Preference Share Agreements - PowerPoint by pmt10533

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									          B-BBEE


VERIFICATION MANUAL
THE CODES OF GOOD PRACTICE
  FOR BROAD – BASED BLACK
  ECONOMIC EMPOWERMENT

        OWNERSHIP
         CODE 100
               CODE 100 – KEY PRINCIPLES OF
                       OWNERSHIP




 Entrench a key objective of the Act, i.e. to
  increase the number of black people that
  manage, own and control enterprises and
  productive assets.

 Provide recognition and measurement
 criteria for black ownership
                           CODE 100 – KEY PRINCIPLES OF
                                   OWNERSHIP
                                          KEY PRINCIPLES
Ownership is measured as an entitlement to both:

    Voting rights – Measures the rights of black people that hold
     shares in companies and
    Economic interest – Measures the economic value that is held
     by black people holding shares in a company
        Measures economic substance vs. legal form

    Net Equity Value – A tool that measures real economic value in the
     hands of black shareholders
        The Scorecard measures the ability of black shareholders to exercise
         and enforce their ownership rights to prevent exploitation
        Scorecard encourages participation by black women, broad-based
         schemes and new entrants
        Companies entering into transactions with broad-based schemes and
         new entrants are rewarded with bonus points
                     CODE 100 – KEY PRINCIPLES OF
                             OWNERSHIP
                                    KEY PRINCIPLES

Excluded Equity Principle

 Allows for the exclusion of shareholding by managed
  investments, public entities or organs of state, s21
  companies, etc. when determining BEE ownership targets

 Sale Of Assets

 Set out conditions under which the sale of assets, equity
  instruments and other businesses will be recognised
                           CODE 100 – KEY PRINCIPLES OF
                                   OWNERSHIP
                                          KEY PRINCIPLES
Equity Equivalents for Multinationals

 Equity Equivalent contributions are measured against the ownership
  element of the scorecard
 Measurable against the compliance target of 25.1% of the South
  African operation
 Interest persons may make written submission to the Minister of Trade
  and Industry requesting approval of equity equivalents
 Approval to participate in an Equity Equivalent is subject to qualification
  criteria (i.e. Global practice, etc.)
Implications
 Multinationals are able to claim ownership points on the scorecard
   based on their equity equivalent programmes
 Promotion of initiatives that will further advance BEE objectives
                       CODE 100 – KEY PRINCIPLES OF
                               OWNERSHIP
                                      KEY PRINCIPLES
Flow Through and Modified Flow Through Principle

 Measuring real BEE benefit by tracing ownership to the ultimate
  natural person to prevent the BEE dilution in a pyramid holding
  structure

Modified flow-through provides relief at one level

 Pierce through pyramid holding structures that are used to
  inflate black ownership in entities
 Measures and reports the actual levels of economic ownership
  held by black people
 Facilitate funding and partnership at one level in the chain
                           CODE 100 – KEY PRINCIPLES OF
                                   OWNERSHIP
                                          KEY PRINCIPLES
 The recognition of ownership after the sale or loss of shares by
  black partners
    The extent to which ownership points can be maintained after the exit of black
     partners will be based on both the net value created in black hands as well as
     the level of transformation in the measured entity

    Black shareholders must have their equity stake for at least 3 years prior to
     exit

    There must be demonstrative net value created in the hands of black people

    There must be a level of BEE transformation within the measured entity

    BEE shareholding arising from the sale or loss of shares by black people
     cannot contribute more than 40% of the points on the ownership scorecard

    It allows for a limited amount of BEE ownership recognition after sale / loss
     of equity by black shareholders (EXIT)
                        CODE 100 – KEY PRINCIPLES OF
                                OWNERSHIP
                                       KEY PRINCIPLES
 Implication
    Linking a company’s performance on the scorecard as well as
     wealth created in black hands to allow for recognition for
     contributing towards the promotion of ownership by black people
     over a limited period of time

    To introduce liquidity in the hands of Black investors after a
     reasonable period of time

    To encourage enterprises not to lock in BEE partners for a long time
     in order to maintain BEE ownership status

    To provide enterprises with enough time to enter into another BEE
     ownership transaction in order to retain their BEE status

    To encourage the retention of black direct investment of at least 15%
     on a continuing basis
                     CODE 100 – KEY PRINCIPLES OF
                             OWNERSHIP
                                    KEY PRINCIPLES

 New Entrants

    Involvement in the ownership of the enterprise of black
     new entrants

 Implications

    Encourage entities to include new entrepreneurs in
     ownership transactions thereby broadening the base of
     beneficiaries
                                CODE 100 : THE GENERIC OWNERSHIP
                                            SCORECARD
             Category                             Ownership indicator                           Weighting    Compliance
                                                                                                    points       Target
       Voting rights:

                        Exercisable Voting Rights in the Enterprise in the hands of black           3        25%+1 vote
                             people
                        Exercisable Voting Rights in the Enterprise in the hands of black           2           10%
                             women
Economic Interest:
                        Economic Interest of black people in the Enterprise                         4           25%

                        Economic Interest of black women in the Enterprise                          2           10%
                        Economic Interest of the following black natural people in the              1          2.5%
                            Enterprise:
                        1.  black designated groups;
                        2.  black Participants in Employee Ownership Schemes;
                        3.  black beneficiaries of Broad based Ownership Schemes; or
                        4.  black Participants in Co-operatives
Realisation points:
                        Ownership fulfilment                                                        1
                        Net Value                                                                   7
Bonus points:
                        Involvement in the ownership of the Enterprise of black new entrants;       2           10%

