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The BEE Ownership scorecard

The Ownership element of the Broad-Based Black Economic Empowerment (B-BBEE) Generic Scorecard is arguably the most impactful, and often the most complex, aspect of B-BBEE compliance in South Africa. It measures the extent of Black ownership within an entity, recognizing that genuine economic transformation requires Black people to have a meaningful stake in the economy. This article provides a comprehensive guide to the Ownership scorecard, explaining its indicators, calculations, and strategic implications.

The Foundation: Statement 100

The rules and principles governing the measurement of Ownership are detailed in Statement 100 of the Amended Codes of Good Practice. This statement outlines the indicators, measurement principles, and specific formulas used to calculate an entity’s Ownership score.

Key Concepts:

Before diving into the scorecard itself, it’s essential to understand these core concepts:

Black People: As defined in the B-BBEE Act, this includes Africans, Coloureds, and Indians who are South African citizens by birth or descent, or who became citizens before April 27, 1994 (or would have been eligible but were prevented by apartheid laws).
Rights of Ownership: This encompasses both Voting Rights (the ability to control the entity through voting at shareholder meetings) and Economic Interest (the right to receive economic benefits, such as dividends and capital growth).
Flow-Through Principle: This principle traces ownership through multiple layers of ownership structures. If a Black person owns shares in a company that, in turn, owns shares in the measured entity, the Flow-Through Principle calculates the effective Black ownership in the measured entity. Only ownership by natural Black persons counts.
Modified Flow-Through Principle: This allows a company, once in a chain of ownership, to treat a Black-owned entity (at least 51% Black-owned using the flow through principle) as if it were 100% Black-owned for the purposes of calculating Voting Rights and Economic Interest. This cannot be used in conjunction with the exclusion principle.
Exclusion Principle: Certain types of ownership, such as ownership by Organs of State or mandated investments (e.g., pension funds), can be excluded from the Ownership calculation under specific conditions. This prevents dilution of Black ownership by entities that are not expected to be transformed.
Net Value: This crucial concept measures the real economic value created in the hands of Black shareholders. It takes into account any acquisition debt used to finance the purchase of shares. This prevents “fronting” or situations where Black shareholders have ownership on paper but no real economic benefit.
B-BBEE Facilitator: Certain designated public entities are treated as 100% black owned.

The Ownership Scorecard (Generic Enterprises):

The Ownership scorecard for Generic Enterprises (those with annual revenue above R50 million) is worth a total of 25 points, distributed across several key indicators:

Indicator	Description	Weighting	Target
Voting Rights
Exercisable Voting Rights	Percentage of voting rights in the entity held by Black people.	4	25% + 1 vote
Black Women Voting Rights	Percentage of voting rights held by Black women.	2	10%
Economic Interest
Economic Interest	Percentage of economic interest (e.g., dividends, share of profits) to which Black people are entitled.	4	25%
Black Women Economic Interest	Percentage of economic interest to which Black women are entitled.	2	10%
Designated Groups	Percentage of economic interest to which Black designated groups (e.g., Black employees, Black participants in broad-based ownership schemes, Black participants in cooperatives) are entitled.	3	3%
New Entrants	Percentage of economic interest to which new entrants are entitled (black participants who have not previously held equity in another entity).	2	2%
Realisation Points
Net Value	Measures the real value created for Black shareholders, considering acquisition debt. The target is based on a time-based graduation factor, increasing from 10% in the first year to 25% over ten years. This is a priority element.	8	Time-Based Graduation Factor
Total		25

Calculations:

The points for each indicator (except Net Value) are calculated using a straightforward formula:

Points = (Actual Percentage / Target Percentage) * Weighting

For example, if a company has 20% Black voting rights (target is 25% + 1 vote), the points for that indicator would be:

(20% / 25%) * 4 = 3.2 points

Note, the plus 1 vote is ignored for the purposes of the calculation.

Net Value Calculation:

The Net Value calculation is more complex and involves a “deemed value” calculation:

Deemed Value: (Value of Black-held Equity Instruments – Carrying Value of Acquisition Debt) / (Value of the Measured Entity)
Net Value Points: The lower of:
- (Deemed Value / (25% * Time-Based Graduation Factor)) * 8
- (Economic Interest of Black Participants / 25%) * 8

The Time-Based Graduation Factor starts at 10% in the first year after the “equity interest date” (the date the Black ownership transaction was implemented) and increases to 25% over ten years. This incentivizes long-term ownership and value creation.

Priority Element Status:

Net Value is a priority element. This means that a company must achieve at least 40% of the available Net Value points (i.e., 3.2 out of 8 points) to avoid being penalized. Failure to meet this sub-minimum results in the company’s overall B-BBEE status level being discounted by one level, regardless of its total score.

Strategic Considerations:

Long-Term Planning: Ownership transactions should be structured with a long-term perspective, considering the time-based graduation factor for Net Value and the importance of genuine value creation for Black shareholders.
Financing: The financing of Black ownership transactions is critical. Vendor financing (where the company itself provides the loan) or third-party financing must be structured carefully to ensure that the Net Value targets can be met.
Choice of Ownership Structure: Various ownership structures can be used, including:
- Direct Ownership: Black individuals hold shares directly in the measured entity.
- Broad-Based Ownership Schemes (B-BOS): These schemes benefit a wide range of Black beneficiaries (e.g., community trusts, employee ownership schemes). Specific rules apply to B-BOS to ensure genuine broad-based benefit.
- Trusts: Trusts can be used, but they must meet strict criteria to ensure that the beneficiaries are clearly defined and that the trust is not used to circumvent the B-BBEE principles.
- Private Equity Funds: Under certain conditions, investments from black managed private equity funds can be recognised.
Sale or Loss of Shares: The Codes allow for continued recognition of Black ownership after a Black participant has sold their shares, provided certain conditions are met (minimum holding period of three years, net value creation, and transformation within the measured entity). This is limited to a maximum of 40% of the ownership points.
51% Black Ownership for QSE’s Qualifying Small Entreprises (QSE’s) that are 51% black owned using the Flow Through Principle, are automatically awarded level 2 status, and only need to provide an affidavit to that effect. They do not need to be measured against the rest of the scorecard.
Exclusion Principle: If using the Exclusion Principle (e.g., excluding mandated investments), the Modified Flow-Through Principle cannot be used.

Conclusion:

The B-BBEE Ownership scorecard is a powerful tool for driving economic transformation in South Africa. Understanding its intricacies, calculations, and strategic implications is essential for businesses seeking to achieve meaningful B-BBEE compliance and contribute to a more inclusive economy. Careful planning, structuring, and long-term commitment are key to maximizing the benefits of Black ownership and achieving genuine empowerment.

With over 10 years of crafting bespoke ownership structures for our clients, we’d welcome an opportunity to have a confidential discussion around your unique needs. Please contact us to get the ball rolling.