Understanding the definition of “51% black-owned” under the dti codes (also: Gazetting the Forest Sector Code)

The BEE Commissioner has issued a non-binding Practice Guide, the focus of which is the achievement of the coveted “51% black owned”  or “100% black owned” statuses for Qualifying Small Enterprises (QSEs) and Exempted Micro Enterprises (EMEs), which elevates such companies with an annual turnover below R50m to an automatic Level 2 or Level 1 respectively. It is the Commissioner’s view, based on what the Codes objectives are, that the Modified Flow Through Principle should not be used to achieve this status, and that companies that do use this enhanced status are fronting.

The initial high level legal view which we sought concluded that this would impact on recognition in Preferential Procurement as well as the status of being an Enterprise and Supplier Development beneficiary, because these definitions are all linked to the status of being at least 51% black owned, and that it is the “51% black ownership status” which is being attacked, not the enhanced recognition that comes with it. At the same time, the legal view is that this is not what the Code says and if the matter were challenged in court, the court would have to find that the Modified Flow Through Principle can, in fact, be used to achieve 51% black ownership, because this is how the Codes were written.

We agree with the principles put forth in the gazette however, because we find it hard to conceive that all the Procurement benefits, Enterprise Development funds and Supplier Development funds should benefit companies which in real terms are 74% white owned and where a “clever structure” has been put in place to create the achievement of the 51% black owned status without any real intention or plan to truly transform. We think this goes against the country’s objectives of developing businesses that are majority owned and managed by black people, and have noticed the plethora of activity in this space amongst SMEs. With the way that BEE transactions are often structured to prevent any real benefit flowing to black people, we would welcome a change to the law. But that is what is required: a change in the law. So that everyone is on the same page and rules are applied consistently across the industry.

The key consequences and unintended consequences of a gazette like this are as follows:

  • The individuals at companies signing affidavits do not have the BEE knowledge or understanding to determine their status accurately; we firmly believe that companies with enhanced recognition (irrespective of this gazette) should be required to obtain a BEE certificate from a SANAS accredited verification agency
  • Some of the individuals at companies signing these affidavits may have been advised otherwise but will still choose to sign them, because their businesses are at stake, and they will likely not be identified or called to task
  • Those verification agents that want to comply with the dti’s opinion will find it difficult to do so unless affidavits are accompanied by supporting documentation – something which the dti has categorically been against. This will also increase the overall cost of compliance for larger companies while smaller companies would be left with uncertainty.
  • Verification agents and the industry as a whole are going to be confused as to how to advise clients and complete verifications for large clients receiving these affidavits. Legally, it would seem that the dti is obliged to change the law, but the BEE space has often operated in a grey area of what the law says and what is done in practice. Some verification agents will be too worried about getting on the wrong side of SANAS or the dti to allow the use of the Modified Flow Through Principle and others will gladly accept paying clients to operate as the law says.

In short, this “opinion” from the dti throws the entire sector into chaos in this area, with risk-avoiders complying with the dti’s opinion and risk-takers taking advantage of the laws as written to profit from BEE.

This puts us in mind of the “changes” coming to Employee Share Schemes and Broad-based Schemes which we have been hearing about for 2 years but with no actual amendment. Perhaps it is a strategy to avoid trying to change the law and rather discourage people from perfectly legal practices which are frowned upon in some sectors but hard to change in retrospect.

Update: Gazetting of the Forest Sector Code:
The Amended Forest Sector Code was gazetted towards the end of April 2017 and came into effect from the date of publication without any transition period. There are various types of companies included in the scope of the Forest Sector Code, including growers, contractors to the sector (including firefighters), producers and manufacturers of pulp, paper, timber board etc, sawmilling, pole treatment plans and charcoal producers.
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