B-BBEE – New Drafts for Comment – How Will They Affect Me (Code 000)
On the 29th March 2018, the DTI issued two new draft codes for comment by the Public for the next 60 days. Traditionally, after comment, these drafts on the Codes are gazetted in a substantially similar form as they are released. The first is the Amendment to Code 000 specifically relating to Ownership and ownership recognition, and the second is the Amendment to Code 300 specifically in relation to Skills Development under B-BBEE.
If these Amendments are gazetted in their current form or a form substantially similar they will affect how Companies spend their Skills Development money under B-BBEE, and how B-BBEE ownership deals are structured in the future.
Amendment to Code 000
Under the proposed amendments:
Unincorporated Joint Ventures
Unincorporated Joint Ventures will be required to compile a consolidated verification certificate. A consolidated verification certificate will consolidate the verified compliance data of joint venture partners as if those Measured Entities were a single Measured Entity.
The consolidation of compliance data shall be based on a weighting in accordance with the joint venture agreement relevant to the specific joint venture. Therefore, should two companies enter into an Unincorporated Joint Venture their respective scores in terms of the relevant Code of Good Practice will be weighted according to their proportionate share in the joint venture and added together for a combined score out of 100.
Further the JV B-BBEE Certificate is valid for 12 Months and only applicable to a specific Project - the consequence of this amendment is that a Joint Venture will have to obtain a JV B-BBEE for each project it undertakes.
Further the Amendment seeks to clarify the position on Exempted Micro Enterprises (EME) those with a turnover below R10m per year and Qualifying Small Enterprises (QSE) those with a turnover between R10m and R50m per year:
The Amendment is clear - recognition for either 51% or more black ownership in EME’s and QSE’s will be measured using the flow-through principle and not the modified flow through principle – the consequence of this amendment is that in EME’s and QSE’s where black ownership is held in a Holding Company may not, depending on the black shareholding in the Holding Company, be able to claim this recognition.
The Amendment further makes it clear that EME’s and QSE’s irrespective of their black ownership are allowed to be measured in terms of the QSE scorecard should they wish to.
The most interesting amendment relates to the Enhanced B-BBEE Recognition Level for Generic Enterprises, turnover above R50m per year, which states that:
a Generic Enterprise which is 100% Black owned, measured using the flow-through principle only, qualifies for elevation to a “B-BBEE Level One Contributor” having a B-BBEE recognition level of 135%; and
a Generic Enterprise which is at least 51% Black owned, measured using the flow-through principle only, qualifies for elevation to a “B-BBEE Level Two Contributor” having a B-BBEE recognition level of 125%
A Generic Enterprise that meets the provisions is only required to obtain a B-BBEE Verification Certificate verifying the element of Ownership
This is an interesting amendment, it appears that some big businesses due to their ownership will no longer be required to upskill their staff or empower their communities or develop and continue a culture of transformation within their companies. We found this a surprising amendment. While we believe that transformation should be the responsibility of all business, this should specifically lie with those in the Generic space, as this is where more often the resources and capabilities lie to affect transformation effectively on a relatively wide scale.
Further unless the Sector Codes follow suit very quickly, this puts the companies in those sectors at a distinct disadvantage as irrespective of their ownership structure they would still be required to meet the somewhat onerous task of the Generic Scorecards in their sector.
The amendment further states that:
Generic Enterprises cannot benefit from the enhanced B-BBEE Recognition Level if one or more of the following is utilised or recognized in the calculation of Black Ownership:
The Modified Flow Through Principle;
The Exclusion Principle;
The B-BBEE Facilitator Status;
Private Equity Funds;
The Exclusion of Mandated Investments;
Sale of Assets, Equity Instruments, and Other Businesses;
Ownership After the Sale or Loss of Shares by Black Participants
While Trusts, Broad-Based Ownership Schemes and Employee Ownership Schemes have come under fire and have been highly criticized by the BEE Commission in the recent past, it is interesting to note that in both the clarification points and enhanced recognition amendments, there has been no clarification, limitation or exclusion of these types of ownership structures. One can only assume that unless there are further amendments or changes to be released for comment, these indirect ownership structures are an accepted and valid form of ownership under the Codes.
The final amendment released under Code 000 incorporates the Youth Employment Scheme (YES) into the Codes. We welcome this inclusion and note that compliance with YES will allow enhanced B-BBEE recognition, encouraging business to upskill and employ South African Youth.
For any queries regarding a B-BBEE Strategy including ownership structuring and skills development plans contact Oriole on 011 346 2422 or firstname.lastname@example.org