bbbee presentation cape town seminar 29 august 2014

PRESENTATION ON THE AMENDMENTS TO THE BBBEE ACT

53 OF 2003 AND THE CODES OF GOOD

PRACTICE ISSUED IN TERMS OF THE

BBBEE ACT

DATE: 29 AUGUST 2014

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INTRODUCTION

The Broad-Based Black Economic Empowerment Act 53 of 2003 (“BBBEE Act”) provides the legislative framework for broad-based black economic empowerment (“BBBEE”) in South Africa. The “Generic” Codes of Good Practice (“Codes”) and Sector Codes are issued under the BBBEE Act.

Significant amendments to the BBBEE Act have been proposed and were passed into law on 27 January 2014, however the effective date of the amendments has not yet been fixed.

Amendments to the Codes were published on 11 October 2013 and will take effect from 1 May 2015. After 1 May 2015 BBBEE compliance measurement will be in accordance with the Amended Codes or any applicable Sector Code.

Firms have a transitional period within which to review and change their BBBEE strategies to take account of the amendments to the Codes.

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INTRODUCTION (cont’d)

The BBBEE Act and Codes do not impose legally binding obligations on firms to comply with BBBEE targets.

They merely set out the methodology to be used when measuring a firm’s BBBEE status.

Fundamental principle for measuring BBBEE – substance takes precedence over legal form.

However a firm’s BBBEE rating is an important consideration to successfully tender for Government or public entity contracts, obtain certain licences (eg mining and gambling) and public private partnerships. Private sector firms try and score BBBEE procurement points from their suppliers.

BBBEE is accordingly an important factor to be taken into account by any firm conducting business in South Africa.

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KEY AMENDMENTS TO THE BBBEE ACT

Establishes a BBBEE Commission

Functions of the BBBEE Commission include, inter alia, to:

oversee and supervise compliance with BBBEE;

receive and investigate complaints relating to BBBEE, BBBEE transactions and “fronting practices”;

apply to court to restrain a breach of the BBBEE Act and/or a “fronting practice”;

maintain a register of BBBEE transactions above a certain threshold.

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KEY AMENDMENTS TO THE BBBEE ACT (CONT’D)

If the Commission believes that any matter it has investigated involves the commission of a criminal offence, it is obliged to refer the matter to the NPA or an appropriate division of SAPS.

Defines terms: “Knowingly”, “knowing” or “knows”

When used in the BBBEE Act, such terms mean that the person (a) had actual knowledge; (b) was in a position in which the person reasonably ought to have (i) had actual knowledge; or (ii) investigated the matter or taken other measures that would have provided the person with actual knowledge.

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KEY AMENDMENTS TO THE BBBEE ACT (cont’d)

Defines term “Fronting Practice”

"Fronting Practice" is very widely defined – a transaction, arrangement or other act or conduct that directly or indirectly undermines or frustrates the achievement of the objectives of the BBBEE Act or the implementation of any provision of the BBBEE Act including but not limited to practices in connection with a B-BBEE initiative –

in terms of which black persons who are appointed to an enterprise are discouraged or inhibited from substantially participating in the core activities of that enterprise;

in terms of which the economic benefits received as a result of the broad-based black economic empowerment status of an enterprise do not flow to black people in the ratio specified in the relevant legal documentation;

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involving the conclusion of a legal relationship with a black person for the purpose of that enterprise achieving a certain level of broad-based black economic empowerment compliance without granting that black person the economic benefits that would reasonably be expected to be associated with the status or position held by that black person; or

involving the conclusion of an agreement with another enterprise in order to achieve or enhance broad-based black economic empowerment status in circumstances in which –

there are significant limitations, whether implicit or explicit, on the identity of suppliers, service providers, clients or customers;

the maintenance of business operations is reasonably considered to be improbable, having regard to the resources available;

the terms and conditions were not negotiated at arm’s length and on a fair and reasonable basis.

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Introduces various criminal offences and penalties

Introduce criminal offences for knowingly misrepresenting or providing false information regarding a firm’s BBBEE status or engaging in a “fronting practice”.

A contravention may result in:

a fine and/or up to 10 years’ imprisonment for individuals or both; and

a firm may be fined up to 10% of its annual turnover;

any person convicted of an offence is banned from contracting with any organ of state and/or public entity for 10 years.

Introduces a right to cancel any contract/authorisation

Introduce a statutory right for government and public entities to cancel any contract or “authorisation” awarded due to false information on BBBEE status.

