BEE laws play catch-up

Adam Ismail of law firm ENS said a law had to be enacted to govern empowerment deals. (supplied)

Adam Ismail of law firm ENS said a law had to be enacted to govern empowerment deals. (supplied)

There can be no discussion about economic transformation without examination of the legal framework put in place by the government expressly to open the way for greater participation of marginalized sectors of South African society.

The Employment Equity Act of 1998, amended in 2013, has probably been the most controversial legislation.

It has faced numerous legal challenges, but it’s the Broad-Based Black Economic Empowerment (B-BBEE) Act on which the government is basing its aspirations for growth, equal distribution of wealth and the creation of viable small and medium and macro businesses, that is presently receiving the most attention.

BEE legislation functions in conjunction not only with the Employment Equity Act but also the Skills Development Act and Preferential Procurement Framework, among others.

The B-BBEE Act and the accompanying codes have come a long way since 2004.

They have been amended to accommodate incompatibilities within industries, loopholes like fronting, and the realisation that companies could still qualify for a strong BEE rating by scoring high on some of the requirements and placing less emphasis on those seen as more onerous.

Although intended initially for companies wanting to do business with the government, B-BBEE has become the standard for what is considered sound business practice, and is now settled in the requirements of several sector codes.

Companies in the information communication technology sector, for example, are now required to comply to receive a license to operate.

Adam Ismail of law firm ENS (formerly known as Edward Nathan Sonnenbergs) said a law had to be enacted to govern empowerment deals as many companies, aware legislation was on the horizon, jumped on the bandwagon.

“Between 1994, when the African National Congress came into power, and 2004, when the Broad-Based Black Economic Empowerment Act came into effect, it was like the Wild West. A lot of deals were being made and lots of pockets were being lined.”

Ismail said legislation to deal with empowerment was essential.

“I shudder to think where South Africa would be now if we had done nothing in 2004. Or where I would be not having been given, [as a previously disadvantaged individual] an opportunity to enter the legal fraternity,” he said.

He believes there is still a long way to go to achieve the goals envisaged when the 2004 law was drafted. Many would agree.

At a two-day B-BBEE Summit in Midrand in October last year, President Jacob Zuma said the new BEE Amendment Act, which is yet to be passed, was intended to fast-track and better guide South Africa’s transformation ambitions, while encouraging equal-opportunity growth.

The black middle class had grown from 1.7-million in 2004 to 4.2-million in 2012, while?the appointment of black people and women in senior management positions in the private sector had increased from less than 10% in the 1990s to more than 40% currently, he said.

A consolidated view of the Top 100 companies on the Johannesburg Stock Exchange as of December 31, compiled for the JSE by Chandler & Associates, reveals black South Africans hold at least 21% ownership.

Of this, 9% is held directly, mostly through empowerment stakes and 12% through mandated investments such as pension funds, life insurance, unit trusts and exchange traded funds. The figures show an increase of only 10% between 2010 and 2012, however, suggesting that growth is slow.

The law governing black economic empowerment has changed substantially over the past 20 years to accommodate new challenges or close loopholes, and account for new realities.

The B-BBEE Act of 2004 was, according to Livia Dryer of law firm Bowman Gilfillan, “not a long piece of legislation that basically just set out how the minister can publish codes of practice, how it applied to the granting of licenses, granting concessions and procurement of goods and services”.

“It also sets out in broad stokes the seven requirements under which companies are scored, namely ownership, management control, employment equity, skills development, preferential procurement, enterprise development and socio-economic development.”

In February 2007, the BEE codes of good practice and a generic score card were released, and in October last year, a revised set of codes reducing the seven elements to five was published.

Dryer said there had been problems with interpretation of the new codes, which had created some uncertainty regarding compliance.

The five elements are now: ownership; management control (which now includes the previous employment equity elements); skills development; socioeconomic development and enterprise and supplier development (which now includes the previous preferential procurement requirement).

“Companies ignoring ownership, skills development, enterprise and supply development in particular, do so at their own peril,” said Ismail.

While the ownership requirement of 25% plus one vote stays the same, the requirement of skills development has moved from 3% to 6% of payroll.

“Companies need to take empowerment more seriously now — supplier and enterprise development counts for 40% of the scorecard, indicating that government is prioritising this element,” he said.

Scoring for classification was also changed. To be regarded as a Level 3 contributor, for example, the points required have increased from 75 and 85 points to between 90 and 95.

“What this scorecard does is try to get big business to act as a catalyst for small business. It tries to stimulate and encourage business by setting BEE points to get small businesses, particularly women owned businesses, up and running,” Ismail said.

Both Ismail and Dryer point out that the new codes make it essential for companies to ensure that their share deals are meaningful and offer returns to black/previously disadvantaged shareholders.

“There is a minimum threshold under the ownership element that may have an impact on BEE deals that are heavily burdened with debt, or where share price has taken a pounding. These companies could find the discounting of one BEE contributor status level applying to them,” said Ismail.

Dryer said: “This puts pressure on companies to structure their deals and ensure that shareholders who have paid for their shares get value back, perhaps through a loan from a bank.”

A year’s grace has been given for companies to comply with the new codes. This ends in October 2014.

The BEE Amendment Act signed into law on Monday January 27, and comes into effect on a date yet to be specified also takes a much harder line than earlier legislation.

For starters, it criminalises fronting, with any company found guilty being subjected to a fine not exceeding 10% of its annual turnover and an imprisonment option of up to 10 years.

The act also sets up a commission to act as an ombudsman for matters relating to the BEE Amendment Act, and includes overseeing general compliance with the new BEE Act, maintaining a registry of BEE transactions and promoting the advocacy of BEE initiatives.

The new act appears to recognise the codes of sector charters which deal with specifics to an industry, such as tourism, construction, forestry, transport, chartered accountancy, property, ICT, agriculture and the financial sector, said Dryer.

Ismail said the biggest stumbling block to BEE was that it cost companies money to comply.

“They presently pay 3% of payroll towards skills development, 3% of net profit after tax towards enterprise development, and 1% of profit after tax towards socioeconomic development. Foreign companies in particular see this as yet another tax they have to pay and can feel resentful.

“To reach the 6% growth the country wants, I believe that BEE is the answer. The drivers of the engine room are small black businesses. They need to get into entrepreneurial mode and start-ups need to establish themselves and grow. What government is trying to achieve through this legislation is to get big business to act as a catalyst for small business.”

Progress of Black Economic Empowerment legislation

• April 21 2004 Broad-Based Black Economic Empowerment Act came into effect;
• February 9 2007 BEE codes of good practice;
• December 9 2011 BEE Act Amendment Bill published for comment;
•November 23 2012 revised Bill published and updated by Parliament;
• October 5 2012 Revised BEE codes published for comment; • October 11 2013 revised BEE codes published.
• January 27 2014 BEE Amendment Act signed into law.
— Table provided by ENS

This article has been made possible by the Mail & Guardian's advertisers. Content and photographs were sourced independently by the M&G supplements editorial team, unless otherwise indicated. It forms part of a larger supplement