B-BBEE Restructuring – Pitfalls to avoid

B-BBEE Restructuring – Pitfalls to avoid
September 11, 2018 Chante Hobbs

Most Broad-Based Black Economic Empowerment (B-BBEE) Sector Codes have been amended and are currently in effect. There is a great need for businesses to become B-BBEE compliant. In order to do these many companies are considering restructuring to assist with compliance, but if this is not done properly the process could actually cause more harm than good.

When considering different restructuring options it is important to steer clear of any practice that could be seen as a fronting practice as defined in the B-BBEE Amendment Act 2013 (BEE Act). The BEE Act defines a fronting practice as a transaction, arrangement or other act or conduct that is aimed at either directly or indirectly circumventing the objectives or implementation of the BEE Act. The BEE Act goes further to state that the following practices amount to fronting:

  1. Where black persons who are appointed to an enterprise are discouraged or inhibited from substantially participating in the core activities of that enterprise.
  2. Practices in terms of which the economic benefits received as a result of the BEE status of an enterprise do not flow to black people in the ratio specified in the relevant legal documentation.
  3. Involving the conclusion of a legal relationship with a black person for the purpose of that enterprise achieving a certain level of BEE compliance without granting that black person the economic benefits that would reasonably be expected to be associated with the status or position held by that black person.
  4. Involving the conclusion of an agreement with another enterprise in order to achieve or enhance the BEE status in circumstances in which:
    1. there are significant limitations, whether implicit or explicit, on the identity of suppliers, service providers, clients or customers;
    2. the maintenance of business operations is reasonably considered to be improbable, having regard to the resources available;
    3. the terms and conditions were not negotiated at arm’s length and on a fair and reasonable basis.

The BEE Act criminalises fronting under Section 13O and also states that a person who misrepresents the BEE status of a company or provides false information in relation to the BEE compliance of an organisation is guilty of an offence in terms of the BEE Act.

The list is not exhaustive and as the definition for fronting is quite broad it will cover any attempt to circumvent the law. Should the BEE Commission find that a practice amounts to fronting this could result in a penalty in the form of a fine of up to 10% of the company’s annual turnover or a prison sentence of up to 10 years.

If you are contemplating restructuring within your company and you are unsure of whether your plans could amount to contravention of the act contact your legal advisor for assistance.

SEESA also provides assistance with ownership restructuring through BOSS: B-BBEE Ownership Structure Solution.

ABOUT THE AUTHOR

Khatoon Smith is an admitted attorney and obtained her LLB degree from the University of South Africa. She is currently a SEESA BEE legal advisor at our Cape Town office.

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