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Imposes reporting obligations

Imposes an absolute obligation on government, organs of state and public entities to:

take the Codes into account in developing their procurement policies and criteria for issuing licences and authorisations and for entering into public private partnerships (previously they were only obliged to do so “as far as reasonably possible”). The Minister may however grant an exemption;

report on BBBEE in their audited financial statements and annual reports required under the PFMA.

Imposes an obligation on South African listed entities to provide a report to the BBBEE Commission on their compliance with BBBEE.

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SIGNIFICANT AMENDMENTS TO

THE CODES

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CHANGES TO NUMBER OF BBBEE POINTS REQUIRED TO ACHIEVE BBBEE LEVELS

BBBEE Level Amended Codes Current Codes

1 > 100 points > 100

2 > 95 but < 100 points

> 85 but < 100

3 > 90 but < 95 points > 75 but < 85

4 > 80 but < 90 points > 65 but < 75

5 > 75 but < 80 points > 55 but < 65

6 > 70 but < 75 points > 45 but < 55

7 > 55 but < 70 points > 40 but < 45

8 > 40 but < 55 points > 30 but < 40

Non-compliance < 40 points < 30

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CHANGES TO NUMBER OF BBBEE ELEMENTS

Current Codes have 7 elements that are taken into account when calculating a firm’s BBBEE rating.

Amendments reduce the number of elements to five by fusing enterprise development/preferential procurement and management control/employment equity elements. The new elements are:

Ownership

Management Control

Skills Development

Enterprise and Supplier Development

Socio Economic Development.

Changes are set out in the following table.

CHANGES TO NUMBER OF BBBEE ELEMENTS (cont’d)

Element Weighting Points (Amended Codes)

Weighting Points (Current Codes)

Ownership 25 20 plus 3 bonus points

Management control

15 plus 4 bonus points

Management control - 10 plus one bonus point

Employment equity – 15 plus three bonus points

Skills development

20 plus five bonus points

Skills development – 15

Enterprise and supplier development

40 plus four bonus points

Preferential procurement – 20

Enterprise development – 15

Socio-economic development

5 5

Total 118 107

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PRIORITY ELEMENTS AND MINIMUM REQUIREMENTS OF PRIORITY ELEMENTS

Changes indicate greater emphasis on three “priority elements” namely: ownership, skills development and enterprise/supplier development.

Amendments impose minimum requirements on priority elements:

40% of the “net value” targets for the ownership element. “Net value” measures the “debt free” portion of the BBBEE ownership of a firm;

40% of the total weighting points for the skills development element;

40% of the targets for the three subcategories of the enterprise and supplier development element.

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EFFECT OF FAILURE TO MEET MINIMUM REQUIREMENTS OF PRIORITY ELEMENTS

A Large Enterprise is required to be measured with regard to all three priority elements.

Large Enterprises presumably firms with total income greater than R50m.

A Qualifying Small Enterprise (QSE) is required to be measured with regard to ownership as a compulsory element and either one of skills development or enterprise and supplier development.

QSEs are firms with total annual income between R10m and R50m (previously it was between R5m and 10m).

If a QSE or a Large Enterprise fails to comply with the 40% minimum targets of any of the priority elements, their BBBEE status will automatically be downgraded by 1 level eg. if its score would have otherwise been a level 4 it will be downgraded to a level 5.

Existing BBBEE transactions will have to be reviewed to assess the likelihood and effect of the downgrade.

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MEASUREMENT OF QSEs and EMEs

Exempted Micro-Enterprises (EMEs) are deemed to have a level 4 rating and “start up” enterprises are measured as EMEs. All shelf companies are start ups and have a level 4 rating in the first year of incorporation or formation.

Ownership changes in relation to EMEs and QSEs:

Threshold for qualifying as an EME has been increased from R5m (or less) to R10m or less total annual income;

Threshold for being a Qualifying Small Enterprise has been increased to between R10m and R50m total annual income (from between R5m to R35m under the current Codes);

EME and QSEs that are 100% black owned will be deemed to have a level 1 BBBEE status;

EMEs and QSEs that are 51% black owned will be deemed to have a level 2 BBBEE status.

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CHANGES TO THE CURRENT METHODOLOGY OF CALCULATING OWNERSHIP

Current Codes provide for one BBBEE ownership point (and a 2.5% compliance target to earn that point) for an economic interest in a firm held by “black-designated groups”, employee share schemes and broad based ownership schemes.

