Loopholes set to undermine new empowerment regime

By Safiyya Patel, Webber Wentzel

South Africa’s minister of trade and industry last month unveiled the key changes contained in the draft revised broad-based black economic empowerment (BBBEE) codes. The draft codes are intended to amend the BBBEE regime which took effect in 2007.

Under the existing regime, businesses in South Africa are offered incentives to optimize their BBBEE compliance levels. The immediate potential upside for such businesses is access to government work, public-private partnerships and state assets.

Elements of compliance

BBBEE compliance levels are currently measured across seven elements: black ownership, black management, black employees, skills development of black employees, the procurement of goods and services from BBBEE-compliant suppliers, support provided to black enterprises, and socioeconomic development contributions. Despite the sophisticated rating regime and diligence of verification agents established under the BBBEE laws, critics say that too few people have benefited from BBBEE and that it has failed to transform corporate South Africa and ultimately the South African economy. Through careful and clever structuring businesses are able to achieve high compliance levels without real transformation having necessarily occurred.

Safiyya Patel Partner Webber Wentzel
Safiyya Patel
Webber Wentzel

Many companies and foreign investors have chosen to ignore what they consider the more expensive and/or risky element of BBBEE – black shareholding – and have focused on the other elements to achieve high compliance levels. Under the proposed new regime, companies may be downgraded by up to two levels if they do not have a minimum 10% black shareholding.

According to the minister, the proposed amendments aim to deal with the tick-box approach to BBBEE generally adopted by companies in South Africa and to ultimately achieve real empowerment. The amendments are also intended to align with the country’s economic trajectory so that productive black businesses are created and supported. Passive black shareholding and ownership may no longer be enough.

Voting rights

However, despite the intention to encourage active and productive black shareholding in companies, there remain loopholes which appear not to have been addressed in the draft codes. For example, the maximum overall target for black ownership is 25% plus one vote, a level that gave black shareholders the power to block the passing of special resolutions under the old Companies Act. But a new Companies Act that came into effect in 2011 allows companies to require less than 75% of the shareholder votes to pass a special resolution provided that 10% more votes are required than for an ordinary resolution.

The lowest percentage required for an ordinary resolution is more than 50%. This means that a company could determine that more than 60% of shareholders’ votes are required to adopt a special resolution. If BEE shareholders have 25%+1 of the voting rights, a company may claim maximum points for voting rights on the ownership element of the BEE scorecard even though the BEE shareholders would not be entitled to block a special resolution.

The potential to undermine does not stop there. Under the new Companies Act, a company can authorize different classes of shares such that each class of shares may potentially have assigned to it different voting rights in respect of different categories of matters. So, for example, a class of shares issued to BEE shareholders could potentially be assigned 25%+1 of the total voting rights in respect of most matters, but 15% in some excluded specified matters and only 10% in a few crucial matters.

Codes silent

The BEE codes do not deal with schemes likely to be devised for BEE transactions under the new Companies Act and the draft codes have not addressed this issue either. More disconcerting is that these schemes would be up for evaluation by BEE verification agencies, many of whose employees are not lawyers or have no or little understanding of the companies legislation.

Another proposed amendment is that the number of elements of the generic scorecard will be reduced from seven to five. The total score across all the elements will rise from 100 to 105 points. Enterprise and supplier development will count for the most points (40) and ownership will count for 25.

Another key shift from the existing regime is that the thresholds for exempted micro-enterprises and qualifying small enterprises have been increased substantially. Entities with a turnover of less than 10 million rand (US$1.1 million) will now qualify as exempted micro-enterprises and enterprises with a turnover of 10 million-50 million rand will qualify as small enterprises. Exempted micro-enterprises that are 100% black-owned will automatically qualify as level one BBBEE contributors. If they are more than 50% black-owned, they will automatically qualify as level two contributors.

Safiyya Patel is a partner at Webber Wentzel. Webber Wentzel is one of the leading corporate law firms in Africa and the South African member of ALN, an established group of Africa’s 12 foremost law firms.


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