Businesses need to plan meticulously to meet new BEE codes

THE new black economic empowerment (BEE) codes are making significant inroads in the quest to transform the economy. With higher overall targets and the prioritisation of certain fundamental elements, these new codes are regarded as the “sharpening of transformation tools” by policy makers. However, in equally fundamental ways, they are creating complex and onerous hurdles for business owners.

Skills development, for example, requires proper planning, as the amounts to be spent are much higher than they were in the old BEE codes and the training of unemployed black people across the demographic and gender spread of African, coloured, and Indian is an alien concept for many businesses and shareholders.

The shareholders of foreignowned companies, in particular, find the rationale behind approving huge sums of money to train nonemployees difficult to comprehend, even more so within the current economic environment in which everyone is attempting to cut costs, protect bottom lines, and safeguard reserves.

The ownership element is creating turmoil, and it is imperative that business owners look further than the requirements of the BEE codes when deciding on an appropriate ownership structure.

Various entities are required to have either a target of 26% black ownership or shareholding, or a preferential consideration of 51% black ownership or shareholding over and above the level of compliance they achieve on the empowerment scorecard.

The new codes provide for automatic level 1 recognition for 100% black-owned entities with an annual turnover of less than R50m, and an automatic level 2 for the same category of businesses with 51% black ownership.

Two industry bodies decided on a sector charter for faster transformation, which the government has approved and published as law. In terms of their charter, the information, communications and technology industry is subject to a black ownership target of 30%, while the new marketing, advertising, and communications charter sets a black ownership target of 40% for the first two years. After March 2018, this target will increase to 45%.

BUSINESSES

cannot take into account only the targets and BEE codes; they are often forced to prepare for 51% black ownership by virtue of the mechanisms of the BEE regime, when clients might insist on 51% or more.

Businesses are, therefore, advised to establish to who they supply or plan to supply in future and determine the ownership requirement set by these clients.

Suppliers to the government and state-owned enterprises should take note of the proposed BEE regulation published on February 17 in the Government Gazette, which stipulates that the government would give more consideration to 51% black-owned or black womenowned entities, as well as ownership by broad-based designated groups when issuing licences and concessions and procuring and selling assets. The draft preferential procurement regulations of 2015 set similar requirements, which should be noted by businesses supplying goods or services to the government. Preference will be given to employee or community trusts, or other similar programmes.

The BEE codes provide for three additional points for the ownership element when using broad-based collective ownership programmes.

Mineral Resources Minister Mosebenzi Zwane says the new mining charter emphasises using these broad-based structures for the mining industry.

Businesses supplying to larger corporations should also note that they prefer buying from 51% blackowned or black women-owned entities to bolster their scorecards. Not only could the percentage black ownership, therefore, be much higher than 26%, but supplying to mines and petroleum companies may necessitate a specific ownership model, such as an employee or community beneficiary programme.

Businesses have to fall in with the needs of their clients. This requires meticulous planning should they have different or conflicting BEE requirements. Some companies opt for direct shareholding and others for indirect shareholding, such as collective and other broadbased programmes, although a combination of the two is popular.

A combination of direct and indirect shareholding is required for the mining industry or those supplying to the mining industry.

FOR

close corporations, the ownership or shareholder options are more limited, but they can be overcome, and there is no need to convert into private companies.

Apart from deciding on the right percentage shareholding and type of ownership model, the programme must be housed in an appropriate structure, such as a trust, nonprofit company, nonincorporated structure, private company or so-called special-purpose vehicle.

The appropriate structure is normally selected with consideration for the tax implications. For example, dividends declared by one company for another would be taxfree, but dividends distributed to a trust or natural person would attract a 15% withholding tax.

To ensure the success of an ownership structure, consider the percentage shareholding; the type of shareholding — whether it is direct, indirect, or a combination of the two; and form an appropriate indirect shareholding structure, such as a trust or nonprofit company.

Take into account the legal considerations, viability, tax implications, and the flexibility — the lifespan of the programme and lock-in and op-out options.

Gerber is an attorney and the founder and Director of Serr Synergy, specialising in BEE structuring and compliance.

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