The revised Codes scrap the bonus points but increase the number of BBBEE ownership points to 3 with a 3% target. This provides an incentive for firms to consider these “broad-based” options.

Under the revised Codes:

two BBBEE ownership points (with a 2% compliance target) have been allocated to the economic interest of “black new entrants” in the firm;

the definition of “Black New Entrant” has also been widened to cover BBBEE owners who have not held equity in another firm with a total value of R50m (R20m under the current Codes).

These changes widen the pool of new entrants and incentivise firms to use new entrants in their BBBEE ownership transactions.

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CHANGES TO THE CURRENT METHODOLOGY OF CALCULATING ENTERPRISE/SUPPLIER DEVELOPMENT The revised Codes introduce the concept of an “Empowering

Supplier” under the preferential procurement subcategory of the enterprise and supplier development element.

The requirements for an “Empowering Supplier” are unduly complicated and include:

being a “BBBEE compliant entity” and a “good citizen”,

complying with “all regulatory requirements” and meeting at least three (or for QSEs, one) of certain local procurement, job creation, raw material transformation/beneficiation and skills transfer requirements.

No preferential procurement points will be obtained if a supplier does not comply with the above requirements.

Ironically these changes will prejudice black-owned and controlled firms that do not comply with the requirements for “Empowering Suppliers”

A firm’s BBBEE status will be automatically downgraded by one level if it fails to meet the minimum 40% target for supplier and enterprise development (even if the firm has made genuine efforts to comply).

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THE IMPORTANCE OF SECTOR CODES

The BBBEE Act allows a sector of the economy to have its own BBBEE code.

The current Codes provide that a sector code has equal status with any other code. This has led to confusion as to whether a firm’s BBBEE status should be measured under the sector code or the “generic” Codes.

The Amendments (as well as the pending amendments to the BBBEE Act) resolve this by providing that the BBBEE status of a firm in a sector may only be measured in accordance with the sector code for that sector (if any).

It remains to be seen whether the existing (and future) sector codes may be less onerous than the amended Codes and whether Government will take steps to align the sector codes with the revised generic Codes. DTI expects sector codes to be updated but devil is in the detail and will this be done by 1 May 2015?

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THE IMPORTANCE OF SECTOR CODES (cont’d)

Reliance on sector codes may (to the extent that they are less onerous) mitigate the effects of the Amendments.

However firms operating in sectors whether there is no sector code will be measured according to the Amendments (and may be incentivised to develop a sector code).

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CONCLUSION

The amendments to the Codes and the BBBEE Act fundamentally change the current BBBEE framework and are a powerful expression of the Government’s intention to promote and implement BBBEE.

The new Codes are due to take effect from 1 May 2015.

It is important that firms use the interim period to review and reassess their BBBEEE strategies to mitigate (and preferably avoid) any adverse effects resulting from the changes.

THANK YOU

Pieter Steyn and

Irma-Dalene Gouws

Legal notice: Nothing in this presentation should be construed as formal legal advice from any lawyer or this firm. Readers are advised to consult professional legal advisors

for guidance on legislation which may affect their businesses.

© 2014 Werksmans Incorporated trading as Werksmans Attorneys. All rights reserved.

THE OWNERSHIP PROVISIONS OF THE NEW CODES WITH SPECIFIC REFERENCE TO PRIVATE EQUITY

DYLAN CUNARD

29 AUGUST 2014

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SUMMARY

Impact of New Codes on Private equity

Meaning of Private Equity under the Codes

Requirements for an investment by a fund to be classified as “Black”

Key changes to measurement of Ownership generally

Priority elements and subminimum requirements

Modified Flow-through principle and other key principles

Once empowered always empowered principle

Equity Equivalent Programmes

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WHAT DO WE MEAN BY PRIVATE EQUITY?

Private equity fund is defined in the Codes of Good Practice as "a third party fund through which investments are made on behalf of the actual owner of the funds pursuant to a mandate given by that person to the private equity fund."

Broad definition which could theoretically catch a whole range of funds, some of which typically fall outside of the private equity industry, including dent funds and collective investment schemes offered to the general public.

