) regulations. This perceived threat to smaller black-owned businesses has to be mitigated against by discouraging lesser owned competitors from reaching their own BEE levels through any programme that promises a promotion of a couple of levels.

The minister himself has tacitly confirmed the onerous nature of the revised BEE scorecard by publishing a proposition that all 51%+ black-owned companies should all be promoted to level 2 irrespective of their turnover. I have a 100% black-owned client that is over the R50 million turnover threshold that could not get better than a level 5 when we took them through the whole BEE scorecard. This company would have truly appreciated the instant promotion that would have come at a fraction of the cost and hassle.

Dubious motive

These developments have me questioning the motive behind the revised BEE codes.

The department of trade and industry (dti) crowed that these codes were more broad-based than ever, stating that they will touch more of the people who need this empowerment than its predecessor.

But if this is the case then surely all companies, irrespective of ownership levels, should be involved in the process? The more companies that hire black people, train them and buy from black-owned businesses and support the black poor, the greater the impact on the economy and society in general.

Yet 51% black-owned companies that turn over less than R50 million don’t have to contribute to any of this because they aren’t measured on it.

I think the reasons behind this are simple, and I must confess that I have been unduly influenced by Institute of Race Relations CEO Dr Frans Cronje’s arguments about the national democratic revolution.

Cronje argues that the National Democratic Revolution (NDR) led by the ANC strives to rid South Africa of all the vestiges of its colonial past. Part of this process would see 51% of the entire economy in black hands. The reward for those companies reaching 51% would be that they may never have to implement a BEE scorecard at all. Everyone would be a level two or higher. And the need to support black-owned businesses and charities would disappear because all businesses would be black-owned.

Punitive

To someone like Davies, a member of the South African Communist Party, this is the purest and cleanest form of transformation.

But it is a very lofty ideal that is unlikely to be achieved in a free market economy. Those companies that do not wish to adhere to this ownership target will be forced to implement the complex BEE scorecard.

This is simply a punitive alternative. Its punitiveness is enhanced when you consider that the targets for elements like skills development, procurement and enterprise/supplier development are not only complex but extremely costly. It attempts to force smaller businesses to get to the 51% black ownership level in the quickest possible way. This pressure has resulted in many smaller white-owned businesses moving to 51% ownership through elaborate empowerment schemes that irritate BEE Commissioner Zodwa Ntuli because she is powerless to curtail them.

Once this concept is understood it becomes quite clear that the codes are less concerned about broad-based transformation and more concerned about giving black-owned businesses a massive competitive advantage over their lesser owned competitors, specifically in procurement that is subject to the PPPFA. To ensure that this advantage is maintained Davies has set up a series of codes that render it almost impossible to meet those levels when a company has to implement the BEE scorecard.

The exception that should be the rule

What is interesting though is that there is one sector code that is never expected to achieve 51% black ownership – the Financial Sector BEE Code (FSC).

This is because of listed shareholding and the requirement of the Banks Act that any shareholder with more than a 15% stake in a bank must meet certain liquidity requirements in the event that the bank requires the shareholder to bail it out.

The FSC is the only BEE code that focuses on the transformation of the entire sector by encouraging those companies to embark a wide range of initiatives that reach the largest amount of people.

I would argue that it is truly a broad-based code.

As for the other codes – they are a smokescreen and if they actually achieve any form of transformation in the future it will be an unintended consequence.

The transformation of South Africa will not come about as a result of those codes. Corporate South Africa needs to prepare to shoulder the blame from this fallout as it has for the government’s failures in the last two decades.

 

 

Exactly what percentage ownership do you need so as not to be fired

Whilst we wait for Cyril to do something about this abomination known as the BEE codes  I might as well provide my loyal readership with a short tutorial on ownership.

Before I start I need to stress that ownership is not the answer to South Africa's problems.  Well in excess of 95% of all the businesses (whether they be formal or informal) have no intrinsic value.  Their value lies in the person who started that business's energy and effort.  When that person dies, retires or emigrates the chances are that that business will close down.  There might be some value in stock or assets but without that person running it it won't survive.  I can almost see what bolshie bob is spoiling at here. He would say "I am the most useless communist and the scourge of South African business, you are speaking the truth my white monopoly capitalist wannabe.  But if you do a proper handover of ownership and involve black people in the running of the business then it will survive." Too true my Bolshevik brother - but human nature isn't like that.  And no amount of EAPing is going to change it.  You keep on dreaming whilst you enjoy your very generous pension after you have walked away from the mayhem you have caused.

