IS DAM­AG­ING

This se­ri­ous of­fence has eroded the pur­pose of BEE to ad­dress his­tor­i­cal in­jus­tices, writes Am­ber von Steiger

CityPress - - Business -

Clear and con­sis­tent com­mu­ni­ca­tion be­tween the par­ties to a BEE trans­ac­tion, such as one in­volv­ing em­ploy­ees, can be the sim­plest, cheap­est and most ef­fec­tive tool to en­sure that all par­ties un­der­stand their le­gal rights and obli­ga­tions in terms of their re­la­tion­ship. It can also avoid the un­nec­es­sary bur­dens of an un­founded fronting al­le­ga­tion.

An amend­ment to the BEE Act in Jan­uary 2014 made fronting a crim­i­nal of­fence. Con­victed per­sons may be sub­ject to a fine, a max­i­mum of 10 years’ im­pris­on­ment and pos­si­ble pro­hi­bi­tion from trans­act­ing any busi­ness with any or­gan of state or pub­lic en­tity.

Fronting is a se­ri­ous of­fence and has eroded the pur­pose of BEE to ad­dress his­tor­i­cal in­jus­tices and pro­mote the em­pow­er­ment of black South Africans.

It can take many dif­fer­ent forms and was his­tor­i­cally de­vel­oped as a prac­ti­cal con­cept un­til a def­i­ni­tion was in­tro­duced in the Broad-Based BEE Amend­ment Act of 2013.

Fronting is a trans­ac­tion ar­range­ment or other act or con­duct that di­rectly or indi­rectly un­der­mines or frus­trates the achieve­ments of the ob­jec­tives of the BEE Act or the im­ple­men­ta­tion of any of its ini­tia­tives. Es­sen­tially, it equates to us­ing BEE codes for ben­e­fits one would oth­er­wise not be en­ti­tled to.

At this year’s Trans­for­ma­tion Fo­rum, the BEE Com­mis­sion ad­vised that 85% of the com­plaints it had re­ceived re­lated to fronting con­cerns.

But, as in all in­ves­ti­ga­tion pro­ce­dures, some com­plaints were valid and some al­le­ga­tions were un­founded.

Un­founded al­le­ga­tions, al­though not nec­es­sar­ily vex­a­tious in their in­tent, of­ten arise ow­ing to a mis­un­der­stand­ing by the ac­cuser as to the ac­tions or in­ac­tions that could con­sti­tute fronting, such as the com­mer­cial de­tails of a trans­ac­tion or the ac­cuser’s le­gal po­si­tion or fronting it­self.

Un­founded ac­cu­sa­tions (whether in­ten­tional or not) are harm­ful to both the ac­cuser and the ac­cused.

The sim­plest and most ef­fec­tive tool to min­imise the risk of un­founded fronting al­le­ga­tions is clear and con­sis­tent com­mu­ni­ca­tion be­tween the par­ties in a busi­ness re­la­tion­ship.

It is es­pe­cially im­por­tant when the par­ties hold dif­fer­ent views re­gard­ing the le­gal ar­range­ments gov­ern­ing the re­la­tion­ship.

Clar­ity around em­ployee-share-own­er­ship schemes is es­sen­tial.

A com­mon ex­am­ple of when com­mu­ni­ca­tion is im­por­tant is when em­ployee-share-own­er­ship schemes are in­tro­duced into a com­pany’s share­hold­ing.

In the build-up to in­tro­duc­ing such a scheme, man­age­ment of­ten makes sweep­ing state­ments to cre­ate ex­cite­ment among em­ploy­ees, such as that “em­ploy­ees will own shares in the com­pany and share in the com­pany’s profit”.

These state­ments of­ten do not re­flect all of the de­tails of the struc­ture, the fund­ing ar­range­ments that es­tab­lish the struc­ture and the rules gov­ern­ing the in­tended em­ployee scheme.

There­fore, if em­ploy­ees’ un­der­stand­ing is based on these high-level state­ments, their un­der­stand­ing of their le­gal re­la­tion­ship with the cor­po­rate ve­hi­cle, the com­pany and the con­se­quen­tial rights that they are en­ti­tled to may be in­cor­rect.

For ex­am­ple, when any prof­its are de­clared to the com­pany’s share­hold­ers, em­ploy­ees’ ex­pec­ta­tions of the amount of profit they will re­ceive is not in line with the agreed com­mer­cial ar­range­ments. These may re­quire the fi­nan­cial ve­hi­cle hous­ing the em­ployee scheme to first re­pay the fund­ing in­curred in ac­quir­ing the un­der­ly­ing shares, or to wait for vest­ing dates or mile­stones to be reached.

Main­tain­ing the re­la­tion­ship be­tween BEE part­ners – es­pe­cially one as im­por­tant as be­tween a com­pany, its share­hold­ers and its em­ploy­ees – is crit­i­cal to the con­tin­ued suc­cess of the busi­ness.

De­te­ri­o­ra­tion of this re­la­tion­ship could cre­ate sig­nif­i­cant ad­min­is­tra­tive, op­er­a­tional and fi­nan­cial bur­dens for it – all of which could have been avoided or mit­i­gated by en­sur­ing that the com­mu­ni­ca­tion with em­ploy­ees was ac­cu­rate, clear and con­sis­tent within the de­fined le­gal struc­ture and

ar­range­ments from the on­set.

THE CON­SE­QUENCES OF FRONTING AL­LE­GA­TIONS

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