Qualifying Small Enterprises (“QSE’s”)
Under the previous BBBEE codes, QSE’s could elect 4 out of the then 7 elements to comply with. With the enactment of the new BBBEE codes, the scorecard has been revised.
These revised scorecard elements are: Ownership, Skills development, Enterprise and Supplier Development, Socio Economic Development and Management Control. QSE’s are now required to be compliant with all 5 scorecard elements.
The scorecard has introduced certain priority elements for QSE’s to elect:
- Skills development
- Enterprise and Supplier Development
A QSE must achieve 40% of the points for two of the three priority elements, with Ownership being compulsory. Non-compliance with the threshold for any of the priority elements will result in a penalty by one level on the scorecard.
Related: BBBEE compliance: Why it is relevant now
The ownership element
In terms of the new codes, an enterprise must achieve at least 40% of the net value targets in order to comply with the above requirements. This, equates to a minimum 10% black shareholding / ownership status.
QSE enterprises’ scores are measured as set out below:
Large enterprises’ (enterprises that must comply with all the scorecard elements) scores are measured as set out below:
Obtaining a favourable score can be achieved through implementing a number of strategies, for example:
- A traditional equity transaction (taking in a “black” partner)
- Establishing an employee share scheme, Incentive Trust or broad based ownership scheme
- Entering into a joint venture agreement.
Generally speaking, it is not advisable to enter into any equity transaction whether on loan payment basis or not, if a proper due diligence has not been conducted, this includes ensuring that there is a shared vision for the business.
In addition, the taxable consequences of the transaction should also be appropriately considered and suitably structured.
What is more, besides unwanted tax consequences, where these transactions result in the creation of debt (funded on a loan account basis), the measured entity will not receive all the points on the scorecard. Thus, thereby senselessly diminishing the value of the transaction.
Employee share schemes, Incentive trusts and broad based ownership schemes
Employee share schemes aim to empower the black employees of the business concerned by making them minority shareholders in the company. This is similar to Incentive Trusts. Broad based ownership schemes on the other hand, have a broader beneficiary impact and often benefit groups outside of the business (and its employees) to benefit the community as a whole.
Employee share schemes particularly, are not always the “right fit” for every business. I say this because:
- Smaller companies or business simply do not employ enough staff for this to be practically feasible; and
- If a Trust structure is applied (as this usually is in this, Incentive Trust and broad based schemes) it needs to comply with certain BBBEE specific requirements. This in addition to the requirements set by the Trust property Control Act 57 of 1988.
- The uncertainty of the future and value of these structured due to the Department of Trade and Industry’s (“DTI”) views taken of late.
In addition, some inherent challenges posed by trust structures include that they are generally expensive vehicles from an income tax perspective and require their own dedicated management and running independent from the business itself.
Related: The new BBBEE codes: What to expect
On the flip side of the coin though, appropriately structured entities are absolutely invaluable vehicles to not only comply with the ownership requirement, but to motivate and retain valuable “black” staff.
This in turn, if properly planned and executed, may even serve to groom the next generation of owners and managers in businesses.
Joint ventures on the other hand, have not had much success statistically.
With that being said, when appropriately structured though, these are the most powerful of available tools for negotiating sustainable mergers or establishing successfully transformed entities.
For these reasons amongst others, it is important to consider a BBBEE ownership strategy that suits your vision and business specific needs best. Importantly, once these have been identified it should be implemented by a suitably qualified team of professionals.
 Earlier this year the DTI issued a notice stating that these schemes will not score full points under the ownership element. This was retracted pending further consideration of the DTI. So, at the moment there is a lot of uncertainty.