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Going with the flow

Going with the flow

The objective of the Broad-Based Black Economic Empowerment (B-BBEE) legislation is to advance the economic transformation of South Africa. Accordingly, the Ownership element on the B-BBEE scorecard is a Priority Element – at least 40% of the Net Value target needs to be achieved in order not to be automatically discounted a level.

BEE affidavits for small businesses

A business entity with 51% or more black ownership and with a turnover of less than R50 million will qualify for an automatic level four affidavit. Should an entity have 100% black ownership with a turnover of less than R50 million they will be able to obtain a level 1 affidavit. The Minister of Trade and Industry has further given a directive which allows such entities (as well as any entity with a turnover below R10 million) to simply use a B-BBEE affidavit as their B-BBEE certification, relieving them from the costs involved with a verification process.

Black ownership – the reality

There are various equity principles and special-purpose vehicles available for businesses to obtain black ownership.

One of these vehicles is a B-BBEE Trust. The B-BBEE Trust is a broad-based ownership scheme and can take the form of the Broad-based Ownership Scheme* or an Employee Share Ownership Program.

*Businesses need to ensure that all the necessary requirements are met by the Trust before any Ownership points will be allocated.

Another form in which a business entity can obtain black ownership is via the flow-through and modified flow-through principle.

The flow-through principle allows, in a multi-tiered chain of ownership structure, for black ownership to flow through from one juristic person to another. This entails multiplying the percentage of black people’s rights of ownership in the juristic persons through which those rights pass, by the percentage rights of ownership of each of those juristic persons successively to the measured entity.

The modified flow-through principle then allows for one such juristic person in the chain of ownership structure with at least 51% black ownership, to be deemed to be 100% black owned.

A new train of thought naturally occurred where business entities attempt to obtain the automatic level 1 or 2 BEE certification/affidavit by applying the modified flow-through principle.

However, the B-BBEE Commission published a Practice Guide stating that the modified flow-through principle must not be applied to circumvent the policy objectives. It is their directive that the modified flow-through principle cannot be used to benefit from the enhanced recognition status reserved for 51% and 100% black owned Exempted Micro Enterprises (EMEs, with a turnover below R10 million) and Qualifying Small Enterprises (QSEs, with a turnover below R50 million).

“Any contrary advice would be regarded as a misrepresentation of Entity B’s B-BBEE status which is an offence in terms of Section 13(1) (a) of the [BEE] Act.

“If an entity is found to have violated the Act, an entity could be fined up to 10% of its annual turnover, and individuals involved could be imprisoned for up to 10 years and/or fined. Specifically, an offence under Section 130(2) could lead to imprisonment of up to 12 months, or a fine, or both.”

While some are of the opinion that this Practice Guide can be ignored due to it not being in the BEE Act itself, the B-BBEE Commission also noted that:

“In terms of Section 13F(1)(d) read with Section 13J of the Act, the B-BBEE Commission has the power to investigate, either on its own initiative or in response to a complaint received, any matter concerning B-BBEE.”

Businesses are advised to consult with a BEE legal advisor prior to amending their ownership structure, in order avoid incurring costs and then not receiving recognition for black ownership on the B-BBEE scorecard.

 

ABOUT THE AUTHOR

Juané Mari Zeelie is an admitted attorney and obtained her LLB degree from the University of Stellenbosch. She is currently a legal advisor for SEESA BEE at the Cape Town office.

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