Code 100 Ownership

The BBBEE Code 100 refers to the ownership of a business. The Code Series 100 is the measurement of the ownership element in the BBBEE scorecard. While Statement 100 refers to the general principles of measuring ownership.

Through Statement 100, the ownership element on the scorecard awards points on the following: i) Voting rights, ii) Economic interest, iii) Ownership fulfilment, iv) Net value and v) Bonus points for new entrants either as black shareholders or black employees receiving shares in the company.

Key Measurement Principles

Rights of ownership by black people in a company give an organisation points on the ownership element of the scorecard. Black people can hold rights of ownership either as direct participants or as participants through the following:

  • A company with shares
  • A close corporation
  • An Employee ownership scheme
  • A co-operative
  • A trust
  • Any form of juristic person as recognised under South African Law
  • A partnership between natural persons
  • A Broad based ownership scheme

There are three principles that can be used to calculate ownership. These are the Flow Through Principle, the Modified Flow Through Principle and the Exclusion Principle.

Inclusion of Mandated Investments in ownership calculations

Mandated Investments are investments made by a third party on behalf of the actual owner of the funds.

The current Code of Good Practice allows entities to decide whether or not to include mandate investments when doing their ownership calculations. However there are a few rules that apply.

Firstly, when an entity decides to exclude mandates, it should be all mandates and not selected ones. Secondly, if all the mandates are to be included, the measured entity may treat all of the ownership as non-black or they may get an independent agency to report the extent of black rights of ownership originating from the mandated investment. Thirdly, Rights of Ownership held by mandated investments may be excluded, but with a maximum exclusion of 40%.

Continued Recognition after exit of BEE participants

After a black person leaves an enterprise through a sale of shares or loss of shares, the measured entity is allowed to recognise that portion of black ownership. However, this is subject to the following criteria:

  • The black participant should have held the shares for more than 3 years.
  • Value should have been created in the hands of the black people.
  • There is a maximum of 40% recognition on the ownership scorecard allowed from continued recognition.

In addition to the above, if a black investor loses shares, the following applies:

  • There must be a written agreement between the lender, measured entity and the black participant.
  • The points can only be awarded for the period for which the shares were in the hands of the black participant.

Continued ownership recognition is calculated using the following:

  • The value created while in the hands of a black participant as a percentage of the measured entity’s value at the point of loss of shares.
  • The measured entity’s BBBEE status based on the scorecard measurements
  • The ownership points attributed on the date of the loss of shares for the measured entity.

All of the above will be multiplied in order to reach the continued recognition measurement.

Some rules that apply to other types of ownership

An entity’s scorecard may have more black participant points through:

  • Broad Based ownership and employee ownership schemes
  • Being a Section 21 company or being a company not limited by guarantee.
  • Trusts

Contributions made by these participants are calculated as follows:

  • A maximum of 40% of ownership points on the scorecard when meeting the rules of Annexure 100
  • 100% of ownership points if the entity meets the additional requirements of Annexure 100.

Black people holding rights in an entity through the following also contribute to the ownership scorecard:

Private Equity Funds, Options and share warrants as well as equity instruments carrying preferent rights.

Statement 102 is recognition of the sale of assets, equity instruments and businesses. It determines how these transactions will contribute towards ownership points.

In order for ownership points to be recognised, the transaction needs to have been firstly, one that creates sustainable business opportunities for black people. Secondly, the transaction should result in the transfer of skills and productive capacity into the hands of black people.

The calculation of ownership points must be based on:

  • The value of the transaction
  • The carrying value of the acquisition debt of a black person in a purchasing the entity.
  • The value of the equity instruments held by black people in the purchasing entity.

Statement 103 is the recognition of equity equivalents for multinationals and how they can apply for BEE status as well as how to measure their contributions.

All Equity Equivalent contributions made by a multinational in South Africa are measurable against the value of their operations in the country. In addition, equity equivalent programmes are limited to multinationals subject to global trends.

When a multinational approaches the government with an equity equivalent programme, the minister may approve the proposal.

If the equity equivalent programme forms part of a Sector Code, it also constitutes as a recognised programme.

Equity equivalent programmes are usually specific to a certain sector. However, the minister may approve a non-sector specific programme.

Equity Equivalent Programmes are those that support:

  • The Accelerated and Shared Growth Initiative for South Africa
  • The National Skills Development Strategy
  • The Joint Initiative for Priority Skills
  • Any of the Department of Trade and Industry’s programmes
  • Promotion of enterprise creation in co-operatives that have more than 50% black ownership, more than 30% owned by black women and those that are more than 50% owned by black designated groups.
  • All other programmes that contribute towards the development of socio-economic development of South Africa.

Equity Equivalent Programmes should include certain information in order for it to be approved. Firstly, there should be a full description of the programme and its projected outcomes. In addition to this, there should be a qualification criteria for participation in the programme. Also, there is a need for a timeline on which the programme will be implemented and delivered. The methods that shall be used to measure the value of the contributions are also included, while the details of the sponsors of the programme are added to this.

Enterprises that benefit from the programmes are as follows:

  • Enterprises in which black people hold 50% or more of the voting rights and economic interest.
  • Enterprises in which black women hold 50% or more or exercisable voting rights and economic interest.
  • Enterprises in which black designated groups hold 50% or more of exercisable voting rights and economic interest.
  • Communities in which over 75% of the beneficiaries are black people and that 75% derive the economic value.

An example of Equity Equivalent Programme is enterprise creation. This is when a multinational is involved in a new value adding enterprise. This equity equivalent contribution should involve the provision of interest free loans and no gain grants. In addition, the human capital investments into the new enterprise should be equivalent in value to 50% of the projected operational costs for the first three years of its establishment.

When a multinational invests in social development as an equity equivalent programmes, there are a few rules that apply. Firstly, the programme must comply with the socio-economic development element of the code. Secondly, it cannot be double counted by also adding to the multinational’s score under Socio-Economic development.

The following are rules that are specific to multinationals:

  • A standard valuation method must be used by them in order to measure its value of operations in South Africa
  • All contributions made towards the BBBEE ownership element of the multinational will be measurable against the value of their operations in South Africa.
  • When calculating the ownership score, the multinational should apply the exclusion principle to any portion of their business value for their South African operations gained from sources that are not South African.
  • In addition to the above, a multinational company may recognise the sale of equity instruments in non-South African black persons if the transaction complies with South African exchange requirements. In addition, the voting rights given to the buyers of the equity instruments must represent the recognisable black voting rights. Also, the equity instruments’ rights of ownership  should be comparable to the rights that would have grown had the equity instrument been in the multinational business.