Exactly how much ownership do need so that you don't get fired a level.  The short answer is 10.03%.  Please look at the calculation below.  We know that you need 3.2 points for net value in order not to drop a level.  My rudimentary Excel skills tell me that under perfect circumstances you can get to 3.2 points under formula A with 1% ownership (Acts.co.za is now a subscription site I can't refer you to the formulas).  But you won't get the 3.2 points under formula B and the rule is that the lesser result of A and B becomes the net value answer.  In order to get 3.2 points under formula B you need 10.03% ownership.  Obviously you will need to pay attention to the requirement under formula A to keep it at at 3.2 points.

Ownership level	1.0%
Deemed value
Value of shares in black hands on date of measurement	2.00
Value of outstanding debt	1.00
Value of company on date of measurement	100.00
Deemed value result	1.00%
The net value formula to use is the one that is lower of the two
Net value formula 1
Year 1	10%
Year 2	20%
Years 3-4	40%
Years 5-6	60%
Years 7-9	80%
Year 9-10	100%
Net Value	3.20
Net value formula 2
Percentage black economic interest	5%
Target for ownership	25.10%
Net value formula B	1.59
Subminimum	3.2
Minimum ownership levels	Net Value levels for Formula B
1.00%	0.32
2.00%	0.64
3.00%	0.96
4.00%	1.27
5.00%	1.59
6.00%	1.91
7.00%	2.23
8.00%	2.55
9.00%	2.87
10.00%	3.19
10.03%	3.20
10.10%	3.22
11.00%	3.51

 

 

Delinquent, or absent shareholders and ownership - repost

This post was originally published in April 2013.  Please excuse the indulgence of the repost.  What is interesting is that certain links in the original post are now dead. I've had to look for new ones.

 The BEE world is really for the good times. Empowerment likes the idea that companies make money and black shareholders get rich. It doesn't do the bad times very well, for instance if a black shareholder is unable to meet the payments for the shares then the company is penalised under the ownership scorecard. What happens if you have a black shareholder who actively does not wish to exercise his shareholder rights. In other words, what do you do with a delinquent shareholder.

Ownership is measured by both voting rights and economic interest. Lesley Fodor has in a comprehensive article on voting rights and shareholders' meetings, writes (on the issue of voting rights) - the original link has broken, sorry Lesley.

The primary rights of shareholders relate to their entitlement to vote at meetings of the shareholders. While this does not confer a direct role in management of the company (this function falling within the purview of the directors), the directors are required to implement those decisions of the shareholders, which are reserved to them.

It follows then that voting rights must be EXERCISABLE. If restrictions are found it's likely that the voting rights' points won't be awarded. If you are interested in a summary of shareholder rights have a look at this post.

That's voting rights sorted. Economic interest is simply (to quote Kyle and Vuyo, page 192) "the basic monetary right of ownership. It refers to an ENTITLEMENT of black people to dividends, capital gains and other economic rights of shareholders." The operative word is ENTITLEMENT. The word does not mean that the person needs to receive cash directly through dividends, there may be an agreement that dividends will be used to settle a debt first and only then will the shareholder get that cash. Any restriction on this entitlement would be considered in determining whether the economic interest points will be allocated. An unreasonable restriction will in all probability not make it through a verification (I really do give verification agencies a lot of credit when it comes to understanding company law).

Say now you have shareholder that is entitled to vote at a shareholders' meeting but chooses not to. I am aware of a specific case where a shareholder has a majority stake in a company and doesn't seem to get on with the other shareholders and as such doesn't vote or pitch to shareholders' meetings. There's no legal reason why he can't; it just seems that he doesn't want to. This example has an interesting issue when it comes to dividends. Dividends can only be declared when a profit is made, the company in question has yet to make a profit and as such hasn't declared a dividend. The shareholders' agreement has this to say on distribution of dividends.

