Employee Schemes, Broad-Based Schemes, Trusts & NPCs

Employee share ownership schemes

An employee scheme is a trust or arrangement that holds shares in your company for your employees. The shares can be funded or given to the scheme for nothing. Giving them for nothing — a free carry — is what makes the arrangement efficient. When the scheme buys its shares on loan, that acquisition debt is subtracted on the “net value” line and the ownership points bleed away until the debt is repaid. A free carry has no acquisition debt, so the scheme contributes net value from the outset.

It is also a practical route to the 3-point designated-groups line on the generic scorecard. That is the line you earn where black ownership sits with people in a designated group (black youth, black women, black people with disabilities, black people living in rural areas, and black unemployed people). If your black shareholders are not themselves in one of those groups, a properly run employee scheme whose participants are black can be the way you reach it. But the scheme has to actually satisfy the requirements below, and its participants must be black. A scheme does not earn the line simply by existing.

What the Codes require

The rules for an employee share ownership programme live in Annexe 100(C). In plain terms the scheme must do five things:

• the scheme’s rules must define who participates and what share of the money each one gets;
• the people running it must have no discretion on those two things — who is in, and who gets what;
• participants must take part in appointing at least half the people running the scheme;
• participants must manage the scheme “at a level similar to shareholders” in a company;
• financial reports must be presented to participants every year at an annual general meeting, and the constitution must be available to them in a language they understand.

The requirement schemes most often fail is the fourth one — participants managing the scheme at a level similar to shareholders. The Codes put it this way.

Broad-based schemes and community trusts

A broad-based scheme holds shares for a defined group of black beneficiaries who are not necessarily your employees — a community, a category of workers, a defined class of people. Its rules live in a different annexe: Annexe 100(B). And they are materially tougher than the employee-scheme rules. This is worth knowing before you choose one.

On top of the basic rules about defining participants and their entitlements, a broad-based scheme must satisfy all of the following:

• at least 85% of the value of benefits must go to black people;
• management fees must not exceed 15%;
• at least half the people running it must be independent — no employment by, or beneficial interest in, the scheme;
• at least half must be black, and at least a quarter black women;
• the chairperson must be independent.

All five of those requirements sit in Statement 100, Annexe 100(B) of the Amended Codes (paragraphs 1.1.1 and 1.1.7 to 1.1.10) — the annexe that governs broad-based schemes. You can read the provision itself on the sources.

The reason this matters is a very common piece of bad advice. The 85% rule, the independent-trustee rule and the 15% management-fee cap sit in Annexe 100(B) — the annexe for broad-based schemes. Employee share ownership programmes have their own annexe, Annexe 100(C), and none of those three rules appears in it. So if you have been told that your employee scheme must have 50% independent trustees, or must give 85% of its benefits to black people, that requirement is not in the annexe that governs employee schemes.

Trusts — the common vehicle

A trust is the most common vehicle for holding shares for a group of people, and for a simple reason: it can hold for a class — “the permanent employees of the group from time to time” — without having to issue and cancel shares every time somebody joins or leaves. That flexibility is exactly what a scheme with a moving population of beneficiaries needs.

The “no discretion” problem — and how it is read down

The Codes require a trust to define its beneficiaries and their share of the money, and then add a phrase that, read literally, would outlaw the ordinary discretionary trust.

The Minister has read that down, and this matters if a discretionary trust is proposed to you. In 2021 the Minister issued a Practice Note confirming that trustees may select individual beneficiaries from within a defined class, and may decide what proportion each selected person receives — provided the trust deed fixes a percentage of distributions that must go to the class, which the trustees cannot go below.

That reading comes from the Minister’s Practice Note on discretionary collective enterprises (General Notice 428 in Government Gazette 44591, 18 May 2021, paragraphs 2.3, 2.4 and 3.2). The safe approach is to put the fixed percentage in the deed itself. The Practice Note was issued under section 14(2) of the B-BBEE Act (guidelines and practice notes), not section 9(1) under which the Codes are made — so it does not amend the Codes and a court is not bound by it. It carries real weight as the Minister’s own reading, but a deed that complies on its own terms — with the Practice Note as confirmation rather than the whole argument — is the sound one. You can read it on the sources.

The 40% cap and the competent-person certificate

A trust is capped in the same way an employee scheme is. Black participants in a trust can contribute a maximum of 40% of your ownership points — 10 of the 25 — if the trust meets the qualification criteria in Annexe 100(D), and 100% only if it also meets the additional criterion in that annexe. That additional criterion is a certificate: for the maximum points, you must hold a certificate from a “competent person” confirming that the trust was created for a legitimate commercial reason (fully disclosed), and that its terms do not directly or indirectly seek to circumvent the Codes or the Act. Without that certificate you are capped at 40%, however well the deed is drafted.

Trust law matters as much as the Codes

Two points of ordinary trust law can sink a well-drafted B-BBEE trust if they are ignored, and both should be designed for before the scheme starts.

Non-profit companies

A non-profit company (an NPC) can hold a B-BBEE shareholding. The Companies Act says so expressly: an NPC may acquire and hold securities issued by a profit company.

How the Codes treat the NPC depends on what it actually does, not on its corporate label. Statement 100 gives the measured entity an election to include or exclude an NPC from its ownership calculation. If it elects to exclude, it can exclude up to 40% of that ownership entirely; if it elects not to exclude when it could have, it must either treat all of that ownership as non-black or obtain a competent person’s report estimating the black ownership behind it. Separately, an NPC that houses a scheme — broad-based or employee — is measured under the rules governing that scheme. So the label “NPC” does not decide the treatment: what decides it is whether the company houses a scheme, and if so which one. An NPC set up to hold shares for a defined class of black beneficiaries will usually be housing a broad-based ownership scheme, in which case the Annexe 100(B) requirements above apply to it.

This is the direct authority. Statement 004 (paragraphs 2.4 and 2.5, published by General Notice 408 in Government Gazette 38766, 6 May 2015) records that a non-profit company has no shareholding and is not itself capable of evaluation for black ownership under Code Series 100 — but says in the same breath that this “does not imply” that an NPC sharing in the ownership of another enterprise cannot contribute to that enterprise’s black ownership. The next paragraph contemplates NPCs doing exactly that, as broad-based ownership schemes. You can read it on the sources.

Wherever a scheme, trust or NPC holds shares, remember the discipline that runs through this whole hub: the structure must be real, the participants must genuinely participate, and the paperwork must reflect what actually happens. A vehicle set up only to look like black ownership, with control kept elsewhere, is the classic marker of fronting — and the B-BBEE Act treats that as a criminal offence.

Frequently asked questions