Zodwa Ntuli, Commissioner of the Broad-Based Black Economic Empowerment (“B-BBEE”) Commission, indicated earlier this week that the commission has declared that the vast majority of transactions involving broad-based trusts are not compliant with the law and do not constitute genuine and effective Black ownership. It was further stated that the commission has informed dozens of companies of the need to rectify their ownership structures and undergo a reverification of their B-BBEE status or face investigations for fronting. These are hard hitting statements that will adversely impact most of corporate South Africa.
Broad-based black ownership schemes typically entail the use of trusts that operate for the benefit of a defined grouping of Black people. According to the 2017 Intelledex Research Report (The Empowerment Endowment), over ZAR50-billion of value has been created for charitable recipients through broad-based B-BBEE structures, including community trusts. As such, there is no question that broad-based ownership schemes have significantly contributed towards the upliftment of a large number of Black people who would not ordinarily have been recipients of such benefits.
According to Ms Ntuli, the beneficiaries of a broad-based trust must:
- be clearly identifiable and able to exercise voting rights;
- receive the same economic benefits as all other shareholders; and
- ultimately become unencumbered owners of the shares in which they are invested.
This follows a statement by Trade and Industry Minister, Rob Davies that this view on broad-based trusts has been affirmed as policy by the B-BBEE Advisory Council in April 2019. The resolution of the B-BBEE Advisory Council has not been debated or commented on by the public neither has it been formally published.
The resolution of the B-BBEE Advisory Council follows a statement made by Minister Davies that Black people must have “powers of economic ownership”, which entails not only the holding of shares but also the power to be involved in the decision making and management of a company and the ability to acquire the requisite skills.
The B-BBEE Codes
In terms of the B-BBEE Codes, Black people may hold their rights ownership in a company as direct participants or as participants through some form of entity, such as a trust or a broad-based ownership scheme. Therefore, participants do not have to hold the rights of ownership directly, which will be held by the entity in question and measured at that level, provided that the trust complies with the relevant qualification criteria in the B-BBEE Codes. To effectively disregard broad-based trusts as an ownership vehicle and measure the achievement of rights of ownership at beneficiary level would be inconsistent with the legislation and would render the ability to hold rights of ownership through a trust (or any other entity for that matter) entirely irrelevant.
Are broad-based trusts then no longer eligible Black ownership vehicles?
It would appear that trusts still have a place in Black ownership structures, provided that they operate for the benefit of an identified “smaller” group of Black people who are able to participate as shareholders of the company in which the trust holds shares (with the right to vote, the right to receive economic interest and the right to receive unencumbered ownership of the shares at a point in time).
Do we need to rethink broad-based Black ownership?
It seems so, at least the form in which they have been traditionally structured. There is clear directive from government to eliminate broad-based schemes that financially benefit the Black public at large without granting them rights of ownership as such schemes are not contributing to the ultimate objective of changing the B-BBEE ownership patterns of corporate South Africa.
What is the way forward?
To simply state that the vast majority of broad-based B-BBEE trusts are not compliant with the law and constitute fronting is not something that corporate South Africa is going accept easily and such a change would also cause significant instability in a market that is already facing challenging economic conditions.
The threat of criminal sanction where there has been no intention to commit fronting will not, in our view, yield the results the Department of Trade and Industry and the B-BBEE Commission seek to achieve. There needs to be a more collaborative approach between government and corporate South Africa so that there can be a clear direction going forward on broad-based Black ownership.
Until a new and simplified direction is agreed upon in a collaborative manner, we would expect some form of moratorium on existing broad-based structures and consideration must also be given to a dispensation for existing broad-based structures.
It may be appropriate for the new direction to be applicable to new broad-based structures established after a pre-announced future date. These thoughts would be the most practical and sensible approach in order to ensure a smooth and stable transition to a new broad-based dispensation.