The shareholders shall procure that the Company shall….. declare and pay dividends equal to a percentage, to be determined and recommended by the board of directors, of the distributable profits of the Company.

This was a problematic paragraph for me but I spoke to two lawyers who both confirmed that the directors cannot distribute dividends on a whim contrary to the percentage shareholding of each shareholder. In other words if you own 25% then you will get 25%.

In this case we have a shareholder who doesn't want to vote and who has never received a dividend because the company hasn't made any money yet. This same shareholder would be described as black and therefore is very beneficial to the company's BEE credentials. That's where the simplicity stops. The company's BEE scorecard considers four other elements and ignores the ownership element – even though the company is in fact (and in law) 51% black owned. It would seem that the verification agency refused to consider this element because they could not interview the shareholder – a requirement that comes from the Udge-approved verification manual; viz paragraph 7.1.6 which states that a verification agency must

Interview a sample of the black shareholders to determine whether they understand their voting rights and whether they have exercised such voting rights independently

This cannot be regarded as fair on the company. There are no restrictions on the ownership in any shape or form, it is only the personality of the shareholder that gets in the way of the allocation of ownership points. Unfortunately there is nothing in any of the BEE information including Vuyo's Book (he does like Black with an uppercase B) that anticipates this situation even though I would suggest it is very common.

We need a solution; what I recommend is that the company follows the procedural guidelines listed by BDO and Fodor and if the shareholder chooses not to attend then that shareholder has not been denied their rights. This is the same argument that I have put forward for this case.

Getting to 51% black ownership using the modified flow through principle

The person who thought of this scheme is cleverer than me, I think I need to apply for apprenticeship in her office (if it is in fact a her).  This structure was explained to me about a year and a half ago by a guy who had got it from someone in Bloem.  It is an application of the modified flow through principle which needs to be explained
Modified flow through principle (MFT)
The modified flow through principle applies to any BEE owned or controlled company.  
"BEE controlled company" means a juristic person, having share holding or similar members’ interest in which black participants enjoy a right to EXERCISABLE VOTING RIGHTS that is at least 51% of the total such rights measured using the flow through principle.
“BEE owned company" means a juristic person, having share holding or similar members’ interest, that is BEE controlled, in which black participants enjoy a right to ECONOMIC INTEREST that is at least 51% of the total such rights measured using the flow through principle.

It follows that a BEE owned company is placed higher in the ownership hierarchy as this company enjoys both black voting rights and economic interest.

Yes but also note…..
A 51% black owned entity must enjoy 51% of the voting rights and economic interest AND have earned all the points for Net Value. The simple way to view this is that the shares must be paid for, the formula tends to favour this approach.

We know that for once in the ownership chain, if the exclusion principle is not used (I'll let you trawl through bolshie's bollocks to figure what this is), the 51% black owned may be viewed as being 100% owned.  

Back to the diagram.  I think this structure is best suited for businesses that turn over less than R50m and have few assets in the company, in other words the assets reside in a vehicle outside the company, a thing which is very commonplace in many businesses.  The reason why I say this is that the rules state that you cannot claim the 51% ownership until all the net value points have been awarded.  I'll talk a little bit more about this earlier.

Let's say the proverbial measured entity (PME) needs to get to that holy grail of ownership which is 51% for now, but watch out for gross arbitrariness from the incompetently run state owned entities that might change this level on a whim.  This is the route they might follow.

1. Establish a company called Holding Company.  Shareholders of this company need to be 51% black and the balance held by the shareholders of the PME.  If a trust is established for this purpose the beneficiaries must be 100% black as defined.  If it is any less than that you can use the MFT to make sure that Holding is 51% black owned but the MFT ends there.
2. Holding company buys 51% of PME.  The original shareholders hold 49% of PME.  
3. The application of the MFT says that PME is now 51% black owned, subject to the conditions of measuring net value.

There you go.  Simple so far.  There are technicalities that you need to consider. 

