The end of Apartheid in 1994, marked the beginning of legal equality in South Africa, however social and economic equality had yet to be achieved.
The newly founded democratic government decided to institute polices of Broad Based Black Economic Empowerment (B-BBEE) to promote and accelerate the economic equality of previously disadvantaged racial groups. The goal, was to integrate black entrepreneurs into the private sector via the transfer of ownership and management functions.
Black Economic Empowerment (BEE) can be defined as an integrated and interrelated socio-economically process that contributes directly to the restructuring of South Africa’s economy and the establishment of the black population in the economy. Furthermore it provides a significant escalation in the black proportion who will lead, control or own companies within South Africa.
Legally standardized BEE goals in the form of scorecards has been introduced by government to measure a specific company’s BBE status as well as measure the said company with other companies. Through the implementation of BEE, a South African company is evaluated for its progress according to a standardized point system.
The B-BBEE status of a company is determined by the total sum of points achieved. The maximum of points achievable on the scorecard is one hundred. Two different scorecards were introduced by the legislature, the Qualifying Small Enterprises, to enable small to medium sized companies to obtain a good BEE recognition level and the general scorecard. In practice there is a great difference between the two scorecards.
The concept of Direct Empowerment under BEE comprises of corporate governance by the previously disadvantaged through the ownership of company shares, voting rights and the right of participation in management. A maximum of 30 points can be achieved in this area. Ten (10) points are awarded for the participation of the black population in the management of a business, the maximum of Twenty (20) points is awarded to a company if the black population has ownership of company shares. Fractional points may and only be allocated under certain sector charters or only partial fulfilment of stated goals.
Companies should be aware of the fact that passive capital share ownership is not considered sufficient to be awarded points according to the scorecard.
In consideration of direct empowerment, the participation of black employees possibilities needs to be mentioned. Businesses instead of having outsider’s participation, companies now prefer to have their own employees participate in the company. This occurs through the creation of an Employee Share Ownership Scheme (ESOP) in form of a BEE Employee Trusts (BET).
An ESOP is the formulation of a trust whereby a large number or all employees are the beneficiaries. The company provides a loan to the trust with which the Trust purchases at least 25.1% of the share capital of the company, from either a previous equity holder or a capital increase.
The Direct Empowerment points required under the ownership, can be contributed by the ESOP for up to 100%, only if the structure of the Trust and trust deed complies with the guidelines regarding pay-outs, access to finance and administrative rules.