I think I could almost write a book on what I and my team have seen in the past four years of performing B-BBEE verification engagements for around 350 companies. One word that keeps coming back to my mind is INTENT. No matter how things are legally structured, management’s true intentions normally become clear over time, with either good or bad results.
Although B-BBEE is not something that comes naturally to most companies, the vast majority of clients we have dealt with do have good intentions. They recognise the wrongs of the past and would like to play their small part in correcting them. They therefore embrace B-BBEE in their businesses and are willing to share the benefits that result from an empowered business with those previously disadvantaged.
Having said this, they also realise that this cannot be done to the detriment of the business that generates such beneficiation. Finding a balance that meets legislation and satisfies all stakeholders often proves challenging, but I am of the opinion that doing so is indeed possible. It starts with INTENT and then doing everything within the relevant legal frameworks.
Here are two things that a qualifying small enterprise (QSE) should be aware of when planning to implement 51% black ownership:
- The sole purpose of the ‘modified flow-through principle’ (MFTP) is to enhance a measured entity’s score on two of the indicators on the ownership scorecard. In all other instances, the normal flow-through principle applies. This means that the MFTP cannot be used to achieve an automatic Level 2 status, as getting to 51% black ownership using the MFTP still leaves the company effectively far less than 51% black-owned.
- Probably realising that this would be a route that many companies would want to consider, the term ‘51% black-owned’ is clearly defined in the codes of good practice. Not only must black people hold at least 51% of the voting rights and 51% of the effective economic interest in the company, but the level of outstanding acquisition debt (if any) in the hands of the black shareholder should be at a low enough level so that if the net value formulas were to be applied, the company would score the full 8 net value points (in terms of the generic codes). This means that even if the black shareholder holds 51% unrestricted shares in the company, a too high level of outstanding acquisition debt will mean that the company is not ‘51% black-owned’ per definition. Claiming by means of a sworn affidavit that it is would be a misrepresentation of its B-BBEE status and constitute a criminal offence.
I specifically mention the above as many companies, and even many advisors, are either not aware of these provisions or are misapplying them.
As B-BBEE implementation often requires initiatives that would otherwise never even have been considered, having positive intentions definitely doesn’t come naturally for most companies. Some of the requirements simply do not make business sense and can create some negativity. It is therefore very important to try and look beyond the obvious and try and see the bigger picture. This would, among other things, mean seeing the longer term return on investment of having an empowered company that can freely operate in the South African landscape which should lead to growth. And if everyone grows, the whole economy should grow.
Author: Anton de Wet CA(SA) is Managing Director of Net Value Holdings