BEE compliance (Part 4): The Ownership Element

Sep 20, 2018 | Features

Voting rights of the board of directors or the executive managers of a company are measured in terms of a separate element namely Management Control.

To obtain a compliant B-BBEE level, estate agencies need to comply with the six scorecard elements applicable to estate agents in the Property Sector Code. Ownership is the first scorecard element under discussion this week by Adrian Frewen, associate with the Phatshoane Henney Group of attorneys.

The Property Sector Code contains a number of elements, each having a certain target and corresponding points attached thereto. Not all the elements contained in the Property Sector Code are applicable to every entity falling within the scope of the Property Sector Code and the targets for each scorecard element differs from one type of entity to the next. This series of articles will only focus on the elements and targets applicable specifically to estate agencies.

The first scorecard element is Ownership. Ownership measures the voting rights, economic interest and net value of equity held by black persons, either South African born or who obtained SA citizenship prior to 27 April 1994. Black persons include African, Indian and coloured persons and no distinction is drawn between these demographic groups. There are however specific points allocated to ownership in the hands of black women. The targets for Generic and QSE companies are similar, with the QSE scorecard attributing slightly less points in total on this element.

Read more on what is meant by EME, QSE and Generic groups here.

Voting rights – A target of 25% plus one vote is set for voting rights in the hands of black persons (male or female), and a target of 10% for voting rights in the hands of black women. Voting rights in this regard are those voting rights attached to an equity instrument held by a participant (such as shares in a company held by a shareholder), i.e. the entitlement to vote at shareholders’ meetings. Voting rights of the board of directors or the executive managers of a company are measured in terms of a separate element namely Management Control.

Economic interest – This measures the entitlement of black shareholders to share in profits and capital growth of the company. With regards to economic interest, the following targets apply: 25% target for economic interest of black persons (male or female), and 10% for economic interest of black women. A marginal number of points are also available where economic interest is held by specific groups of black persons, inter alia black designated groups such as black youths or black persons with disabilities, or black participants in employee share ownership schemes.

Realisation – Lastly, the Ownership element also includes realisation points, which measure the net equity value of a black participant’s shareholding, in other words whether there is any debt outstanding relating to the black shareholder’s shareholding. In many instances, particularly where a person acquires shareholding in an existing company with a high value, the shareholding transaction may be subject to financing. In order to score any points under this indicator, the acquisition debt of a black shareholder’s shares may not remain outstanding indefinitely. The Property Sector Code contains a target formula which measures the defrayal of such debt over a period of time, ranging from 10% in year 1 to 100% in year 9.

Importantly to note is that an estate agency need not achieve the full target on each of the above indicators in order to score any points. Points can be scored pro rata for partial compliance with each indicator. Ownership is however a priority element, and all Generic and QSE estate agencies have to comply with the sub-minimum of this element to avoid being discounted by one B-BBEE level overall. The sub-minimum applies specifically to the net value calculation, with the effect that at least 40% of the targeted black ownership must be free from encumbrance in order to avoid being discounted by one level.

Ownership accounts for more than one quarter of the available points on the applicable scorecard of the Property Sector Code and is also a priority element. Any estate agency seeking to obtain a good B-BBEE level will therefore have to ensure compliance with this element. It is possible to obtain a compliant B-BBEE level without any black ownership, however an estate agency will have to ensure that a proper plan and strategy is put in place to comply with the other scorecard elements to compensate for the large number of points lost on this element, as well as the one level that will be discounted.

Next week we take a closer look at how to go about complying with the elements Management Control and Employment Equity in terms of the Amended Property Sector Code. All three the prior articles can be found on the Property Professional website.

The legal requirements around B-BBEE compliance can be complicated to understand and put into practice. Send any questions you may have on this to editor@propertyprofessional.co.za.