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B-BBEE Ownership Method: Equity Equivalents

Overview

Equity Equivalents (EE) are a specialized mechanism within the B-BBEE framework designed specifically for multinational companies that have global policies preventing them from selling shares in their local (South African) subsidiaries. Instead of transferring ownership, these companies can contribute to approved “Equity Equivalent Investment Programmes” that promote enterprise development, job creation, and other socio-economic objectives. These programmes must be approved by the Minister of Trade, Industry and Competition.

Equity Equivalents are not available to South African companies.

How does it work normally?

Equity Equivalents are not a standard commercial transaction. They are a bespoke arrangement negotiated with the Department of Trade, Industry and Competition (the dtic). The process typically involves:

  1. Proposal Development: The multinational company develops a detailed proposal outlining its proposed investment programme. This proposal must demonstrate how the programme will contribute to B-BBEE objectives, such as:
    • Enterprise creation and development
    • Foreign direct investment
    • Job creation
    • Skills development
    • Technology transfer
    • Rural development
    • Infrastructure development
  2. Negotiation with the dtic: The company negotiates the terms of the programme with the dtic, including the investment amount, the duration, the specific targets, and the reporting requirements.
  3. Ministerial Approval: The Minister of Trade, Industry and Competition must approve the programme. This is a critical step; without Ministerial approval, the programme will not be recognized for B-BBEE purposes.
  4. Implementation: The company implements the approved programme, making the agreed-upon investments and achieving the specified targets.
  5. Monitoring and Reporting: The company regularly reports on the progress of the programme to the dtic.

What are the BEE rules?

The B-BBEE Codes (Code Series 100, Statement 100, paragraph 3.6, and Statement 000, paragraph 3.6) provide the framework for Equity Equivalents:

  • Multinationals Only: Equity Equivalents are only available to multinational companies that can demonstrate a genuine global policy prohibiting the sale of shares in subsidiaries.
  • Ministerial Approval: The programme must be approved by the Minister of Trade, Industry and Competition.
  • Contribution to B-BBEE Objectives: The programme must contribute to specific B-BBEE objectives, as outlined above.
  • Investment Value: The value of the contribution to the Equity Equivalent Programme should be:
    • 25% of the value of the South African operations; or
    • 4% of the South African entity’s Total Revenue annually, over the life of the programme.
  • Duration: Equity Equivalent Programmes typically have a long duration (often 10 years or more).
  • B-BBEE Recognition: Once approved, the multinational company can claim B-BBEE ownership points based on the value of its contribution to the programme, even though it hasn’t transferred any actual ownership. The points are granted annually.
  • Public Entities as B-BBEE Facilitators: The Minister can designate certain Organs of State or Public Entities as B-BBEE facilitators.

What’s the spirit?

The spirit is to:

  • Accommodate Multinationals: Provide a mechanism for multinational companies with genuine global restrictions on share ownership to contribute to B-BBEE.
  • Promote Investment: Encourage foreign direct investment and job creation in South Africa.
  • Advance B-BBEE Objectives: Ensure that these investments contribute meaningfully to B-BBEE objectives, even in the absence of direct ownership transfer.
  • Avoid Circumvention: Prevent companies from using Equity Equivalents to avoid genuine B-BBEE compliance.

The deal process: (This is not a “deal” in the traditional sense, but rather a negotiated agreement with the government.)

  1. Assess Eligibility: Determine if the company is a multinational with a genuine global policy preventing the sale of shares in subsidiaries.
  2. Develop Proposal: Create a detailed proposal for an Equity Equivalent Investment Programme.
  3. Engage with the dtic: Contact the dtic and begin the negotiation process.
  4. Negotiate Terms: Negotiate the investment amount, duration, targets, and reporting requirements.
  5. Obtain Ministerial Approval: Secure formal approval from the Minister of Trade, Industry and Competition.
  6. Implement Programme: Make the agreed-upon investments and achieve the specified targets.
  7. Monitor and Report: Regularly report on the programme’s progress to the dtic.

Pros & cons of this method

Pros:

  • Alternative to Ownership: Provides a B-BBEE compliance mechanism for multinationals that cannot transfer ownership.
  • Potential for Significant Impact: Can lead to substantial investments in enterprise development, job creation, and other B-BBEE objectives.
  • Certainty (once approved): Once approved, the programme provides certainty regarding B-BBEE ownership recognition.

Cons:

  • Complexity: Developing and negotiating an Equity Equivalent Programme is a complex and time-consuming process.
  • High Cost: The required investment can be substantial.
  • Ministerial Discretion: The Minister has significant discretion in approving or rejecting proposals.
  • Long Duration: Equity Equivalent Programmes typically have a long duration, requiring a long-term commitment.
  • Reporting Burden: The reporting requirements can be onerous.
  • Not an Option for Local Companies: This is specifically for Multinationals.

Costs

  • Setup Costs:
    • Extensive legal and consulting fees to develop the proposal and negotiate with the dtic.
  • Ongoing Costs:
    • Programme implementation costs (the actual investments).
    • Monitoring and reporting costs.

Gotchas

  • Lack of Ministerial Approval: The most significant risk is failing to obtain Ministerial approval. Without approval, there is no B-BBEE recognition.
  • Unrealistic Targets: Proposing targets that are unrealistic or unachievable.
  • Insufficient Contribution: Proposing an investment that is not considered sufficient by the dtic.
  • Failure to Deliver: Failing to implement the programme and achieve the agreed-upon targets.

Grey Areas

  • Defining “Genuine Global Policy”: Determining whether a multinational’s global policy against selling shares in subsidiaries is “genuine” can be subjective.
  • Valuation of Contributions: Determining the appropriate value of the contribution to the Equity Equivalent Programme can be complex.

Alternatives

  • Tusker has developed a proprietary ownership structure using the private equity rules that achieves similar outcomes to Equity Equivalents but for a lower overall cost and without the wait. Unlike Equity Equivalents, the same structure is also available to South African companies. Please contact us to learn more.

This provides a comprehensive overview of Equity Equivalents as a B-BBEE ownership mechanism. It’s a highly specialized option, applicable only to a specific subset of companies (multinationals with global shareholding restrictions), and requires significant engagement with the government.

Chapter: Ownership methods
Chapter: Ownership methods
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