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TYPICAL PRIVATE EQUITY FUND STRUCTURE

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OWNERSHIP - PRIVATE EQUITY PROVISIONS

A Measured Entity may treat any of its Ownership arising from a Private Equity Fund as if that Ownership were held by Black people, where the Private Equity Fund meets the following criteria –

at least 51% of any of the private Equity Managers’ Exercisable Voting Rights associated with the Equity Instruments through which the Private Equity Fund holds rights of Ownership, must be held by Black people;

at least 51% of the Private Equity Funds’ Executive Management and Senior Management must be Black people;

at least 51% of the profits made by the Private Equity Fund Manager after realising any investment made by it, must by written agreement, accrue to Black people; and

the Fund Manager invests a proportion of the funds it manages in black influenced portfolio companies..

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INVESTMENT IN BLACK INFLUENCED PORTFOLIO COMPANIES

To maintain BEE status as a the fund manager is required to seek to invest a proportion of the value of its funds under management in companies that have at least a 25 percent direct black shareholding (using flow through principle and taking account the cost of the investment made) as follows –

5% of funds within 1 year;

10% of funds within 2 years;

20% of funds from day 1 Year 3 – last day Year 4;

30% of funds from day 1 Year 5 – last day Year 6;

40% of funds from day 1 Year 7 – last day Year 8; and

51% of funds from day 1 Year 9 and beyond.

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PRIORITY ELEMENTS AND SUBMINIMUM REQUIREMENTS

The priority elements are - ownership, socio-economic

development and enterprise/supplier development.

If a QSE or a Large Enterprise fails to comply with the 40%

minimum target for any of the priority elements, it’s BBBEE

status will automatically be downgraded by one level.

By way of example, if its score would have otherwise been

a level four, it will be downgraded to a level five.

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OWNERSHIP - COMPLEX FORMULAE

The Codes contain a multitude of formulae that are to be

used when calculating the Ownership score. Separate

formulae are provided for –

measuring voting rights;

measuring economic interest;

calculating the deemed value for all Black Participants;

calculating the Net Value, which is determined as the lower

result achieved by the application of two different formulae;

and

calculating the recognition of ownership after the sale or loss

of shares by Black Participants

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KEY CODE AMENDMENT: OWNERSHIP (cont.)

“NET VALUE” is the portion of ownership interest of Black people

within a firm which is not subject to outstanding acquisition debts.

A Measured Entity is required to achieve a minimum of 40% on

Net Value points for the Ownership Element otherwise it will drop

a BEE status level.

This fundamental change in the calculation of the ownership

interest will require an overhaul of the traditional funding

mechanisms for BBBEE transactions and may in fact stifle BBBEE

transactions.

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POINTS AWARDED FOR BLACK NEW ENTRANTS

Two BBBEE ownership points (with a 2% compliance target) have been

allocated to the economic interest of “Black New Entrants”.

The definition of “Black New Entrant” has also been widened to cover

BBBEE owners who have not held equity in another firm with a total

value of R50m (R20m under the current Codes).

Incentive to use new entrants in their BBBEE ownership transactions

but the increase in value to R50m has led to some criticism.

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KEY CODE AMENDMENT: OWNERSHIP

Ownership represents 25 of the 118 points which it is possible to achieve under the amended Codes.

B-BBEE RECOGNITION LEVELS

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B-BBEE STATUS QUALIFICATION B-BBEE RECOGNITION LEVEL

Level One Contributor≥ 100 points on the Generic Scorecard 135%

Level Two Contributor≥ 95 points on the Generic Scorecard 125%

Level Three Contributor≥ 90 points on the Generic Scorecard 110%

Level Four Contributor≥ 80 points on the Generic Scorecard 100%

Level Five Contributor≥ 75 points on the Generic Scorecard 80%

Level Six Contributor≥ 70 points on the Generic Scorecard 60%

Level Seven Contributor≥ 55 points on the Generic Scorecard 50%

Level Eight Contributor≥ 40 points on the Generic Scorecard 10%

Non-Compliant Contributor‹ 40 points on the Generic Scorecard 0%

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OWNERSHIP - GENERAL PRINCIPLES

Black people may hold their rights of Ownership in a Measured Entity as direct Participants or as Participants through some form of Entity such as –

a Company;

a Close corporation;

a Co-operative;

a Trust;

a Broad-Based Ownership Scheme;

an Employee Share Ownership Programme;

a Partnership or other association of natural persons; and

any other form of juristic person recognised under South African law.