1. The true definition of 51% black ownership means that the shares must be paid for.  Holding company is a start-up and worth nothing, there is no reason why the black shareholders should be indebted at that level.  In fact Holding does nothing other than own PME or any other company. It doesn't need to register for VAT and it doesn't trade.
2. This also applies to the ownership of PME.  The codes say that in order to claim 51% black ownership all the net value points must be awarded.
3. On the issue raised by a and b, my good friend David says the shares should be given away.  If the company has no assets then it's not worth that much anyway.
4. Note that the DTI declaration states that the PME is 51% black owned.  See the definition of black owned above, if the shares are indebted in any shape or form then that is quite possibly fraud.  There's nothing stopping anyone checking a little deeper to take a look at this.  I would go with what David suggests here.  Give the shares away to Holding.
5. It's quite difficult for anyone looking at your BEE declaration to know that the modified flow through principle has been used.  

This structure is code-worthy.  It's messy and requires the management of two companies but it gets you to that level 2.  Now the only issue is the incompetent SOEs insisting on BEE certificates when affidavits will do. As an aside - surely I don't need to precede SOEs with the word incompetent,  it's implied.  Our dear BEE Commissioner sis zod has addressed this in her surprisingly well written the Whistle.  I'll let you find it and read it yourself.

And on a completely un-related note, other than SOEs and their predilection for state capture, this document is a discussion of the guptas, zuma and bell pottinger.  Read it and puke.

And I am marching tomorrow.  I hope you do too.

 

 

 

Related articles

Ownership uber alles - can anyone confirm this?

Measurement of ownership – when?

Is there anything good in the world of BEE at all. No, not much. All that is good is forgotten about and all this is bad is used by both the minister and the advisory council to entrench racial polarisation. But I digress. The issue here is when do you measure ownership? Is it ownership that existed during the measurement period, or is it on the date of measurement. Something as critical as this is not discussed in the codes and Vuyo's labour of love doesn't appear to discuss this either. This is what EmpowerFlex thinks

A Bee verification is mostly or in terms of the monetary elements skills, procurement, enterprise development and socio-economic development based on your previous financial period. As for ownership, management and employment equity it is measured as at present or as close to present as possible.

The above is so as the verification manual along with SANAS requires verification agencies to conduct an interview for example with a shareholder in his/her capacity as a shareholder. If this interview is not possible or the person is no longer a shareholder and can therefore not conduct such an interview in his/her capacity as a shareholder then no points may be allocated.

The two underlined paragraphs are significant because there is no written documentation that confirms this. Yes there is the verification manual (which IRBA seems to disregard). The bit about the shareholder in their capacity as a shareholder is not date-stamped. All that paragraph 7.1.6 of the ownership part of the manual says is

Interview a sample of black shareholders whether they understand their voting rights and whether they have exercised such voting rights independently.

This does not mean that they have to have been shareholders on the date of verification. It means that whilst they were shareholders they understood their rights. You can't take the piss here and say "well JZ was a shareholder three years ago so let's interview him". The shareholder must have been a shareholder during the period we are measuring. The next mystery is how much of the period did they need to be shareholders for? I believe my good friend Gerhardus has an answer which goes along the lines of you prorate the points according to the period they had shareholding – which is fair. The calculation would be, shareholders exited after six months of the year, their shareholding would have contributed 20 points so your calculation comes up with a score that is 50% of the 20 points. But again this is not documented so a practise needs to arise that establishes this as acceptable.

I have been told that SANAS will allow you to consider ownership if it ended about a month before the verification, this in itself is arbitrary – why not any time less than 12 months?

It's very clear that the verification manual does not prescribe when the ownership needs to exist but I believe that the real problem lies with SANAS who have now decreed that this is how it's going to work, but the decree does not exist in writing. This is unfair – if this process exists and is prescribed by an organ of state like SANAS then these procedures and prescriptions must be made available and not arbitrarily imposed. The legality of this is dubious.

Let's go back to management and employment equity as per EmpowerSex. Why should those be measured as close to the verification date as possible? The verification requires agencies to consult the company's EEA2 and the COR documents – which are typically historical document. Yes it does say that interviews need to be conducted but that's almost in conflict with the EEA2 requirement. Also a verification agency will check the payroll which is determined on the measurement period , not on the date of verification. The only document that I can find that might help us here is the Interpretive Guide to the Codes of Good Practice which says on page 56 (referring to management)

this employee will not be accounted for under the measured enterprise's employment equity element for the year under measurement

Is this not VERY clear that we are talking about a measurement period and that we measure the performance under that year. Can you imagine if an auditor decided to not consider the profit for a financial year but chose to use the figure that existed on the date of the audit. It's as ridiculous as that.

