A
- Agreed Upon Procedures (AUP): Specific procedures that BEE verification agencies use to assess compliance with the BEE scorecard, including ownership structures.
- Annual Financial Statements (AFS): Financial reports prepared annually, used in BEE transactions to verify company performance and ownership levels.
B
- B-BBEE (Broad-Based Black Economic Empowerment): A South African government policy aimed at increasing economic participation by historically disadvantaged groups (Black, Coloured, and Indian South Africans).
- B-BBEE Commission (Broad-Based Black Economic Empowerment Commission):
The B-BBEE Commission is a regulatory body established under the B-BBEE Act to oversee, monitor, and promote adherence to B-BBEE legislation in South Africa.- Functions:
- Investigates complaints related to B-BBEE, including fronting practices (misrepresenting BEE status).
- Monitors compliance with the B-BBEE Act and works to address any violations.
- Provides guidance on the interpretation of the B-BBEE Act and Codes of Good Practice.
- Ensures that B-BBEE transactions are legitimate and contribute to the sustainable transformation of the South African economy.
- Can impose penalties on companies involved in fronting or other BEE-related misconduct.
- Relationship with SANAS: While SANAS accredits verification agencies, the B-BBEE Commission plays a broader role in ensuring compliance with the BEE Act and investigating any issues related to BEE credentials.
- Functions:
- BEE Ownership: The portion of a company’s shares or equity that is owned by Black people (as defined under B-BBEE legislation).
- Beneficial Ownership: Refers to the true ownership rights of individuals who receive the benefits of the shares, even if the shares are held in another party’s name. In South Africa, all companies must report the beneficial ownership annually.
- Black People: Under B-BBEE, this term includes African, Coloured, and Indian persons who are South African citizens by birth or descent, or who became citizens before April 27, 1994.
- BEE Trust: A legal structure used to hold BEE ownership on behalf of Black beneficiaries, often used in employee or community schemes.
- Black Industrialist: A policy within BEE aimed at supporting Black-owned businesses that have or intend to have manufacturing capabilities.
C
- Codes of Good Practice: The set of regulations issued by the Department of Trade, Industry and Competition (DTIC) to guide businesses on how to implement and measure B-BBEE compliance. The Codes include various scorecards for measuring ownership, management control, skills development, enterprise development, and socio-economic development.
- Code Series 100: The portion of the B-BBEE Codes of Good Practice dealing specifically with ownership, setting out how ownership points are calculated.
- Community Trust: A trust set up to benefit a community, often used in BEE transactions to ensure broad-based benefits.
- Control: The ability to direct the business’s strategic decisions, often linked to ownership levels in BEE, where Black people must hold a majority of the voting rights.
- Co-operatives: Business entities that are owned and controlled by their members, sometimes used as BEE structures in rural or community upliftment programs.
- Sector Codes: Industry-specific B-BBEE codes that override the generic Codes of Good Practice for companies operating in certain sectors, such as Mining, Financial Services, Agriculture, and ICT. These codes are tailored to the unique circumstances and transformation needs of each industry. Where a specific sector code does not exist, the generic codes are used.
D
- Deemed Ownership: When economic interest is attributed to Black shareholders for BEE purposes, even if the shares are financed or encumbered, or if Black shareholders do not directly own shares as a result (e.g. Trusts, ESOPs, Equity Equivalents, Private Equity).
- Dilution: When a company issues more shares, reducing the ownership percentage of existing shareholders, potentially including BEE shareholders.
- Discounted Cash Flow Valuation Method (DCF): A method used to value a company’s equity when determining the BEE ownership portion, often reflecting the value of the shares transferred. DCF valuations predict future cash flows and discount their value back to present using a risk-adjusted discounting rate.
- DTI (Department of Trade, Industry and Competition):the South African government department responsible for the creation and implementation of economic policies, including the B-BBEE Act and the Codes of Good Practice.
- Role in BEE:
- The DTI is the primary policymaker when it comes to B-BBEE and is responsible for developing the Codes of Good Practice that businesses must follow.
- It also has oversight over the B-BBEE Commission and provides guidance on how the BEE policy should be applied across sectors.
- The DTI engages with various stakeholders, including businesses and industry bodies, to ensure that B-BBEE policies are aligned with the country’s economic transformation objectives.
- Role in BEE:
E
- Economic Interest: Refers to the right to receive dividends, capital gains, or other financial benefits from ownership in a company.
- EME (Exempted Micro-Enterprise): A company with an annual turnover of less than R10 million. EMEs are automatically considered B-BBEE compliant and are typically given a Level 1 (100% Black-owned) or Level 2 (51% Black-owned) BEE status without needing to undergo a formal verification process. Non-Black-owned EMEs are typically granted a Level 4 status.