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OWNERSHIP - FLOW-THROUGH PRINCIPLE

As a general principle only rights held by natural persons are relevant. If the

rights of Ownership of Black people pass through a juristic person, then the

rights of Ownership of Black people in that juristic person are measurable.

This principle applies across every tier of Ownership in a multi-tiered chain of

Ownership until that chain ends with a Black person holding rights of

Ownership.

The Flow Through Principle is applied to ownership in all instances apart from

the calculation of the Voting Rights of Black people and the Economic Interest

of Black people in which case the Modified Flow-Through Principle applies.

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OWNERSHIP – FLOW THROUGH PRINCIPLE

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MODIFIED FLOW-THROUGH PRINCIPLE

BEE 1 BEE 2

15%

51% 60%

10%

Company A Company B

Original Codes - %BEE = (100% x 15%) + (100% x 10%) = 15% + 10%

=25%

Application is only once in an entire structure rather than once in a chain

Amended Codes - %BEE = (100% x 15%) + (60% x 10%) = 15% + 16%

=21%

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OWNERSHIP – CHANGES TO THE MODIFIED FLOW-THROUGH PRINCIPLE

In calculating Exercisable Voting Rights of Black people and Economic Interest of Black people the following applies –

Exclusion Principle can no longer be applied with the Modified Flow-Through Principle

where in the chain of Ownership, Black people have a flow-through level of participation of at least 51% (previously it was more than 50%)

and then only once in the entire ownership structure (previously it was once in a chain) of the Measured Entity, such Black participation may be treated as if it were 100% Black

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OWNERSHIP - MANDATED INVESTMENTS

Mandated Investments defined in the Code (e.g. pension funds, medical schemes, insurers, banks) may be excluded.

An election to exclude one Mandated Investment is an election to exclude all Mandated Investments and vice versa.

A Measured Entity applying the Exclusion Principle to Mandated Investments cannot benefit from the Modified Flow-Through Principle.

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OWNERSHIP - BBBEE FACILITATOR STATUS

The Minister may by notice in the gazette, designate

certain organs of State or Public Entities as BBBEE

Facilitators. In calculating their Ownership score, Measured

Entities must treat BBBEE Facilitators as having rights of

Ownership held –

100% by Black people;

40% by Black woman;

20% by Black designated groups (previously this was

10%);

without any acquisition debts; and

without any third-party rights.

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SIGNIFICANT CHANGES TO BROAD-BASED OWNERSHIP SCHEMES

The Codes contain detailed rules (and additional

criteria) for –

Broad-Based Ownership Schemes – (there are now

additional requirements for Broad-Based Schemes)

Trusts; and

Family Trusts

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OWNERSHIP –DILUTION OF ONCE EMPOWERED ALWAYS EMPOWERED PRINCIPLE

A Measured Entity is allowed to recognise a portion of Black Ownership after a Black participant has exited through the sale or loss of shares.

Share to be held for a minimum of 3 years by the Black participant.

Black participation arising from continued recognition of Black Ownership cannot contribute more than 40% of the score on the Ownership scorecard.

Previously on a loss of shares only continued recognition was limited to the period the shares were held.

Now this applies on a sale of shares as well- cuts through the “Once Empowered Always Empowered Principle

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Equity Equivalents

Multinationals may struggle to comply with changes on

ownership and may consider Equity Equivalent

Programmes as an alternative .

Equity Equivalent Programmes

Require DTI approval for the multinational to be awarded

ownership points

encourage participation in the South African economy

through various government plans.

THANK YOU

Dylan Cunard

Date




RECOMMENDED STEPS

DATE: 29 AUGUST 2014

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RECOMMENDED STEPS

Understand impact of amendments on firm’s BBBEE rating

identify strengths/weaknesses.

what makes commercial sense?

what BBBEE rating is required commercially (eg what do customers want?)

Is the firm a QSE/EME?

Review BBBEE strategy and focus on

priority elements (ownership, skills development and enterprise/supplier development

consider broad based/employee share ownership schemes

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RECOMMENDED STEPS (cont’d)

work with reputable advisers and accredited verification agent;

ensure management/employees are fully aware of the new criminal offences under the BBBEE Act (ie fronting practices and misrepresenting BBBEE status) – consider compliance programmes/seminars for management and employees and internal procedures/systems for the firm’s own BBBEE rating/verification

substance over form approach.

THANK YOU

Pieter Steyn




bbbee presentation cape town seminar 29 august 2014

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