THE CODES OF GOOD PRACTICE FOR BROAD – BASED BLACK ECONOMIC EMPOWERMENT OWNERSHIP CODE 100 – STATEMENT 100, 102 AND 103

2 tStatement 100 tStatement 100 – The general principles for Measuring Ownership tStatement 102 tStatement 102 – Recognition of the Sale of Assets tStatement 103 tStatement 103 – The Recognition of Equity Equivalents for Multinationals CODE 100 – OWNERSHIP

3 Ownership (Code 100 : Statement 100)  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

4 CODE 100 – OWNERSHIP KEY PRINCIPLES DescriptionKey principlesImplication OwnershipOwnership is measured as an entitlement to both voting rights and economic interest. Net Equity Value – measures economic substance vs. legal form Excluded Equity Principle Sale of Assets tAny financing structure that passes the test will be able to obtain ownership points tEntities encouraged to facilitate the funding of BEE transactions tAllows for the exclusion of shareholding by managed investments, government owners, s21 companies, etc. when determining BEE ownership targets tSet out conditions under which the sale of assets, equity instruments and other businesses will be recognised Equity Equivalentst Equity Equivalent contributions are measured against the ownership element of the scorecard t Measurable against the compliance target of 25.1% of the South African operation t Interest persons may make written submission to the Minister of Trade and Industry requesting approval of equity equivalents t Approval to participate in an Equity Equivalent is subject to qualification criteria (i.e. Global practice, etc.) t Multinationals are able to claim ownership points on the scorecard based on their equity equivalent programmes tPromotion of initiatives that will further advance BEE objectives

5 Key Principles DescriptionImplication Ownership as Economic Interest and Voting Rights Ownership is measured as an entitlement to both voting rights and economic interests. Having control without economic flow, or having economic flow without control both contradict the principles of the Act. t Prevent transactions where black people are given voting rights but no economic interest or benefits over the duration of the BEE transaction t Prevent fronting transactions where no real economic transfer takes place 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 t Pierce through pyramid holding structures that are used to inflate black ownership in entities t Measures and reports the actual levels of economic ownership held by black people t Facilitate funding and partnership at one level in the chain Net Equity Value A tool that measures real economic value in the hands of black shareholders using a graduation model t Encourage traditional enterprises to facilitate preferred financing when introducing BEE ownership tEnsures alignment of objectives between transaction participants CODE KEY PRINCIPLES

6 DescriptionKey principlesImplication Ownership - Broad Based Schemes tEncourage full participation of beneficiaries in all structures of the scheme tEncourage accountability by fiduciaries to the intended beneficiaries t Specific governance requirements tA maximum of 40% of the total points on the ownership scorecard of the measured entity is allowed if the BB scheme is unable to meet some of the requirements t Accrual of benefits tends to be conditional and vest after a long period of time t Discourages a practice where no real powers of ownership accrue to employees or beneficiaries tDiscourages a practice where shares remain unallocated perpetually resulting in control still being retained by the traditional shareholders tDiscourages the use of broad based schemes as employee retention strategies – master/ servant relationship t Avoid the sole inclusion of ESOPS to the exclusion of new entrants (i.e. entrepreneurs) t Encourages the structuring of deals made up of a combination of black women, black designated groups black new entrepreneurs (i.e. black new entrants), and broad based schemes

7 CODE KEY PRINCIPLES DescriptionKey principlesImplication Mandated Investments (Indirect Ownership) t Option to include such ownership if the following criteria is met: Demonstrate value attributable to black people in terms of both economic interest and net value; Demonstrate how shareholders activism is promoted; Inclusion of one results in inclusion of all; Inclusion limited to a maximum of 40% of target; tOption to exclude from the top and the bottom tExclusion limited to 40% of total value of measured entities equity tAlign rights and obligations of beneficiaries of such ownership schemes to those of ordinary shareholders in a company; tPromote direct participation by black investors in companies that they invest in; tPromote a balanced mix of shareowners; tPromote shareholder activism; tMaintain a minimum level of direct ownership by black investors;

8 CODE KEY PRINCIPLES DescriptionKey principlesImplication The recognition of ownership after the sale or loss of shares by black partners t 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 t Black shareholders must have their equity stake for at least 3 years prior to exit t There must be demonstrative net value created in the hands of black people t There must be a level of BEE transformation within the measured entity tBEE shareholding arising from the sale or loss of shares by black people cannot contribute more than 40% of the points on the ownership scorecard t It allows for a limited amount of BEE ownership recognition after sale / loss of equity by black shareholders (EXIT) t 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 t To introduce liquidity in the hands of Black investors after a reasonable period of time tTo encourage enterprises not to lock in BEE partners for a long time in order to maintain BEE ownership status t To provide enterprises with enough time to enter into another BEE ownership transaction in order to retain their BEE status tTo encourage the retention of black direct investment of at least 15% on a continuing basis

9 CODE KEY PRINCIPLES DescriptionKey principlesImplication New Entrantst Involvement in the ownership of the enterprise of black new entrants t Encourage entities to include new entrepreneurs in ownership transactions thereby broadening the base of beneficiaries Private Equity Funds t measured enterprise may treat any of its ownership arising from private equity funds as black owned and controlled if it meets the following criteria: tMore than 50% of exercisable voting rights are in the hands of black people tMore than 50% of profits accrue to black people tPrivate Equity Fund manager must be a black owned company tMore than 50% of the value of funds invested by private equity fund must at all times be invested in black owned enterprises tTo encourage the emergence of Private Equity Funds owned and controlled by Black People. tTo encourage Private Equity Funds to drive investment in black owned enterprises.

