OWNERSHIP IS ONE TO CONSIDER

OWNERSHIP IS ONE TO CONSIDER

by Cathy Bryant 

 

In order to bring certainty to a market place where “BEE deals” were being concluded with great fanfare but with very little economic flow-through into the economy to benefit people previously excluded from the economy, the Department of Trade and Industry published its Codes of Good Conduct for comment in late 2005.  The strategy underpinning the Codes is the facilitation of access to the mainstream economy for more black people not only through the acquisition of ownership stakes in businesses, but in addition through elements such as human resource development, employment equity and social upliftment.

Of all the elements which are used to measure BEE compliance in accordance with the scorecard, however, the responses to the element of ownership are the most emotive.  This is true in small businesses and particularly so in owner-managed businesses. Choosing to be measured in accordance with the ownership element requires 26% of the exercisable voting rights in the shareholding of a business to be in the hands of black people which is a substantial amount of equity in small businesses.

Careful consideration should be given to the development of your BEE strategy.  Businesses which fulfill the requirements laid out for qualifying small enterprises (“QSE’s”) will be entitled to choose five of the seven elements of the BEE scorecard by which to be measured in order to achieve a procurement recognition level.  The thresholds for qualification as a QSE were still under review at the time of the writing of this article, but they are linked to the number of employees in a business and the annual turnover of that business.  In choosing which of the five elements to be incorporated into the BEE strategy, businesses should give considerable thought to the ways in which the targets set out in the QSE scorecard are to be achieved.  Given that the elements of enterprise development and preferential procurement require substantial resources, the element of ownership, however fraught with emotion it is, may be an element to consider in the BEE strategy.

 

In recent years, the ways and means of identifying a BEE partner, raising finance and implementing the deal have proliferated as the merchant banks and other players in the market have participated in the deal processes.  An option which does not require the involvement of complicated financing mechanisms or lengthly legal processes is a broad-based employee share plan.  In its simplest form, a broad-based employee share plan will take the form an employee share trust.  In terms of such a plan, the employee is granted an option to acquire shares in the company at some point in the future at a price to be fixed when the share option is granted.

The rules for the treatment of a broad-based employee share plan are set out in s8B of the Income Tax Act.  The rules are very specific and are outside the scope of this article, but they provide for the tax-free treatment of qualifying shares in the hands of the employees who acquire them.  In effect, a broad-based employee share plan provides dividend and voting rights in the equity share capital of a company for at least 90% of permanently employed employees who do not already participate in any other form of incentive scheme.

Not only does such a share plan fulfill the QSE scorecard requirement of unlimited access to the net equity interest of a business, but the employees who are targeted by such a plan are those who have traditionally been excluded from participation in the economy by reason of their lack of access to education, skills development and finance.       

The implementation of a broad-based employee share plan must be the right fit for the circumstances of the business, but its benefits are substantial.  Employees benefit from gaining access to the mainstream economy, participating in decision-making processes in the business and expanding their skills base.  In addition, the taxation on the sale of shares in accordance with the provisions of the share plan will only attract capital gains tax and then only once the deduction of the annual exemption has been made.  The employees’ exposure to tax will be minimal.

Employers benefit in being able to, in the correct circumstances and subject the limitations, deduct the cost of the shares made available to the employee share trust, they gain an empowered and motivated workforce and the business can count the shareholding gained by its workforce through the trust towards its ownership score.  In addition, should the business choose to use ownership as one of its measurable elements in the QSE scorecard, they will be entitled to multiply the ownership score by 1.25 provided the maximum score has been achieved.

Give due consideration to all the elements of the BEE scorecard in devising your strategy, but in doing so consider that that some elements confer greater benefits on your business and its people than others.                        

Cathy Bryant is an attorner in private practise. Contact her on bryantattorney@mweb.co.za

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