Amended Financial Services Sector Series FS100: The general principles for measuring ownership – part 3

This article continues the discussion of the measurement of ownership principles as defined in Gazette No. 41287 dated 01 December 2017. Code Series FS100 is a lengthy document therefore this article is part 3 of a series related to this code series. Please read part 1 and 2 before continuing with part 3.

The article deals with?BROAD-BASED OWNERSHIP AND EMPLOYEE OWNERSHIP SCHEMES, PRIVATE EQUITY FUNDS and NON-PROFIT COMPANIES AND COMPANIES LIMITED BY GUARANTEE.

OBJECTIVES OF STATEMENT FS100

The objectives of this statement are to:

Specify the scorecard for measuring the Ownership element of B-BBEE for Banks, Long-term Insurers, Short-term Insurers and the Stock Exchanges and their members;

Specify the scorecard for measuring the Ownership element of B-BBEE for all other financial institutions;

Define the key measurement principles associated with the Ownership element of B-BBEE;

Specify the specific measurement principles applicable to various types of enterprises;

Specify the specific measurement principles applicable to various types of equity instruments; and

Specify the formula for measuring voting rights, economic interest, net value points, realisation points and bonus points.

BROAD-BASED OWNERSHIP AND EMPLOYEE OWNERSHIP SCHEMES

1. Black participants in Broad-Based Ownership Schemes and Employee Share Ownership Programmes (ESOPs) Programmes holding rights of ownership in a measured entity may contribute:
2. A maximum of 40% of the total points on the Ownership scorecard of the measured entity if they meet the qualification criteria set out in Annexe 100(B).
3. 100% of the total points on the Ownership scorecard of the measured entity if they meet the additional qualification criteria set out in Annexe 100(B).

PRIVATE EQUITY FUNDS

A measured entity may treat any of its ownership arising from a private equity fund as if that ownership were held by black people, where the private equity fund meets the following criteria:

1. At least 51% of any of the private equity managers’ exercisable voting rights associated with the equity instruments through which the private equity fund holds rights of ownership, must be held by black people;
2. At least 51% of the private equity fund’s executive management and senior management must be black people; and
3. At least 51% of the profits made by the private equity fund manager after realising any investment made by it, must by written agreement, accrue to black people;
4. The term ‘profit’ in this instance is deemed to be profit from the operations of the private equity fund manager and the carried interest that the private equity fund manager?(and/or its associated entities, provided that at least 51% of the profits of the associated entities accrue to the private equity fund manager)?receives after realising any investment made by it;
5. The private equity fund manager must be a black owned company as defined;
6. The private equity fund manager must invest at least 51% of the value of the South African funds in management in companies that have at least a 25% direct black shareholding, post investment of the investment by the private equity fund, using the modified flow-through principle;
7. The private equity fund manager can facilitate direct black shareholding at the time of entering into the transaction if the target company does not meet the requirement of at least 25% black shareholding at the time that the transaction is concluded;
8. This determination will be made at each measurement date and the status given to the private equity fund manager will be applicable for a period of 12 months;
9. In recognition of the fact that it is currently a challenge for private equity fund managers to find companies to invest in, that already have a significant black shareholding, they are allowed to achieve the 51% target over a period of time based on the formulation detailed below. It must be noted that this formulation is in line with that of the net value calculation above. This rule will apply to all investments made after 11 October 2014. The commencement date is the latter of 11 October 2014 and the date of establishment of a new fund:
10. 9.1 Within one year from the commencement date, more than 5% of the value of funds invested by the private equity fund must at all times be invested in enterprises that have at least 25% direct black shareholding;
11. 9.2 Within two years from the commencement date, more than 10% of the value of funds invested by the private equity fund must at all times be invested in enterprises that have at least 25% direct black shareholding;
12. 9.3 From the first day of the third year and the last day of the fourth year from the commencement date, more than 20% of the value of funds invested by the private equity fund must at all times be invested in enterprises that have at least 25% direct black shareholding;
13. 9.4 From the first day of the fifth year and the last day of the sixth year from the commencement date, more than 30% of the value of the funds invested by the private equity fund must at all times be invested in enterprises that have at least 25% direct black shareholding;
14. 9.5 From the first of the seventh year and the last day of the eight year from the commencement date, more than 40% of the value of the funds invested by the private equity fund must at all times be invested in the enterprises that have at least 25% direct black shareholding;
15. 9.6 From the first day of the ninth year and beyond from the commencement date, at least 51% of the value of the funds invested by the private equity fund must at all times be invested in enterprises that have at least 25% direct black shareholding;
16. The measurement of at least 51% of the value of funds invested by any private equity fund that must be invested in enterprises with at least 25% direct black shareholding is to be measured with reference to the cost of the investment made by the private equity fund;
17. In the case of private equity funds that were fully invested prior to 11 October 2014, investments by the fund managers will be considered as being made by black people if the private equity fund management entities meet the following criteria:
18. 11.1 At least 51% of any of the private equity fund manager’s exercisable voting rights associated with the equity instruments through which the private equity fund holds rights of ownership in a measured entity, must be held by black people;
19. 11.2 At least 51% of the profits accruing to the private equity fund manager after realising any investment made by it, must by written agreement, accrue to back people; and
20. The private equity fund manager must be a B-BBEE owned company.