10 GUIDELINES FOR EQUITY EQUIVALENT PROGRAMMES FOR MULTINATIONALS

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12 THE MULTINATIONAL ENTITY tMust be able to prove that they have not entered into any Ownership partnership arrangements in other countries globally tThe EE contributions towards the ownership element of B-BBEE made by Multinationals will be measurable against: s 25% of the value of their operations in South Africa s4% of Total Revenue from its SA operations annually over the period of continued measurement GUIDELINES : EQUITY EQUIVALENT PROGRAMMES FOR MULTINATIONALS

13 tAn EE programme would entail a sPublic Programme / Scheme and / or sPrivate Programme / Scheme tDesigned to fulfill the requirements of B-BBEE Ownership. tSuch Programmes need to be approved by the Minister of Trade and Industry in order to qualify for Ownership points on the Scorecard GUIDELINES : EQUITY EQUIVALENT PROGRAMMES FOR MULTINATIONALS

14 GUIDELINES : EQUITY EQUIVALENT PROGRAMMES FOR MULTINATIONALS OBJECTIVES EE Programmes are expected to contribute towards the achievement of the following objectives:  Enterprise creation and development.  Foreign direct investment.  Accelerated empowerment of black rural women and youth.  Sustainable growth and development.  Human development with focus on education and skills development.  Infrastructure investment with emphasis on developing the country’s research and development infrastructure.

15 GUIDELINES : EQUITY EQUIVALENT PROGRAMMES FOR MULTINATIONALS PRINCIPLES The economic impact of the EE Programme must be aligned to the objectives of the B-BBEE Act. The EE Programme must not displace other B- BBEE initiatives to be undertaken as per the scorecard. The EE Programme must be broad based in its impact on the black population.

16 QUALIFICATION CRITERIA FOR PARTICIPATION IN EE PROGRAMME EE proposals must demonstrate commercial viability and long term sustainability (economically and operationally) EE proposals must be aligned to the overall objectives of B-BBEE. There must be transfer of business and/or technical skills. EE proposals must be measurable against the value of their operations locally with tangible measurable outputs. GUIDELINES : EQUITY EQUIVALENT PROGRAMMES FOR MULTINATIONALS

17 EXAMPLES OF DIFFERENT FORMS OF EE PROGRAMMES Enterprise Creation Programmes Economic Development Programmes Projects aimed at technology transfer/diffusion within the small, medium and micro-enterprise sector of the local economy. Programmes that promote economic growth and employment creation through the enhancement of technological innovation. GUIDELINES : EQUITY EQUIVALENT PROGRAMMES FOR MULTINATIONALS

18 CODE 100 : THE GENERIC OWNERSHIP SCORECARD CategoryOwnership indicatorWeighting points Compliance Target Voting rights: Exercisable Voting Rights in the Enterprise in the hands of black people 325%+1 vote Exercisable Voting Rights in the Enterprise in the hands of black women 210% Economic Interest: Economic Interest of black people in the Enterprise425% Economic Interest of black women in the Enterprise210% Economic Interest of the following black natural people in the 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 12.5% Realisation points: Ownership fulfilment1 Net Value7 Bonus points: Involvement in the ownership of the Enterprise of black new entrants; 210% Involvement in the ownership of the Enterprise of black Participants: 1.in Employee Ownership Schemes; 2.of Broad-Based Ownership Schemes; or 3.Co-operatives. 110%

19  The Flow-Through Principle is the default  Modified Flow-Through and Control Principle are limited to companies with shareholding CODE 100 : OWNERSHIP - APPLICATION OF THE PRINCIPLES

20 Black People Family Trust Company A Company B Measured Company Non-Black People 90% 65% 26% 10% 35% 74% Effective black ownership in Measured Company = 90% x 90% x 65% x 26% = 13.7% CODE 100 : OWNERSHIP - MEASUREMENT

21  Apply the Flow-Through Principle to all measurement  General Concerns: - Flow-Through Principle ignores black control Minority white shareholding in a BEE vehicle is an important financing mechanism  Solution – Development of a New Principle Modified Flow Through – Economic Interest only CODE 100 : OWNERSHIP – APPLICATION OF THE FLOW-THROUGH PRINCIPLE

22 CODE 100 – OWNERSHIP – MODIFIED FLOW- THROUGH PRINCIPLE Black People Family Trust Company A Company B Measured Company Non-Black People 90% 65% 26% 10% 35% 74% Effective black ownership in Measured Company = 90% x 90% x 100% x 26% = 21.1%

23 CODE 100 OWNERSHIP – REALISATION POINTS  1 Point if no encumbrances against black shareholders (including interposed vehicles)  7 Points linked to Net Equity Interest measures the extent to which black participants have paid off all debt associated with their acquisition of shares (including interposed vehicles) Takes into account growth in value of shares, amounts paid off as well as all dividends received Yearly targets for required level of settlement Yearly Targets: YEAR ONE10% OF 25%(2,5% PAID UP) YEAR TWO20% OF 25%(5% PAID UP) END OF YEAR FOUR40% OF 25%(10% PAID UP) END OF YEAR SIX60% OF 25%(15% PAID UP) END OF YEAR EIGHT80% OF 25%(20% PAID UP) END OF YEAR TEN100% OF 25%(25% PAID UP)

24 QUESTIONS AND DISCUSSION

25 THANK YOU