After publishing a General Notice issued in Gazette Number 38764 on Tuesday, 5 May 2015 (the Notice) which had the effect of virtually abolishing the recognition of ownership rights achieved using broad-based ownership schemes and employee share ownership programmes (B-BBEE Schemes) when calculating a measured entity’s broad-based black economic empowerment (B-BBEE) ownership score, the Department of Trade and Industry (DTI) calmed the resulting storm on Friday, 8 May 2015 by releasing a media statement to the effect that this provision will not have retrospective effect and that B-BBEE deals concluded prior to 1 May 2015 will not be affected.

The Amended Codes of Good Practice (the Amended Codes), which were gazetted in two parts in October 2013 and October 2014 respectively, and which came into force on 1 May 2015, brought about a number of practical issues in respect of which the DTI was required to provide clarity. For these purposes the DTI published the Notice.

Clause 1(d) of the Notice provides that “Black participants in Broad-Based Ownership Schemes and Employee Share Ownership Programmes holding rights of Ownership in a Measured Entity must only score points under paragraph 2.2.3 under the Ownership scorecard.”  Essentially this highly controversial provision, which understandably caused some frenzy in business circles, implied that B-BBEE Schemes will only score points in respect of economic interest in the hands of individual participants in B-BBEE Schemes, which accounts for only 3 points on the ownership scorecard.

Under the previous B-BBEE Codes, transactions involving B-BBEE Schemes were very popular given that a measured entity could potentially achieve 23 out of a possible 23 points on the old scorecard. Before the DTI published the Notice, the expectation was that the same principles would apply in respect of the new ownership scorecard under the Amended Codes and that a measured entity would be able to achieve 25 out of a possible 25 points using B-BBEE Schemes.

The effects of this change could have been catastrophic as a vast number of South African and multinational enterprises have concluded B-BBEE deals based on B-BBEE Schemes and the change would have meant that these enterprises could potentially have dropped by up to 3 levels.

However, only a few days after publishing the Notice, the DTI released a media statement indicating that the Notice will not have a retrospective effect and that all B-BBEE deals concluded prior to the implementation of the Amended Codes, i.e. before 1 May 2015, will not be affected. Accordingly, measured entities that rely heavily on B-BBEE Schemes can rest assured that these deals will have a full recognition under the ownership element under the Amended Codes.

The reality is, however, that the recognition of ownership rights based on B-BBEE Schemes implemented after 1 May 2015, i.e. all deals going forward, will still be downgraded by the DTI in some or other way. In this regard, the DTI indicated in its media release that it will appoint a technical task team which will explore the appropriate balance between active and passive ownership. The technical task team will report its recommendations to the Minister of Trade and Industry within 30 days. Upon receipt of the recommendations, the Minister will provide further guidance on the implementation of the ownership element and the rights of ownership based on B-BBEE Schemes.

Although measured entities will have to wait for the Minister’s guidance on this issue before it will understand the full extent of the changes that will be brought about by these considerations, it can be safely assumed that the recognition of ownership rights based on B-BBEE Schemes, as we know it, is probably a thing of the past and one will have to carefully consider the implications when implementing empowerment transactions going forward.

Written by Helgard Janse Van Rensburg, associate in the Corporate and Commercial Department of Adams & Adams