Understanding BEE Ownership: Your Top Questions Answered

1. What is B-BBEE and why is it important?  

B-BBEE is a key part of the South African government’s strategy to address transformation and remedy the inequalities of the historical Apartheid regime by giving Black people (South African citizens racially classified as African, Indian or Coloured) opportunities that were previously not available to them. 

This is achieved by measuring and scoring enterprises initiatives regarding increasing Black ownership and management of enterprises and productive assets, achieving equitable racial representation in the workforce, developing skills of Black people, investing in, and procuring from, Black-owned enterprises, and making contributions to support socio-economic development of Black people. 

Addressing B-BBEE is not compulsory, however an enterprise’s B-BBEE score/status will impact its ability to tender for and secure contracts.  This is because an enterprise’s B-BBEE status impacts the B-BBEE scoring of its customers and because public sector work typically requires suppliers having a minimum B-BBEE status.

2. How is B-BBEE measured?  

The B-BBEE Codes of Good Practice set out a balanced scorecard consisting of five elements: Ownership; Management Control; Skills Development; Enterprise and Supplier Development; and Socio-Economic Development.  

Points are allocated to each of the five elements, with scoring outcomes based on achieved outcomes versus stipulated targets. An enterprise’s total points achieved then equate to a B-BBEE level/status. The B-BBEE levels range from “Non-Compliant” to “Level 1”.  

Each B-BBEE Level is attributed a Procurement Recognition Percentage which enables customers to recognise a percentage of spend on goods and services from the entity as Black procurement spend, which positively impacts such customer’s own B-BBEE scoring.  

Figure A. Generic B-BBEE scorecard 

Figure B. Generic B-BBEE level achievement and related procurement recognition level 

3. Why is B-BBEE Ownership a critical part of B-BBEE strategy?  

The Ownership element of the B-BBEE scorecard addresses ownership of enterprises by Black people, with empowerment and transformation being promoted through the ability of Black people to participate in economic returns from ownership as well as decision-making.  

The Ownership element comprises a significant weighting (25 points) of overall points on the B-BBEE scorecard.  In addition, Ownership is a “Priority Element”, meaning that if at least 40% of total targeted Black ownership is not achieved together with a minimum level of wealth creation for Black investors, then the B-BBEE status of an enterprise will be discounted by a one B-BBEE level penalty. It is therefore challenging and costly to achieve a strong B-BBEE status without addressing B-BBEE Ownership.

4. How can a multinational address B-BBEE Ownership?  

There are various options for multinational companies to successfully address B-BBEE Ownership, including: 

• Share ownership: This is the most common approach adopted by multinational companies and involves share ownership by Black investors in the local or foreign entity. Investors may include strategic Black partners, investment firms, Employee Share Ownership Plans (ESOPs), or broad-based charitable trusts; 

• Sale of assets: Sale of productive assets (e.g. property) to Black investors with B-BBEE ownership being recognised based on the relative value of assets sold to value of the selling entity and the B-BBEE credentials of the investor; and 
• Equity Equivalent Investment Programme (EEIP): multinationals with a global practice preventing a traditional sale of shares to Black investors may seek government approval to instead implement an EEIP.  This entails making approved enterprise development and/or socio-economic contributions to qualifying beneficiaries, with B-BBEE ownership being recognised based on the relative value of such contributions sold to value of the entity

5. What is the Equity Equivalent Investment Program? 

Multinational companies with a global practice preventing a traditional sale of shares to Black investors may seek government approval to instead implement an Equity Equivalent Investment Programme (EEIP).  This entails making approved enterprise development and/or socio-economic contributions to qualifying beneficiaries, with B-BBEE ownership percentage being recognised based on the relative value of such contributions sold to value of the entity, and the period over which such ownership can be recognised based on the value of such contributions. 

While potentially attractive, EEIP can prove lengthy and costly to implement, and relatively few have B-BBEE implemented.

6. Why are ESOPs a popular approach to addressing B-BBEE Ownership?  

Employee Share Ownership Plans (ESOPs) have become an increasingly popular approach to addressing B-BBEE Ownership. With South Africa facing a skills shortage, employee ownership provides a means to attract and retain valuable talent, together with aligning interests of employees and shareholders, in addition to recognising Black ownership.  ESOPs provide an ability to achieve true broad-based empowerment, in a way that rewards those that have played a part in achieving business success. 

Although there was historically uncertainty regarding the feasibility of ESOPs, since the Department of Trade, Industry and Competition (DTIC) issued a practice note which confirmed employee ownership as a viable approach to achieving B-BBEE Ownership, ESOPs have been on the rise.

7. Do B-BBEE investors have to pay for their shares?  

There is a common misconception that B-BBEE Ownership requires giving away shares.  This is not correct, and most transactions involve B-BBEE investors acquiring ownership at fair value or at a discount to fair value. 

A key aspect of B-BBEE Ownership is wealth creation for Black investors, so most often a B-BBEE acquisition discount is offered.   

Funding of B-BBEE transactions depends on the type of B-BBEE investor.  Established B-BBEE investors will often contribute equity in addition to external or vendor funding.  Vehicles such as ESOPs or broad-based charitable trusts are most often vendor financed, with a proportion of dividends earned being applied to debt reduction.

8. How long does it take to implement an Ownership transaction? 

The length of time required to structure and implement a B-BBEE transaction is dependent on the nature and complexity of the transaction, and can vary from 3 months to 18 months.  

9. What are the roles of Black private equity funds in B-BBEE Ownership? 

The B-BBEE Codes explicitly recognize black private equity funds as a legitimate vehicle for ownership. These funds provide a structured and viable method for achieving B-BBEE ownership when set up correctly. They should operate like traditional private equity funds, with an independent general partner managing third-party funds. 

However, caution is required, as these structures are sometimes misused. Abusive practices involve using private equity funds as mere wrappers for personal shareholding rather than genuine third-party investment. Such misuse is considered fronting and undermines the intent of B-BBEE. 

When properly structured and independently managed, Black private equity funds can be an effective means of achieving sustainable B-BBEE ownership.

10. What are the Public Interest Competition Commission requirements when considering a merger or acquisition? 

When considering the approval of a merger or acquisition, the competition authorities assess the impact of the merger or acquisition on the public interest. In doing so, the competition authorities considers whether the merger has a negative impact on any of the following economic aspects: 

• Employment; 

• The promotion of a greater spread of ownership, in particular to increase the levels of ownership by historically disadvantaged persons and workers; 

• A particular industrial sector or region; 

• The ability of small businesses or firms controlled or owned by historically disadvantaged persons to become competitive; and 

• The ability of national industries to compete in international markets. 

The Competition Commission require that parties to the merger commit to measures that remedy any expected negative impact on the above factors. Most often this includes a requirement around implementing an Employee Share Ownership Plan (ESOP).

About the Author

Shaun Smit CA(SA), MBA – Director at Transcend Capital – With over a decade of experience in providing Employee Share Ownership Plan (ESOP) and B-BBEE transaction advisory to multinationals and South African corporates, Shaun Smit has a proven track record in crafting and executing ownership strategies aimed at fostering growth and sustained business success.

About Transcend Capital

Transcend Capital is a specialist Employee Ownership (ESOP) and B-BBEE Ownership transaction advisor, serving South Africa’s leading listed and multinational companies. Founded in 2005, Transcend Capital has successfully advised on over 200 transactions. The company utilises unparalleled expertise and experience to structure and implement value-adding ESOPs and B-BBEE transactions.

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