                        Involvement in the ownership of the Enterprise of black Participants:       1           10%
                        1.    in Employee Ownership Schemes;
                        2.    of Broad-Based Ownership Schemes; or
                        3.    Co-operatives.
                                     CODE 100 : THE QSE OWNERSHIP
                                              SCORECARD


Category                  Ownership indicator                                              Weighting   Compliance
                                                                                           points      Target
•Voting rights:
                       Exercisable Voting Rights in the Enterprise in the hands of black   6           25%+1 vote
                       people
•Economic Interest:
                       Economic Interest of black people in the Enterprise                 9           25%
•Realisation points:
                       •Ownership fulfilment                                               1           Refer to the
                                                                                                       formula in the
                                                                                                       main codes

                       •Net Value                                                          9           Refer to the
                                                                                                       formula in the
                                                                                                       main codes

•Bonus points:
                       •Involvement in the ownership of the Enterprise by black women      2           10%

                       •Involvement in the ownership of the Enterprise                     1           10%
                       •by black Participants in Employee Ownership Schemes, Co-
                       operatives or Broad-Based Ownership Schemes
                         CODE 100 : THE GENERIC OWNERSHIP
                                     SCORECARD

            Element                Weighting   Compliance Targets

Ownership                        20 points     25% +1

Management control               10 points     (40% to 50%)

Employment Equity                15 points     (43% to 80%)

Skills Development               15 points     3% of payroll

Preferential Procurement         20 points     70%

Enterprise Development           15 points     3% (NPAT)

Socio-Economic Development       5 points      1% (NPAT)

TOTAL                            100 points
                          OWNERSHIP – VERIFICATION
                              METHODOLOGY
                                                  STATEMENT 100


Voting Rights in the hands of black people

    Review the Shareholders Certificates and trace the exercisable
     voting rights in the hands of black people


    Review the Shareholders agreement in order to ascertain if there
     are any restrictions in terms of Voting Rights in the hands of
     black people, black women,       black new entrants or black
     designated groups
                            OWNERSHIP – VERIFICATION
                                METHODOLOGY
                                                    STATEMENT 100


 Voting Rights in the hands of black people

    In the case of Complex structures review the funding
     arrangements, the B-BBEE partners audited financial statements,
     inspect the organogram and undertake the flow through and
     modified flow through principles where applicable.

    Where the equity is held by a trust, employee share ownership
     scheme or a broad-based ownership scheme interview the
     fiduciaries to ensure that they understand their duties and review
     the election procedures in the first year of existence.

    In the case of a sale or loss of shares by the black participants
     review the transaction agreement
                          OWNERSHIP – VERIFICATION
                              METHODOLOGY
                                                STATEMENT 100

 Economic Interest in the hands of black people

    Review the Shareholders agreement in order to ensure that
     there are no restrictions in terms of Economic Interest in the
     hands of black people, black women, black new entrants or
     black designated groups and also identify any options (call
     vs put options)

    Where equity held by black people have a debt characteristic
     inspect other supporting documentation e.g. finance
     agreements, loan agreements or if the acquisition of the
     shares is funded through a third party determine the
     repayment terms and the amount repaid and outstanding
                          OWNERSHIP – VERIFICATION
                              METHODOLOGY
                                                  STATEMENT 100

 Economic Interest in the hands of black people

    Review the Shareholders agreement to establish if there are any
     exit clauses which can impact on economic interest for black
     shareholders

    Review all transaction documents which include but are not
     limited to Sale of Shares, funding agreements, preference share
     agreements, cessions, pledge and options in order to determine
     the possible impact of these on the economic interest of black
     shareholders.

    Review all transaction documents to ensure that the beneficiaries
     are entitled to economic interest that are in proportion to their
     shareholding and that dividends are indeed paid to the black
     shareholders.
                      OWNERSHIP – VERIFICATION
                          METHODOLOGY
                                            STATEMENT 100

Net value

   Net value is measured according to real benefit realised
   by black shareholders rather than loosing a large
   percentage to debt repayment

Ownership fulfilment

   Obtain evidence that there are no restrictions on the date
   on which shares can be sold by the black shareholders or
   if the shares have been pledged or ceded to a third party
                               OWNERSHIP – VERIFICATION
                                   METHODOLOGY
                                                         STATEMENT 102


 Recognition in the Sale of Assets
    Review the previous years Annual Financial Statements to determine
     the sustainability of the business opportunity
    Review the previous years Annual Financial Statements of the Measured
     Entity to determine that the transaction was at arms length and at a market
     related value
    Analyse the sales agreements between the measured entity and the
     associated enterprise to determine that there are no unreasonable
     limitations on trade
    Establish that a transfer of specialised skills has taken place
    Calculate the Voting rights, Economic interest and Net Value using the
     detail in Statement 100
                                OWNERSHIP – VERIFICATION
                                    METHODOLOGY
                                                            STATEMENT 103


 Recognition of Equity Equivalents for Multinationals
    Obtain and review the certificate of exemption issued by the dti
    Confirm the Authenticity and validity of the certificate directly from the dti
    Review the business plan submitted to the dti to ensure compliance with
     indicated milestones
    Recalculate and review the contributions made since the date of
     exemption
    Obtain or perform the valuation using the standard valuation
     methodology as set out in the Codes (e.g. Discounted Cash Flow, Price
     Earnings Multiple etc.)
QUESTIONS
   AND
DISCUSSION

								
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