Generic Codes – Ownership Element

The Generic codes are ‘where it all began’ – they were the Genesis of the sector codes that came later. In most discussion around BEE ownership it’s useful to start with a solid understanding of the Generic codes and then only dive into specific sector codes. Let’s go…

1. Introduction and Applicability

• 1.1 Sector Code Overview: The Amended Codes of Good Practice on Broad-Based Black Economic Empowerment (B-BBEE) provide the general framework for measuring B-BBEE compliance across all sectors of the South African economy, except where a specific Sector Code has been issued under Section 9 of the B-BBEE Act.
• 1.2 Scope of Application: The Generic Codes apply to all entities operating in South Africa, unless they are specifically covered by a Sector Code. This includes private companies, public entities, state-owned enterprises, and non-profit organizations.
• 1.3 Legal Basis: Broad-Based Black Economic Empowerment Act (No. 53 of 2003, as amended) and the Amended Codes of Good Practice (Government Gazette No. 36928, 11 October 2013).
• 1.4 Effective Date: 1 May 2015 (with a one-year transitional period).
• 1.5 Precedence: The Generic Codes are the default framework. Sector Codes, once issued, supersede the Generic Codes for companies within their specific scope.

2. Ownership Scorecard and Thresholds

• 2.1 Ownership Scorecard: Indicator Weighting Target Exercisable Voting Rights (Black People) 4 points 25% + 1 vote Exercisable Voting Rights (Black Women) 2 points 10% Economic Interest (Black People) 4 points 25% Economic Interest (Black Women) 2 points 10% Economic Interest (Designated Groups, etc.) 3 points 3% New Entrants 2 points Net Value 8 points See Below Total 25 points Net Value Target: Based on a time-based graduation factor, starting at 10% of 25% (i.e., 2.5%) in year one and reaching 25% in year nine and thereafter.
• 2.2 Priority Element Status: Ownership is a priority element.
• 2.3 Subminimum Requirements: 40% of the Net Value points (i.e., 3.2 points out of 8, based on the time-based graduation factor).
• 2.4 Entity Size Thresholds:
  • EME Threshold: Annual Total Revenue of R10 million or less.
  • QSE Threshold: Annual Total Revenue between R10 million and R50 million.
  • Generic Threshold: Annual Total Revenue above R50 million.
• 2.5 Automatic Recognition for EMEs/QSEs:
  • EMEs:
    • Automatically Level Four (100% recognition).
    • 100% Black-owned: Level One (135% recognition).
    • At least 51% Black-owned: Level Two (125% recognition).
  • QSEs:
    • 100% Black-owned: Level One (135% recognition).
    • At least 51% Black-owned: Level Two (125% recognition).

3. Specific Ownership Requirements and Interpretations

• 3.1 Unique Ownership Targets: None in the Generic Codes.
• 3.2 Flow-Through and Modified Flow-Through: Standard Flow-Through and Modified Flow-Through Principles apply.
• 3.3 Exclusion Principle: Standard Exclusion Principle applies (Organs of State, Public Entities, and optionally, Mandated Investments).
• 3.4 Treatment of Specific Entities: Standard rules apply for trusts, BBOS, ESOPs, Section 21 companies, and private equity funds.
• 3.5 Multinationals: Equity Equivalents are available for multinationals with demonstrable global policies preventing the sale of shares in subsidiaries.
• 3.6 Qualified Professionals: No specific requirement or consideration.
• 3.7 Sale of Assets: Standard rules for the sale of assets apply.
• 3.8 Other Unique Provisions: None.

4. Areas of Uncertainty and Interpretation

• 4.1 Ambiguities: Valuation methodologies, the definition of “competent person” for certain certifications, and the interpretation of “irrevocable transfer” in the context of options/warrants.
• 4.2 Industry Practice: Generally well-established industry practice based on years of experience with the Codes.
• 4.3 Potential Disputes: Valuation disputes, challenges to the legitimacy of trusts or BBOS, and disputes over the application of the Modified Flow-Through Principle.

5. Deal Process, Parties, and Costs

• 5.1 Typical Deal Structures: Direct ownership, trusts, BBOS, ESOPs, private equity investments.
• 5.2 Key Parties Involved: Companies, Black investors, legal advisors, financial advisors, B-BBEE verification agencies.
• 5.3 Deal Process Overview: Varies depending on the chosen structure, but generally involves due diligence, valuation, negotiation, legal documentation, and implementation.
• 5.4 Cost Considerations: Legal fees, valuation fees, advisory fees, B-BBEE verification fees, and the cost of the ownership transaction itself (e.g., share purchase price, fund management fees).

6. Gotchas and Best Practices

• 6.1 Common Mistakes: Failing to meet the Net Value subminimum, inadequate documentation, fronting, using inappropriate ownership structures.
• 6.2 Fronting Risks: High risk across all sectors.
• 6.3 Best Practices: Thorough planning, expert advice, genuine commitment to transformation, careful structuring of ownership deals, ongoing monitoring of compliance.

7. Alternatives to Ownership
The other elements of the Generic Scorecard are:
* Management Control (19 points + bonus points): Measures Black representation in management.
* Skills Development (20 points + bonus points): Measures investment in training Black people.
* Enterprise and Supplier Development (40 points + bonus points): Measures procurement from Black-owned businesses and support for Black entrepreneurs.
* Socio-Economic Development (5 points): Measures contributions to social development initiatives.

8. Conclusion
The Generic Codes provide the default framework. Ownership is a priority element. Specific sector codes, where applicable, supercede the Generic codes.