CONTROL AND EQUITY OWNERSHIP BY HISTORICALLY DISADVANTAGED GROUPS AND THE APPLICATION OF THE ICT SECTOR CODE

FACT SHEET

CONTROL AND EQUITY OWNERSHIP BY HISTORICALLY DISADVANTAGED GROUPS AND THE APPLICATION OF THE ICT SECTOR CODE

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SUMMARY

Since 2006, ICASA has been obliged to comply with the objects of the ECA in its regulation of the telecoms and broadcasting sectors – objects such as the promotion of “broad-based black economic empowerment (BBBEE), with particular attention to the needs of women, opportunities for youth and challenges for persons with disabilities”[1] (the BEE obligation) and the determination of the percentage of equity ownership to be held by persons from “historically disadvantaged groups” [2] (the HDG obligation) when awarding, amending, transferring and renewing licences.  In this Regulation[3] ICASA states that its primary purpose is to “promote equity ownership by HDG and to promote BBBEE”.  It also states that the Regulation will “facilitate diversity and transformation in the ICT Sector…”.  ICASA has drawn on the ICT Sector Code[4] in formulating this Regulation, with some changes.

 

Please note these 2 important points:

• HDG obligation: ICASA already requires licensees to comply with the ECA in that 30% of their equity should be held by HDGs when application for a new licence or amendment, transfer or renewal is made. However, Appendix 2 suggests that ICASA only expects compliance by individual licensees with various targets for HDG compliance over a period of time.  These obligations do not apply to class licensees.
• BEE obligations: these are twofold –
• Every individual and class licensee must attain Contributor Status Level 4 determined according to paragraph 5.2 of Series AICT000, Statement AICT000 of the ICT Sector Code, as confirmed by a BBBEE Verification Certificate (BEE obligation one); and
• Every individual licensee must ensure that a minimum of 30% of equity is held by Black People, which must be confirmed by a BBBE Verification Certificate (BEE obligation two).

Compliance by individual licensees with the HDG and BEE obligations is required within 3 years. Class licensees must comply with BEE obligation one in 4 years.  Despite the 3 and 4-year periods for compliance (the transitional periods), compliance with BEE obligation two by individual licensees is suspended until a future date that ICASA will determine, at which point it must amend these Regulations.  This is because ICASA has yet to approach the Department of Trade, Industry and Competition regarding its view of the BEE obligations.

The only remaining obligation on all licensees is to achieve Level 4 within the relevant transitional period.

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ACHIEVING COMPLIANCE

During the transitional periods, ICASA intends to monitor compliance by both class and individual licensees with BEE obligation one (Level 4 Contributor Status) through their annual Compliance Manual Regulation reports.

Our view, at present, is that over the transitional period you should provide an annual BBBEE Verification Certificate (or CIPC certificate or affidavit, as the case may be – see later) indicating steady progress towards the Level 4 target.  Appendix 2 of the Regulations suggests other targets, but ICASA has no power to enforce compliance with a ‘target’, particularly if it has not had discussions with the caretaker of the BEE framework.

For completeness, we set out the targets for the HDG and BEE obligation one in each year of the transitional periods, in the table below.  Note that ICASA has, in Appendix 2, also given individual EME and QSE licensees[5] a lengthier period for compliance:

Licensee	Obligation	12 months	24 months	36 months	48 months
Individual	HDG
Individual	BEE 1
Individual EME and QSE	BEE 1	7	6	5	4
Class	BEE 1	7	6	5	4

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ICASA’s APPROACH TO THE MEANING OF ‘CONTROL’

Annexure A to the Explanatory Memorandum accompanying the Regulations (the Memorandum) set outs what ICASA terms “its approach to control” (which may be helpful to some licensees).  ICASA notes that it follows section 12 of the Competition Act, 1998, including the fact that the list included in that Act is not exhaustive and that a person with “material influence” may also be considered to control a licensee.  It also relies on part of the Competition Tribunal’s decisions in Ethos Private Equity Fund and Tsebo Outsourcing Group Pty Ltd[6] and in Johnnic Holdings Limited and Hosken Consolidated Investments LtdI[7].

ICASA then notes that material influence “will be judged by reference to whether the actions, conduct or rights (even without implementation of such rights) are strategic (in the sense of being able to direct strategy or policy of the licensee) as against being designed or granted to protect the financial interests or investments in the licensee of the party holding those rights”.  Potential control such as veto rights will also be regarded as control.  ICASA goes further to consider what “joint control” might be and concludes that a shareholders agreement might also constitute joint control.

ICASA also notes that intention is an important factor in analysing control; if a shareholder with less than 50% equity has no intention to control a licensee, this may be considered by ICASA.

Control is of course important when determining whether or not control has been transferred as a result of a salle of shares for example.  Regulation 5 requires individual licensees to notify ICASA when a transfer or multiple transfers take place over a period of 24 months which result, directly or indirectly, in a decrease of 5% or more of the shares held by HDG AND/OR dilution of the rights including voting or veto rights, that attach to those shares.

“Transfer” is defined in the Regulation as “assign, cede, sell, convey, settle, alienate or otherwise transfer in whole or part, whether or not for value, any interest in a licence or licensee from one person to another”.  This is not the same as the existing definition of “transfer” in the Licensing Processes and Processing Regulations of 2010, which define “transfer” as “assign, cede or transfer a Licence from one person to another.”