- Employee Share Ownership Plan (ESOP): A scheme where employees are given shares or the right to buy company shares, sometimes used to meet BEE ownership targets.
- Empowerment Financing: Financial instruments (e.g., loans, equity) designed to support the funding of BEE transactions.
- Equity Equivalent Investment Programme (EEIP): A programme allowing multinational companies unable to meet direct ownership requirements to invest in Black-owned enterprises or projects instead.
F
- Flow-through Principle: A principle used to calculate BEE ownership by tracing ownership through multiple layers of shareholding to determine the ultimate Black ownership percentage.
- Fronting: A fraudulent practice where a company misrepresents its BEE status, such as by appointing Black people as “token” owners or directors without granting them genuine control or economic benefit. Fronting is illegal and carries criminal penalties for anyone involved, and heavy fines for the company that fronts.
G
- Generic Enterprise: A company with an annual turnover of more than R50 million. These companies are required to comply with the full B-BBEE scorecard and are measured against all five elements, including ownership, management control, skills development, enterprise and supplier development, and socio-economic development.
- Goodwill Financing: In BEE transactions, this refers to a situation where part of the purchase price of shares reflects the future potential of the company, which may not be immediately payable by the BEE partner.
- Group Structure: The organisational structure of a company and its subsidiaries, relevant in BEE ownership transactions for determining the flow-through of ownership at different levels.
H
- Historical Disadvantage: Refers to individuals who were disadvantaged by apartheid policies, specifically Black, Coloured, and Indian South Africans.
- Hybrid Scheme: A BEE ownership structure that combines different types of schemes, like employee ownership, community trusts, and direct ownership by Black shareholders.
I
- Indirect Ownership: When Black people own shares in a company through another entity, such as a trust or holding company, rather than directly.
- Interim Certificate: A temporary B-BBEE certificate that companies might use while final verification is being completed, including in ownership transactions.
J
- Joint Venture (JV): A business arrangement where two or more parties agree to pool resources for a specific project or business activity, often used in BEE where partners include Black-owned firms.
K
- Key Employees: Employees who have a significant impact on the company’s operations, which may include Black persons in a BEE ownership structure.
- Khula Finance: A South African government initiative that provides funding to small businesses, often linked to BEE and Black-owned enterprises.
L
- Lock-in Period: A period during which BEE shareholders are required to retain their shares and cannot sell or transfer them to maintain BEE ownership levels.
- Loan Funding: Loans provided to Black shareholders to purchase shares in a company for BEE purposes, often structured with favourable repayment terms.
M
- Management Control: Refers to the extent to which Black people occupy top management and control positions in a company, often linked to BEE scorecard points.
- Modified Flow-through Principle: A variation of the Flow-through Principle that allows companies to treat 51% ownership as 100%, but only once in an entire ownership structure.
N
- Net Value: A calculation used in BEE transactions to determine the effective Black ownership of a company, taking into account debt and other liabilities attached to the shares.
- New Entrants: Black shareholders who have not previously held equity in another company, often incentivised to participate in ownership transactions.
- Net Value Targets Using the Time-Based Graduation Factor
The Net Value measures how much of the debt associated with the BEE ownership transaction has been reduced over time, reflecting the actual unencumbered (free of debt) value transferred to Black shareholders. The targets are set over a 10-year period, and the Net Value must increase as the financing of the Black shareholders’ stake is paid off.
Here are the Net Value targets over the 10-year period based on the Time-Based Graduation Factor:
Year v Minimum Net Value Realisation Target
Year 1: 10% of the value of the Black ownership stake
Year 2: 20% of the value of the Black ownership stake
Year 3: 30% of the value of the Black ownership stake
Year 4: 40% of the value of the Black ownership stake
Year 5: 50% of the value of the Black ownership stake
Year 6: 60% of the value of the Black ownership stake
Year 7: 70% of the value of the Black ownership stake
Year 8: 80% of the value of the Black ownership stake
Year 9: 90% of the value of the Black ownership stake
Year 10: 100% of the value of the Black ownership stake
O
- BEE Verification: The process by which a company’s BEE ownership (and other scorecard points) are confirmed by a BEE verification agency.
- Option Agreements: Contracts where Black shareholders are given the option to purchase shares in the future, often used in BEE transactions to phase in Black ownership. BEE options differ from normal options in that if the holder of a call option is a Black natural person, then the company may treat that % of the equity as being Black IF the option holder receives profits and participates in voting rights as if they were an actual shareholder. They are thus a very effective way to achieve ownership because they don’t rely on upfront funding for the BEE shareholder.
