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NPC/Section 21 Companies and Companies Limited by Guarantee

Overview

This section addresses a specific, and somewhat specialized, aspect of B-BBEE ownership: the treatment of Section 21 companies (now referred to as Non-Profit Companies under the Companies Act 71 of 2008) and companies limited by guarantee within a B-BBEE ownership structure. These are not methods of achieving Black ownership in themselves, but rather types of entities that might hold shares in a measured entity, and therefore need to be considered. The key question is: how do you account for ownership held by these non-profit entities when calculating a company’s B-BBEE ownership score?

How does it work normally?

Section 21 Companies (Non-Profit Companies): These are companies incorporated not for profit, but for a public benefit purpose or a cultural or social activity. They don’t have shareholders in the traditional sense; they have members. Any income or property is used to advance the company’s stated objectives.
Companies Limited by Guarantee: These companies also don’t have shareholders. Instead, they have members who guarantee to contribute a certain amount of money if the company is wound up. They are often used for professional associations, charities, and other non-profit organizations.

What are the BEE rules?

The B-BBEE Codes (Code Series 100, Statement 100, paragraph 3.11) provide options for dealing with ownership held by Section 21 companies and companies limited by guarantee:

Exclusion (Up to 40%): A measured entity can elect to exclude up to 40% of the ownership held by these entities from its B-BBEE ownership calculation. This simplifies the process, as the company doesn’t need to try to determine the “Black ownership” within a non-profit entity.
Inclusion (with Competent Person’s Report): If a company chooses not to exclude this ownership, it can either:
- Treat all of that ownership as non-Black.
- Obtain a competent person’s report estimating the extent of Black rights of ownership originating from those Section 21 companies or companies limited by guarantee. This is a complex process, as it requires tracing the ultimate beneficiaries of the non-profit entity.
BBOS/ESOP Exception: If a Section 21 company houses a Broad-Based Ownership Scheme (BBOS) or an Employee Share Ownership Programme (ESOP), the rules governing those schemes apply, not the general rules for Section 21 companies. This means the BBOS/ESOP must meet the specific requirements for recognition (independent trustees, defined beneficiaries, etc.).
Contribution Limits: If a Section 21 Company meets the rules for either a BBOS or ESOP, the normal contribution limits apply (40% general, 100% if they meet the additional criteria).

What’s the spirit?

The spirit is to provide flexibility while preventing circumvention:

Flexibility: Recognizing that it can be very difficult, or even impossible, to determine the precise level of “Black ownership” within a non-profit entity with a broad public benefit purpose. The exclusion option provides a practical solution.
Preventing Circumvention: Preventing companies from artificially inflating their B-BBEE ownership scores by transferring shares to non-profit entities without genuine Black economic empowerment. The competent person’s report option provides a way to recognize genuine Black participation, but it requires rigorous verification.
Promoting BBOS/ESOPs: Encouraging the use of Section 21 companies to house legitimate BBOS and ESOPs, which have their own specific requirements for recognition.

The deal process: (This is not a deal process in the same way as the other methods. It’s about how to treat existing ownership by these entities.)

Identify Ownership: Determine if any Section 21 companies or companies limited by guarantee hold shares in the measured entity.
Decision: Exclude or Include: Decide whether to exclude up to 40% of this ownership or to include it.
If Excluding: Apply the exclusion principle in the ownership calculation.
If Including:
- Either treat the ownership as non-Black.
- Or, obtain a competent person’s report to estimate the Black ownership.
Ongoing Reporting: Report the chosen treatment in the company’s B-BBEE verification.

Pros & cons of this method

Pros (of Exclusion):

Simplicity: Simplifies the ownership calculation.
Avoids Complexity: Avoids the need for a complex competent person’s report.

Cons (of Exclusion):

Potential Loss of Points: May result in a lower ownership score if the non-profit entity does have significant Black participation.

Pros (of Inclusion with Report):

Potential for Higher Score: May result in a higher ownership score if the non-profit entity has significant Black participation.

Cons (of Inclusion with Report):

Complexity: Requires a complex and potentially costly competent person’s report.
Uncertainty: The outcome of the report may be uncertain.

Costs

Exclusion: Minimal direct costs.
Inclusion with Report: Significant costs for the competent person’s report.

Gotchas

Incorrect Exclusion: Applying the exclusion principle incorrectly.
Inadequate Report: Obtaining a competent person’s report that doesn’t meet the requirements of the Codes.
Fronting: Using a Section 21 company to create a false impression of Black ownership.
BBOS/ESOP Compliance: If a section 21 houses one of these, ensuring it meets those specific rules.

Grey Areas

Defining “Competent Person”: The Codes don’t provide a precise definition of a “competent person,” leading to some uncertainty.
Estimating Black Ownership: The methodology for estimating Black ownership within a non-profit entity can be complex and subjective.

Alternatives

This is not an alternative to other ownership methods, but rather a way of dealing with ownership that already exists through these types of entities.

Please contact us for a confidential discussion around your unique BEE ownership challenges; we’ll help where we can.