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CAUTIONARY NOTES

These are not the only observations one could make about the Regulations (ignoring some contradictions and errors in cross-referencing) but these are relevant to some of the more important features of the Regulation (bearing in mind that most of the Regulation will not apply to licensees for some time).

Note 1:

ICASA defines a BBBEE Verification Certificate as “an independent written verification certificate of compliance with the ICT Sector Code issued by a SANAS recognized and accredited verification agency”.  However, in regulation 3(6), ICASA requires proof of compliance with the HDG obligation to be in the form of:

• “a BBBEE Verification Certificate confirming ownership equity held by Black People determined using the Flow-Through Principle; and/or
• A credible assurance report issued by a SANAS recognized and accredited verification agency confirming ownership equity held by historically disadvantaged groups (excluding Black People if a BBBEE certificate is provided in terms of regulation 3(6)(a) determined in accordance with Appendix 1.”

ICASA has no jurisdiction over SANAS accredited agencies and it is these agencies that issue verification certificates.  In Appendix 1 ICASA purports to determine the documents that should be submitted to a SANAS agency and/or ICASA itself to prove compliance with the HDG obligation.  Clauses 2.1 read with 2.3 of the Appendix suggest that an indirect ownership (through a company, CC, trust or other juristic person) will be acceptable for compliance.  This appears to be an error since clauses 2.4 to 2.6 of the Appendix indicate that measurement will take place according to the Flow-Through Principle.

Note 2:

Compliance with regulation 3(4) (the HDG obligation) is to be demonstrated by a BBBEE Verification Certificate AND/OR a “credible assurance report issued by a SANAS recognized and accredited verification agency confirming ownership equity held by HDG (EXCLUDING Black People if a BBBEE Verification Certificate has been provided already)”.

The definition of the BBBEE Verification Certificate is identical to the wording of this regulation 3(4), and as the regulation is phrased as an AND/OR, it is not clear what other kind of certificate is intended to be issued by SANAS.

Note 3:

Appendix 1 sets out at clause 3 the documents required to report compliance under the Compliance Manual Regulations, along with Form 1 of those Regulations.  ICASA wants a significant number of documents to satisfy compliance under the Compliance Manual Regulations –

1. a certified copy of the licensee’s latest share register (for listed companies this could be an impossible task given that trades take place all the time);
2. certified copies of each of the individual shareholder’s share certificates (same problem);
3. certified copies of the MOI, MOU, shareholders or joint venture agreement;
4. CIPC’s confirmation of directors;
5. documents to prove that Black People, women, people with disabilities and the youth (the HDG group) received dividends proportionate to their shareholding in the past financial year;
6. a diagram illustrating ownership ultimately accruing to natural persons falling within the HDG group;
7. certified copies of share registers of corporate shareholders indicating which natural persons (within the HDG group) own shares and their share certificates;
8. shareholders agreements at every tier of shareholding in the licensee until the “South African citizen which the licensee seeks to rely on for compliance with the HDG Equity Requirement” [clause ends];
9. certified copies of identity documents of natural persons;
10. if shareholders at any level take the form of a trust, then the trust deed;
11. letter from trustees confirming who the beneficiaries are and that they are South African citizens;
12. submission of proof of a shareholder’s disability status;
13. proof of ownership by any organs of state or public entities in the form of share certificates or confirmation from the entity; and
14. if a state-owned or public entity is a BBBEE facilitator, then a copy of the Gazette identifying the entity as a facilitator.

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DETAILED ASSESSMENT

We have prepared two tables, one for each of individual and class licensees.  These tables summarise, to the extent possible, the requirements of the Regulations, their implications, and how compliance might be achieved.  In compiling the summary, it became clear that some issues may need revision by ICASA.

As the obligations covered in these tables take effect after the transitional periods, the tables are presented for your interest.

April 2021

Reader’s note: this document is a summary for your interest and reference, it is not legal advice and it does not purport to address your specific issue.

[1] Section 2(h) of the ECA.

[2] Section 9(2)(b) of the ECA.

[3] Gazette 44382 of 31 March 2021.

[4] Gazette 40407 of 7 November, 2016.

[5] Exempted Micro Enterprises and Qualifying Small Enterprises, respectively.

[6] Ethos Private Equity Fund and Tsebo Outsourcing Group Pty Ltd (30/LM/Jun03) [2003] ZACT 51 (3 October 2003)

[7] Johnnic Holdings Limited and Hosken Consolidated Investments Limited CC (65/FN/Jul05) [2005] ZACT 69 (21 October 2005)

[8] This is determined in terms of paragraph 5.2 of Series AICT000, Statement AICT000 of the ICT Sector Code, as confirmed by a BBBEE Verification Certificate.

[9] If they are 100% black-owned, these entities qualify as Level 1 Contributors, and if they are >50% black-owned they qualify as Level 2.  Other EMEs and QSEs must depose to an affidavit confirming their annual Total Revenue (<R10m and <R50m respectively) as well as the ownership equity percentage held by Black People using the Flow-Through Principle.

[10] If 100% black-owned, these entities qualify as Level 1 Contributors, and if >50% black-owned they qualify as Level 2.  Other EMEs and QSEs must depose to an affidavit confirming annual Total Revenue (<R10m and <R50m respectively) and the ownership equity percentage held by Black People using the Flow-Through Principle.