Whilst I don't agree with EmpowerRedNex I would appreciate a uniform measurement regime which will allow all of us that are subject to the codes a little certainty when it comes to determining our BEE status.

Delinquent, or absent shareholders and ownership - repost

This post was originally published in April 2013.  Please excuse the indulgence of the repost.  What is interesting is that certain links in the original post are now dead. I've had to look for new ones.

 

The BEE world is really for the good times. Empowerment likes the idea that companies make money and black shareholders get rich. It doesn't do the bad times very well, for instance if a black shareholder is unable to meet the payments for the shares then the company is penalised under the ownership scorecard. What happens if you have a black shareholder who actively does not wish to exercise his shareholder rights. In other words, what do you do with a delinquent shareholder.

Ownership is measured by both voting rights and economic interest. Lesley Fodor has in a comprehensive article on voting rights and shareholders' meetings, writes (on the issue of voting rights) - the original link has broken, sorry Lesley.

The primary rights of shareholders relate to their entitlement to vote at meetings of the shareholders. While this does not confer a direct role in management of the company (this function falling within the purview of the directors), the directors are required to implement those decisions of the shareholders, which are reserved to them.

It follows then that voting rights must be EXERCISABLE. If restrictions are found it's likely that the voting rights' points won't be awarded. If you are interested in a summary of shareholder rights have a look at this post.

That's voting rights sorted. Economic interest is simply (to quote Kyle and Vuyo, page 192) "the basic monetary right of ownership. It refers to an ENTITLEMENT of black people to dividends, capital gains and other economic rights of shareholders." The operative word is ENTITLEMENT. The word does not mean that the person needs to receive cash directly through dividends, there may be an agreement that dividends will be used to settle a debt first and only then will the shareholder get that cash. Any restriction on this entitlement would be considered in determining whether the economic interest points will be allocated. An unreasonable restriction will in all probability not make it through a verification (I really do give verification agencies a lot of credit when it comes to understanding company law).

Say now you have shareholder that is entitled to vote at a shareholders' meeting but chooses not to. I am aware of a specific case where a shareholder has a majority stake in a company and doesn't seem to get on with the other shareholders and as such doesn't vote or pitch to shareholders' meetings. There's no legal reason why he can't; it just seems that he doesn't want to. This example has an interesting issue when it comes to dividends. Dividends can only be declared when a profit is made, the company in question has yet to make a profit and as such hasn't declared a dividend. The shareholders' agreement has this to say on distribution of dividends.

The shareholders shall procure that the Company shall….. declare and pay dividends equal to a percentage, to be determined and recommended by the board of directors, of the distributable profits of the Company.

This was a problematic paragraph for me but I spoke to two lawyers who both confirmed that the directors cannot distribute dividends on a whim contrary to the percentage shareholding of each shareholder. In other words if you own 25% then you will get 25%.

In this case we have a shareholder who doesn't want to vote and who has never received a dividend because the company hasn't made any money yet. This same shareholder would be described as black and therefore is very beneficial to the company's BEE credentials. That's where the simplicity stops. The company's BEE scorecard considers four other elements and ignores the ownership element – even though the company is in fact (and in law) 51% black owned. It would seem that the verification agency refused to consider this element because they could not interview the shareholder – a requirement that comes from the Udge-approved verification manual; viz paragraph 7.1.6 which states that a verification agency must

Interview a sample of the black shareholders to determine whether they understand their voting rights and whether they have exercised such voting rights independently

This cannot be regarded as fair on the company. There are no restrictions on the ownership in any shape or form, it is only the personality of the shareholder that gets in the way of the allocation of ownership points. Unfortunately there is nothing in any of the BEE information including Vuyo's Book (he does like Black with an uppercase B) that anticipates this situation even though I would suggest it is very common.

We need a solution; what I recommend is that the company follows the procedural guidelines listed by BDO and Fodor and if the shareholder chooses not to attend then that shareholder has not been denied their rights. This is the same argument that I have put forward for this case.