Has the bell tolled for broad-based ownership and employee trusts?

The Department of Trade and Industry (DTI) published a notice on 5 May 2015 where, in a move that raised concerns across the entire business sector, it was announced that Broad-Based Ownership Schemes (BBOS) and Employee Share Ownership Programs (ESOPs) will only contribute a maximum of three points to the total BEE scores of companies which implement such solutions after the date of the announcement. In light of the flood of criticism that followed this announcement, the DTI published a retraction on 15 May 2015 - and although wholly retracted, it came with a warning.

Some of the reasons provided pursuant to the initial notice regarding the cap on BEE ownership points to be earned through BBOS and ESOPs, included the following:

  The beneficiaries thereof will never have a real opportunity to participate in and drive the business and will not be able to influence company decisions.
  These sort of schemes provide an ideal platform for complex fronting practices as the beneficiaries in such schemes are often not identifiable. 
For meaningful transformation of the economy to be achieved, black shareholders must participate actively and more strategically in the business.

Prominent black business leaders and groups like the Black Management Forum also supported the DTI’s decision and in the course of the weeks following the notice publication it has become more apparent that concerns have for some time already been raised, from various sources, against such schemes.

Stakeholders and roleplayers across the BEE industry have agreed that the reasons offered by the DTI relating to fronting are very relevant as there are many dubious practices involving such schemes. However, many also agree that the solution is not to punish all companies arbitrarily across the board which have implemented or are planning to implement such schemes.

The DTI has since the publication publicly conceded that it acted in haste and without proper consideration of all the implications of the notice and accordingly retracted the notice relating to such schemes. The DTI further indicated in a media statement that a technical task team would be established to explore the appropriate balance between active (direct) and passive (broad-based) ownership. This technical task team would then report its recommendations to the Minister of Trade and Industry within 30 days, after which the Minister would provide further guidance on the future treatment of such schemes.

It was in passing suggested by the DTI that a possible solution could be to introduce more stringent verification criteria for such schemes and that verification agencies may need to perform proper audits on all schemes before awarding points.

The current position for now remains as it was prior to the notice publication. Companies which have BBOS and ESOPs in place can still earn maximum points under the ownership element of their BEE scorecards as allowed for such schemes. Companies that choose to structure their empowerment equity transactions through such schemes in future will still be able to do so, but cognisance must be taken of the intent of the DTI and possible future changes in respect of these schemes.

Although the period for recommendations by the technical team is short, one hopes that they are able to take into account all relevant factors when making their recommendations on the future of such schemes. When structured correctly such schemes can be advantageous to many people across various income classes and can have a truly broad-based impact. Many small, medium and even larger privately owned businesses have had no choice but to opt for such schemes to address their BEE ownership in the absence of interest or the capability to attract black individual investors, investment trusts and consortiums. Such valuable contributions must however be balanced against the need to root out fronting practices which are often associated with such schemes to enable a framework which increases active black stakeholder involvement in businesses across the board.

What is clear from these recent events is that there is a pertinent move towards greater active shareholder involvement. For now it is a waiting game to see what the technical task team will recommend in respect of broad-based and employee ownership schemes, but it does appear that a target has been painted on the back of these schemes, and any business wishing to make use of such a scheme to address their ownership element may be well advised to wait for more clarity on their future before committing to any such scheme.

June 11, 2015

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