Beyond simple structures: unlocking flexibility with hybrid B-BBEE ownership methods.

Broad-Based Black Economic Empowerment (B-BBEE) Ownership in South Africa is often presented in terms of straightforward options: direct shareholding by Black individuals, broad-based ownership schemes, or trusts. However, the reality of business structures and the need for tailored solutions often call for more complex approaches. This is where hybrid B-BBEE Ownership structures come into play. This article explores the concept of hybrid models, explaining their purpose, common types, benefits, drawbacks, and key considerations for implementation.

What are Hybrid B-BBEE Ownership Structures?

A hybrid B-BBEE Ownership structure, as the name suggests, combines two or more of the recognized ownership mechanisms within a single entity or across a group of related entities. It’s not a separate category defined in the Codes of Good Practice, but rather a practical approach to achieving B-BBEE objectives in a way that aligns with the specific circumstances of the business. The goal is to create a structure that maximizes B-BBEE points, facilitates genuine empowerment, and meets the commercial and operational needs of the company.

Motivations for Using Hybrid Structures:

Several factors can drive the adoption of a hybrid approach:

• Complexity of the Business: Large businesses with multiple divisions, subsidiaries, or complex operations may find that a single, uniform ownership structure doesn’t fit all parts of the organization.
• Varying Stakeholder Needs: Different groups of Black participants may have different needs and preferences. For example, employees might prefer an Employee Share Ownership Programme (ESOP), while a community trust might be more suitable for broader community beneficiaries.
• Maximizing Points: Combining different ownership mechanisms can help maximize points across the various Ownership indicators (Voting Rights, Economic Interest, Net Value).
• Attracting and Retaining Talent: Offering employees a stake in the company through an ESOP, alongside other ownership forms, can be a powerful tool for attracting and retaining skilled Black employees.
• Strategic Partnerships: A hybrid structure might be used to accommodate a strategic Black investor alongside a broad-based ownership scheme.
• Phased Implementation: A company might start with one type of ownership structure (e.g., direct ownership) and phase in others (e.g., an ESOP) over time.
• Addressing Specific Challenges: Certain sectors or industries might have unique challenges that are best addressed through a tailored hybrid approach.
• Balancing scorecards: A hybrid approach may help a company reach the subminimums on the priority elements, while still achieving a good score.

Common Types of Hybrid Structures:

There’s no limit to the possible combinations, but some common examples include:

1. Direct Ownership + ESOP: Black individuals hold a direct stake in the company, and an Employee Share Ownership Programme (ESOP) provides ownership to Black employees. This combines the benefits of individual wealth creation with broader employee participation.
2. Direct Ownership + Broad-Based Ownership Scheme (B-BOS): A strategic Black investor holds a significant stake, and a B-BOS (e.g., a community trust or educational trust) benefits a wider group of beneficiaries.
3. Trust + ESOP: A trust holds shares for the benefit of a defined class of Black beneficiaries (e.g., Black women in a particular community), and an ESOP provides ownership to employees.
4. Holding Company + Operating Company Structure: A holding company with a specific ownership structure (e.g., a B-BOS) owns shares in one or more operating companies. This can be useful for isolating ownership at a higher level while maintaining operational flexibility in the subsidiaries.
5. Multiple Trusts: Different trusts might be established for different purposes or beneficiary groups (e.g., a family trust for a Black entrepreneur’s family, a community trust for local residents, and an educational trust for scholarships).
6. Combination of excluded and non-excluded: For example, combining ownership by a B-BBEE facilitator, with direct black ownership.
7. Private Equity and Direct/Indirect Ownership: A combination of a private equity fund, and direct or indirect ownership.

Advantages of Hybrid Structures:

• Flexibility: Tailored to the specific needs of the business and its stakeholders.
• Maximizing Points: Can potentially achieve higher Ownership points by addressing multiple indicators.
• Wider Impact: Can combine individual wealth creation with broader community benefits.
• Strategic Alignment: Can accommodate strategic partnerships and employee participation.
• Phased Approach: Allows for gradual implementation of ownership changes.

Disadvantages and Challenges:

• Complexity: Hybrid structures can be more complex to design, implement, and administer than simpler models.
• Cost: The legal, administrative, and compliance costs can be higher.
• Potential for Conflicts: Different ownership groups may have conflicting interests, requiring careful management.
• Transparency: Maintaining transparency and ensuring that all beneficiaries understand the structure and their rights can be challenging.
• Risk of Circumvention: If not structured carefully, hybrid models could be perceived as attempts to circumvent the B-BBEE principles, leading to scrutiny and potential penalties.

Key Considerations for Implementation:

• Clear Objectives: Define the specific B-BBEE and business objectives the hybrid structure is intended to achieve.
• Legal and Tax Advice: Seek expert legal and tax advice to ensure the structure is compliant with all relevant legislation (Companies Act, Trust Property Control Act, B-BBEE Act, Income Tax Act).
• Stakeholder Engagement: Consult with all relevant stakeholders, including employees, potential Black investors, and community representatives.
• Transparency and Communication: Ensure that the structure is transparent and that all beneficiaries understand their rights and benefits.
• Governance: Establish clear governance structures and processes to manage the different ownership groups and prevent conflicts.
• Documentation: Meticulously document the structure, including the rationale, the beneficiaries, the rights and obligations of each party, and the mechanisms for distributions and decision-making.
• B-BBEE Verification: Engage with a reputable B-BBEE verification agency early in the process to ensure the structure will be recognized and score points as intended.
• Regular Review: Periodically review the structure to ensure it remains effective and compliant with evolving B-BBEE legislation and best practices.

Conclusion:

Hybrid B-BBEE Ownership structures offer a valuable tool for businesses seeking to achieve meaningful transformation while addressing their unique circumstances and strategic goals. While they can be more complex than simpler models, the flexibility and potential for maximizing B-BBEE points and broadening the impact of empowerment make them a compelling option. Careful planning, expert advice, stakeholder engagement, and rigorous documentation are essential for successful implementation. When designed and managed effectively, hybrid structures can contribute significantly to a more inclusive and equitable South African economy.

For many companies, a better structure can be achieved using the private equity rules. Please contact us for a confidential discussion around your unique requirements.