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DTI sheds light on collective enterprises
14 July 2021
 
“I’ve taken over the management of a non-profit trust that is focused on the development of previously disadvantaged scholars based in rural communities. Increasingly, companies that want to fund and work with us are asking us for a BEE certificate. However, our auditors have told us that it’s not so easy for a trust like ours to be rated as we don’t have named beneficiaries. Is this correct and what are our options?”

Until recently, this has been the case as there have been many differing views about in particular the ownership element of entities that have a broad range of beneficiaries. Fortunately, the Minister of Trade, Industry and Competition (the “DTI”), on the 18th of May 2021, published a practice note (“Practice Note”) in terms of the Broad-Based Black Economic Empowerment Act 53 of 2003 (the “Act”) on the rules for Discretionary Collective Enterprises. 

The Practice Note provides greater clarification on the DTI’s interpretation on ownership and how such should be interpreted under the Act and B-BBEE Codes of Good Practice (the “Codes”) by entities collectively referred to in the Practice Note as “Collective Enterprises”, such as:

  • Broad-Based Schemes
  • Employee Share Ownership Programmes
  • Co-operatives
  • Trade Unions
  • Not for Profit companies
  • Trusts
The Practice Note guides the DTI, the B-BBEE Commission (the “Commission”) and all measured entities. In it, the DTI admits that there have been significant differences of opinion between stakeholders in the B-BBEE environment on how ownership structures, especially of so-called Discretionary Collective Enterprises, should be considered for ownership purposes under the Codes. 

Discretionary Collective Enterprises are those that allow for some discretion in respect of the distribution of proceeds to beneficiaries, unlike the more traditional arrangements where ownership is held directly in the name and for the benefit of a specific individual. Here, the fiduciaries are able to decide on the disbursement of funds, which disbursement is typically in line with the founding or constitutional document of such an enterprise. This is probably also what your non-profit trust would be regarded as.

The Practice Note deals with the application of the rules relating to the measurement, evidentiary and reporting treatment of Discretionary Collective Enterprises, with some important aspects addressed by the Practice Note being: 

  • A defined class of black beneficiaries satisfies the ownership provisions under the Codes and that specific beneficiaries need not be individually identified, provided that the measured enterprise complies with the provisions of the Practice Note.
  • In line with broad-based and meaningful ownership in the economy by black persons, the Codes intentionally and expressly provide for the use of a ‘defined class of natural person’ as participants when structuring for example a broad-based ownership scheme or a not-for-profit company. It is accordingly not necessary to have a written record of the names of your participants/beneficiaries. 
  • The defined class of natural persons must have a vested right against the income and capital, and not necessarily the specific individuals who form part of such a class. The fiduciary’s discretion can therefore benefit this class of natural persons but not someone outside of that class. 
  • Only black persons attract recognition on the ownership scorecard. The Codes place no restrictions on the nature of the black person, meaning that minors for example, are not restricted from being participants as part of a defined class of natural persons.
  • Dividend distributions to participants forming part of a defined class, may be in cash or in kind and in kind distributions must in no way detract from the Economic Interest points claimable by an entity. Also, whether or not the distributions are actually made has no bearing on the aforesaid, as economic interest attaches to the right to receive dividends, not the distribution itself and entities may not be penalised for not having made any dividends in any particular year.
  • Rules that require Collective Enterprises to present its financial reports to participants at an annual general meeting does not mean that all participants must be in attendance for compliance with the rule.
  • Discretionary Collective Enterprises allows for ‘single purpose’ Collective Enterprises such as an educational broad-based ownership scheme to be recognised in a chain of ownership and for the measured entity to receive points proportionate to the black ownership housed in such ‘single purpose’ Collective Enterprise.
  • An enterprise’s founding document (constitution, memorandum of incorporation or trust deed for example) needs to have a clearly defined objective and may provide for a discretion to the fiduciaries to distribute such portions of the scheme’s income and capital as they deem fit from time to time to members of a defined class of natural persons to the exclusion of others.
  • Where a discretion exists, the race and gender of the participants’ rights of ownership must be determined referencing the constitution, memorandum of incorporation or trust deed (as the case may be) as well as any applicable law whilst having regard to the race and gender of members of the defined class of natural persons and that class’s vested right to income and/or assets.
  • Except where expressly stated otherwise, participants’ rights are represented by the fiduciaries who make decisions for and on their behalf. The voting rights of such participants, although exercised by the fiduciaries, will be attributed to the race and gender of the participants and not that of the fiduciaries. 
  • Where a measured entity is a Discretionary Collective Enterprise and is called upon to report on its B-BBEE compliance to the Commission in terms of section 13(G) of the Act, it might very well be that such an entity is not capable of reporting on the black participants in terms of classifying their ‘number’, ‘province’ or ‘age’ etc. In such cases the measured entity will be required to report only on the participation of black participants but not the other categories and it must do so only in line with the information that the entity is able to produce.
In your case therefore, consider enlisting the help of a BEE advisor that can help you plan your BEE verification and who is aware of the Practice Note to help determine to what extent your not-for profit entity will qualify and be recognised for Ownership points as a Discretionary Collective Enterprise.
 
 
 
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