OWNERSHIP IS ONE TO CONSIDERby 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
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