NON-PROFIT COMPANIES AND COMPANIES LIMITED BY GUARANTEE

1. A measured entity may elect to include or exclude these companies for the purposes of measuring ownership in terms of this statement.
2. A non-profit company or company limited by guarantee that houses a Broad-Based Ownership Scheme or an ESOP is subject to the provisions governing those types of schemes and not to this paragraph.
3. When a measured entity elects to exclude such companies, it can do so by excluding up to 40% of the level of their ownership completely from the determination of its compliance with the ownership target.
4. A measured entity electing not to exclude these non-profit companies when it is entitled to do so may either treat all of that ownership as non-black or obtain a competent person’s report estimating the extent of black rights of ownership measurable in the measured entity and originating from those companies.
5. Black participants in such companies holding rights of ownership in a measured entity may contribute:
6. 5.1 A maximum of 40% of the total points on the ownership scorecard of the measured entity if they meet the qualification criteria for Broad-Based Ownership Schemes set out in Annexe 100(B) and ESOP set out in Annexe 100(B).
7. 5.2 100% of the total points on the ownership scorecard of the measured entity if they meet the additional qualification criteria set out for Broad-Based Ownership Schemes in Annexe 100(B) and ESOP set out in Annexe 100(B).

ANNEXE FS100 (B)

RULES ON CERTAIN TYPES OF ENTERPRISES

1. RULES FOR BROAD-BASED OWNERSHIP SCHEMES

The following rules apply to Broad-Based Ownership Schemes:

1.1 the management fees of the scheme must not exceed 15%;

1.2 the constitution of the scheme must record the rules governing any portion of Economic Interest received and reserved for future distribution or application;

1.3 the constitution of the scheme must define the Participants and the proportion of their claim to receive distributions;

1.4 a written record of the name of the Participants or the use of a defined class of natural person satisfies the requirement for identification;

1.5 a written record of fixed percentages of claim or the use of a formula for calculating claims satisfies the need for defining proportion of benefit;

1.6 the fiduciaries of the scheme must have no discretion on the above-mentioned terms;

1.7 at least 85% of the value of benefits allocated by the scheme must accrue to Black people;

1.8 at least 50% of the fiduciaries of the scheme must be independent persons having no employment with or direct or indirect beneficial interest in the scheme;

1.9 at least 50% of the fiduciaries of the scheme must be Black people and at least 25% must be Black women;

1.10 the chairperson of the scheme must be independent;

1.11 the constitution, or other relevant statutory documents, of the scheme must be available, on request, to any Participant in an official language in which that person is familiar;

1.12 the scheme fiduciaries must present the financial reports of the scheme to Participants yearly at an annual general meeting of the scheme; and

1.13 on winding-up or termination of the scheme, all accumulated Economic Interest must be transferred to the beneficiaries or an entity with similar objectives.

1. RULES FOR EMPLOYEE SHARE OWNERSHIP SCHEMES

The following rules apply to Employee Share Ownership Schemes (ESOP):

2.1 The scheme constitution must define the participants and the proportion of their claim to receive distributions;

2.2 A written record of the name of the participants or the use of a defined class of natural person satisfies the requirement for identification;

2.3 A written record of fixed percentages of claim or the use of a formula for calculating claims satisfies the need for defining proportion of benefit; and

2.4 The fiduciaries of the scheme must have no discretion on the above-mentioned terms. The participants must take part in:

2.4.1 Appointing at least 50% of the fiduciaries of the scheme; and

2.4.2 Managing the scheme at a level similar to the management role of shareholders in a company having shareholding;

2.5 The constitution, or other relevant statutory documents of the scheme must be available, on request, to any participant in an official language in which that person is familiar;

2.6 All accumulated economic interest of the scheme is payable to the participants at the earlier of a date or event specified in the scheme constitution or on the termination or winding-up of the scheme; and

2.7 The scheme fiduciaries must present the financial reports of the scheme to participants yearly at an annual general meeting of the scheme.

ADDITIONAL CRITERIA APPLICABLE TO BROAD-BASED OWNERSHIP SCHEMES AND EMPLOYEE OWNERSHIP SCHEMES:

1. For a measured entity to obtain the maximum points on its ownership scorecard, the following additional requirements must be met by a Broad-Based Scheme or Employee Share Ownership Scheme:
2. 1.1 A track-record of operating as a Broad-Based Ownership Scheme or ESOP, or in the absence of such a track-record demonstrable evidence of full operational capacity to operate as a Broad-Based Ownership Scheme or ESOP; and
3. 1.2 Operational capacity must be evidenced by suitably qualified and experienced staff in sufficient number, experienced professional advisors, operating premises and all other necessary requirements for operating a business.

As one can see, the Ownership Series is loaded with criteria second to none and requires that you don your?“serious thinking cap”?when dealing with this never-ending set of factors or else confusion will prevail.

Look out for future articles explaining more of the Ownership Principles including?TRUSTS, OPTIONS AND SHARE WARRANTS, EQUITY INSTRUMENTS CARRYING PREFERENTIAL RIGHTS, NET VALUE and BONUS POINTS.