P
- Preferential Procurement: A BEE initiative focused on purchasing from Black-owned businesses to encourage supplier diversity.
- Private Company: A company not listed on a public stock exchange, where BEE ownership transactions often occur through private agreements. Private companies are 99.9% of the market (by number of entities).
Q
- Qualifying Small Enterprise (QSE): A company with an annual turnover between R10 million and R50 million, subject to a simplified BEE scorecard that includes ownership requirements.
R
- Redemption: The process by which previously issued shares (including BEE shares) are bought back by the company.
- Regulated Industry: Industries like mining, financial services, or telecommunications with specific BEE ownership requirements under sector charters.
- Reportable Transaction:
In the context of B-BBEE, a Reportable Transaction refers to any significant BEE ownership deal or transaction that must be reported to the B-BBEE Commission for monitoring and oversight purposes. These transactions typically involve the transfer of ownership to Black people, and they are reported to ensure that they align with B-BBEE principles and do not involve any form of fronting or misrepresentation.- Thresholds: According to the B-BBEE Act and regulations, a transaction is considered “reportable” if it involves:
- A change in ownership that results in Black people obtaining a holding of 25% or more of the equity in a company, and
- The transaction value exceeds R25 million.
- Why It’s Important: Reporting such transactions helps the B-BBEE Commission monitor the implementation of BEE policies and ensure that transactions genuinely contribute to economic empowerment. It also helps prevent fronting and other forms of BEE misrepresentation.
- What Must Be Reported:
- Details of the transaction (e.g., parties involved, structure, and value).
- Ownership information, including the percentage of shares being transferred to Black shareholders.
- Any financing arrangements (e.g., vendor financing or loans) that facilitate the transaction.
- When to Report:
- The parties involved in the transaction must submit a report to the B-BBEE Commission within 15 business days of concluding the transaction. This includes providing all required documentation and information related to the deal.
- Consequences of Non-Compliance:
- Failure to report a qualifying transaction could lead to investigations by the B-BBEE Commission and potentially result in penalties or the invalidation of the B-BBEE status claimed by the company.
- Example:
- If a company sells 30% of its shares to a Black shareholder consortium for R100 million, this transaction would need to be reported to the B-BBEE Commission within 15 business days because it exceeds both the ownership and value thresholds.
- Thresholds: According to the B-BBEE Act and regulations, a transaction is considered “reportable” if it involves:
S
- Sale of Assets: A BEE transaction where a company sells part of its operations or assets to a Black-owned entity to meet ownership targets.
- SANAS (South African National Accreditation System): SANAS is the government body responsible for accrediting B-BBEE Verification Agencies in South Africa. It ensures that these agencies meet certain standards of competence, impartiality, and consistency when conducting B-BBEE verifications.
- Role in BEE: SANAS accreditation is required for verification agencies to provide legally recognised B-BBEE certificates. The accreditation process ensures that the agencies can be trusted to correctly apply the B-BBEE Codes and to verify companies fairly and objectively.
- Scorecard: The B-BBEE Scorecard is a measurement tool used to assess a company’s compliance with the Broad-Based Black Economic Empowerment (B-BBEE) Act. It assigns points to a company based on its performance in different key areas (called elements) of economic empowerment. The total points a company earns will determine its B-BBEE level, which can range from Level 1 (the highest) to Level 8 (the lowest). The scorecard is made up of five main elements, each with a specific number of points that a company can earn. These elements are:
- Ownership:
Measures the extent of Black ownership in the company. Maximum points are awarded for Black people holding equity, with additional points for Black women and new Black entrants.- Weighting: 25 points
- Management Control:
Assesses the representation of Black people in management positions (executive and non-executive directors, senior management, etc.).- Weighting: 19 points (includes Bonus Points)
- Skills Development:
Looks at how much the company invests in training and developing Black employees and Black people in general, including providing bursaries and learnerships.- Weighting: 20 points
- Enterprise and Supplier Development (ESD):
Measures a company’s procurement from Black-owned suppliers and its efforts to develop Black-owned businesses, including offering financial and non-financial support.- Weighting: 40 points (includes Bonus Points)
- Socio-Economic Development (SED):
Considers the company’s contributions to initiatives that promote the socio-economic upliftment of Black people and communities. - Total Points:
The total points available on the Generic Scorecard are 109 points (including bonus points). The points a company earns will determine its B-BBEE level, as shown below:
- Ownership:
- B-BBEE Level v Points Range
Level 1: ≥ 100 points
Level 2: 95 – 99 points
Level 3: 90 – 94 points
Level 4: 80 – 89 points
Level 5: 75 – 79 points
Level 6: 70 – 74 points
Level 7: 55 – 69 points
Level 8: 40 – 54 points
Non-Compliant: < 40 points - Sector Charter: Industry-specific BEE regulations that provide additional or modified requirements for certain sectors (e.g., mining, ICT).
