Recent statements by Minister of Trade, Industry & Competition, Minster Ebrahim Patel (that pioneering Broad Based Black Empowerment Trusts ("BBTs") constituted genuine black ownership structures) have prompted a relook at the role of BBTs as potential vehicles to achieve credible Black ownership credentials, contrary to the position taken by the Black Economic Empowerment Commission ("Commission") to date.
At their core Black Economic Employment ("BEE") schemes are meant to give an opportunity to previously disadvantaged persons by affording them a chance to regain the economic agency that was taken away by the apartheid regime, and to participate meaningfully in the broader economy - with a view to closing the inequality gap.
Central to BEE is the idea is that people falling within the definition of "black people" in terms of the Broad-Based Black Economic Empowerment Act will be afforded an opportunity to participate in the ownership and management of corporate entities ("Entities"), which will, in turn, enable skills development and economic benefits to flow to them, empower future generations and hopefully thereby reduce the ever-growing inequality gap.
In terms of the existing BEE framework, Entities are incentivised to achieve ownership by "black people" by being awarded a score on the BEE ownership scorecard (which increases on a sliding scale based on the extent to which "black" ownership is achieved). Having a high score creates many lucrative opportunities for Entities in South Africa.
The Department of Trade, Industry & Competition has promulgated a series of codes of conduct ("BEE Codes") in which the BEE regime is fully laid out. The BEE Codes recognise that ownership in Entities may be held through Trusts (including BBTs).
A BBT is typically a Trust in which a class of beneficiaries are identified (e.g., a defined grouping of "black people") and who get to enjoy the economic benefits and fruits of the assets in which the BBT is invested. The dilemma that is often faced is that, in a trust (particularly a BBT) beneficiaries do not hold the right of ownership directly but rather the trustees hold the right.
The Commission has taken the position that, in order for a BBT to achieve full recognition, the beneficiaries of BBTs must receive economic benefits like those of true shareholders, be easily distinguished and individually identified (i.e, not an amorphous grouping of individuals), enjoy voting rights and become exclusive owners of the shares they are invested in through the mechanism of the BBT. In other words, the underlying asset and its benefits must vest in the beneficiaries for full recognition to be achieved. As will immediately be appreciated, this militates against the primary purpose of the discretionary Trust.
However, the position that is currently being taken by the Commission does not find expression in the wording contained in the BEE Codes (the Commission holds the view that they are in conflict with the spirit and purport of BEE). The effect of the Commission's interpretation of the BEE Codes is that the BBT has, from a practical perspective, become obsolete when used in the context of BEE ownership. The problem with this is, of course, that so many legacy BEE ownership schemes that have been established since the inception of the BEE Codes, have made use of the BBT and these schemes are currently stranded with an ownership structure which, according to the Commission's interpretation, doesn't allow them to achieve maximum points on the BEE ownership scorecard.
Patel's comments, in which he appeared to recognise pioneering BBTs as genuinely "black-owned", stand at odds with those voiced by the Commission. While this may alleviate much of the consternation of Entities that currently make use of BBTs in their ownership structures, this uncertainty and policy ambiguity is deeply problematic - corporate players in South Africa require consistent messaging and policy certainty to enable them to plan their compliance requirements in order to free them up to focus on building enterprise and expanding the economy.
While it is arguably fair to observe that BBTs, in their current form, give insufficient economic agency back to the previously disadvantaged and are potentially open for abuse, there can be no doubt that they have a crucial role to play in the way the BEE landscape is formulated in South Africa. Minister Patel's statement may be seen as a move to influence the Commission to soften its position on BBTs - something that will be welcomed by many of the existing Entities that have made use of BBTs to attempt to achieve compliance. However, it is essential that those responsible for formulating policy and drafting the legislation on the part of the Department (the Minister and political leadership) and those responsible for enforcing the legislation (the Commission) be aligned on how it is to be interpreted.
Perhaps this latest development is an opportunity for meaningful dialogue between all stakeholders and policy makers to once and for all achieve a respectable level of policy certainty on the issue of BBTs.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.