- Share Buyback: When a company repurchases its shares from shareholders, potentially affecting BEE ownership percentages.
- Shareholder Agreement: A legal document outlining the rights and responsibilities of shareholders, including specific provisions for BEE shareholders.
T
- Time-Based Graduation Formula:
The Time-Based Graduation Formula is a mechanism provided in the B-BBEE Codes of Good Practice to allow companies to gradually recognise the full value of Black ownership over a defined period, even if the Black shareholders have not yet fully paid for the shares. The formula encourages the structuring of BEE ownership deals where Black participants acquire shares through mechanisms like vendor financing, loans, or other deferred payment arrangements. How It Works:- In many BEE ownership transactions, Black shareholders may not have the financial resources to pay for shares upfront, and the shares are often funded through a loan or other financing structure. Since the shares are not yet fully paid for, under normal circumstances, the company cannot immediately claim the full BEE ownership points.The Time-Based Graduation Formula allows companies to recognise the Black ownership on a graduating scale over a 10-year period, even if the shares are still subject to debt or encumbrances.The longer the Black shareholders hold the shares, the more ownership points the company can claim, irrespective of whether the debt has been fully repaid.
The BEE Codes provide for a sliding scale, where companies can claim a portion of the Black ownership points based on the number of years that have passed since the transaction was concluded:- Years 1-3: 10% of the full potential pointsYears 4-6: 20% of the full potential pointsYears 7-9: 40% of the full potential pointsYear 10 onwards: 100% of the full potential points
- Let’s say a company agrees to sell 25% of its shares to a Black shareholder, but the shareholder finances the deal through a loan that will be repaid over time.In Year 1, the company can only claim 2.5% (10% of 25%) of the Black ownership points.By Year 5, the company can claim 5% (20% of 25%) of the ownership points.By Year 10, the company can claim the full 25% of the ownership points, regardless of whether the loan is fully paid off.
The Time-Based Graduation Formula is designed to incentivise long-term ownership by Black shareholders and to make it easier for companies to comply with the BEE ownership requirements, even when the shares are not fully paid for upfront. It effectively encourages sustainable and gradual wealth creation for Black shareholders. - Transformation: The broader goal of BEE, aimed at rectifying economic imbalances caused by apartheid by promoting Black ownership, management, and participation in the economy.
- Transaction Advisor: A professional advisor (like myself) who specialises in structuring BEE ownership deals, including legal, financial, and tax aspects.
U
- Ultimate Beneficiary: The person or group who ultimately benefits from a company’s shares, even if ownership is indirect, crucial in determining BEE compliance.
V
- Vendor Financing: A financing arrangement where the seller (vendor) of a business or shares provides funding to the buyer, often structured as a loan or deferred payment. In BEE ownership transactions, vendor financing is commonly used to help Black shareholders acquire shares without requiring immediate, full capital. The vendor effectively “lends” the purchase price, and the loan is repaid over time, typically from dividends or other profits generated by the shares.
- Verification Agency:
A Verification Agency is an independent, accredited organisation that verifies a company’s B-BBEE status based on the B-BBEE Codes of Good Practice or relevant Sector Codes. The agency assesses the company’s compliance across the various B-BBEE elements (ownership, management control, skills development, etc.), and issues a B-BBEE certificate that reflects the company’s BEE level and score.- Accreditation: Verification agencies must be accredited by SANAS or recognised by the B-BBEE Commission to ensure they follow proper guidelines and procedures when assessing compliance.
- Voting Rights: The rights attached to shares that allow shareholders (including Black shareholders in a BEE transaction) to vote on company decisions.
W
- Winding-up: The process of dissolving a company, during which BEE ownership structures may be affected, particularly in how remaining assets are divided.
X
- X-Factor Beneficiaries: A term sometimes used to describe outstanding Black entrepreneurs or employees who receive significant recognition or ownership stakes in BEE transactions.
Y
- Yield: The income return on an investment, including dividends received by Black shareholders as part of a BEE ownership deal.
Z
- Zero-Coupon Loan: A type of loan used in BEE transactions where no interest is paid until maturity, often used to help Black shareholders finance their equity participation.
