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BEE Guidelines on Complex Structures & Transactions, and Fronting

The BEE Commission published a summary document combining the key topics surrounding Broad-Based Black Economic Empowerment (B-BBEE) and its implementation for Complex Structures and Transactions, and Fronting.

The Guide is published in two sections.

Section A: Complex Structures & Transactions
Section B: Fronting

This article will deal with Section A only. A second article will deal with Section B.

SECTION A: COMPLEX STRUCTURES & TRANSACTIONS

The organisational structures of businesses are not always simple. Some entities have complex structures involving holding companies, subsidiaries, and associate companies. Some entities may be involved in joint
ventures. This document provides entities with guiding principles for the measurement of these complex structures and, in addition, seeks to address the following issues:

• Claiming recognition of B-BBEE transaction at different levels within a group structure.
• Sharing of administrative and infrastructure costs amongst different subsidiaries and divisions.
• Subsidiaries and divisions of companies operating in different sectors.

This guide uses the term ‘complex structures’ as a collective term, which includes group structures, divisional structures, related enterprises, and unincorporated joint ventures.

Overview & Objectives

• Provides guidelines on how complex structures and transactions should be measured, specifically with respect to the measurement of group structures, divisional structures, related enterprises, and unincorporated joint ventures.
• To ensure that B-BBEE contributions across complex structures are justly measured by preventing inaccurate recognition.
• To allow for consolidated contributions to elements such as enterprise development and socio-economic development.
• To give subsidiaries and divisions operating in different sectors of the economy to their holding company guidance on how to determine their score on the B-BBEE scorecard.

Key measurement principles
The underlying objective of this section is to provide complex structures with the flexibility to choose between two types of B-BBEE scorecards. The two types of B-BBEE scorecards are as follows:

  • Measured Entity level B-BBEE scorecard

It is issued for one entity or part thereof only (e.g. a division in a divisional structure or a subsidiary in a group structure), without measuring any contributions by another entity or part-entity within the group/divisional structure that may be performed at a central location within the structure.

  • Consolidated B-BBEE scorecard

A consolidated B-BBEE scorecard includes the measurement of contributions across more than one entity within a group/divisional structure.

During the tendering process where subsidiaries are the ones tendering for a contract, the procurement officers may require that the tendering subsidiary provide its own B-BBEE scorecard as opposed to a group consolidated attribution B-BBEE scorecard. In these instances, this document provides guidelines on how various contributions to B-BBEE within the group structure can be attributed to the subsidiary company tendering for the contract.

There may be instances where subsidiaries within a group fall within a sector that has a Sector Charter gazetted as a Sector Code under the B-BBEE Act. In these instances, a subsidiary is expected to comply with its sector code, especially as it competes with companies in its unique sector.

The subsidiary would also have the ability to attribute contributions within the group structure to its own B-BBEE contributions, provided there is a reasonable method for such attribution.

B-BBEE Scorecard Options for Group Structures

Companies forming part of a group structure may obtain:

  1. One consolidated B-BBEE scorecard for the holding company and its subsidiaries; or
  2. Measured entity-level B-BBEE scorecards for the holding company and each of its subsidiaries.

Conditions applicable to consolidated B-BBEE scorecards for group structures.

  1. The B-BBEE scorecard must list the names of the holding company as well as all subsidiaries to which the B-BBEE scorecard pertains to;
  2. Ownership score: only the holding company’s B-BBEE ownership contributions count as measured in accordance with statements 100 or 103 as well as points arising from the sale of equity instruments in its subsidiaries in accordance with Statement 102.
  3. Management control score (board only): only black members on the board of the holding company can count towards the score for Black Board participation.
  4. Management control/ employment equity score (top management and owner-managers only): calculation of the score for these aspects must measure black representation in the holding company as well as all measured subsidiaries.
  5. Skills development score: calculation of the score for this element must measure skills spent by the holding company as well as all measured subsidiaries.
  6. Enterprise development score: calculation of the score for this element must measure enterprise development spend by the holding company as well as all measured subsidiaries.
  7. Socio-economic development score: calculation of the score for this element must measure socio-economic development spent by the holding company as well as all measured subsidiaries.
  8. Preferential Procurement score: calculation of the score for this element must measure procurement spend by the holding company as well as all measured subsidiaries. Note that intra-group procurement in group structures cannot be counted as B-BBEE procurement.

Conditions applicable to Measured Entity Level BEE scorecards for group structures

Only the compliance levels or contributions of the Measured Entity in question may count towards the overall score of the Measured Entity B-BBEE Scorecard Options for Divisional Structures.

Companies forming part of a divisional structure may obtain:

  1. One B-BBEE scorecard for the entire divisional structure in question with its divisions; or
  2. A B-BBEE scorecard for one or more of the divisions or business units in the divisional structure.

Conditions applicable to Measured Entity Level B-BBEE scorecards for Group Structures

  1. The B-BBEE scorecard must list the details of the divisional structure and the company to which the division/ business unit belongs;
  2. Ownership score: only the B-BBEE ownership contributions of the company to which the measured division/ business unit belongs count for measurement purposes. Contributions that count are those measured in accordance with Statements 100 or 103 as well as points arising from the sale of equity instruments in its subsidiaries in accordance with Statement 102.
  3. Management control score (board only): only Black members on the board of the company to which the measured division/ business unit belongs can count towards the score for Black Board participation.
  4. Management control/ employment equity score (top management and owner-managers only): calculation of the score for these aspects must measure black representation in the measured division/ business unit only.
  5. Skills development score: calculation of the score for this element must measure skills spent by the measured division/ business unit only.
  6. Enterprise development score: calculation of the score for this element must measure enterprise development spend by the measured division/ business unit only.
  7. Socio-economic development score: calculation of the score for this element must measure socio-economic development spend by the measured division/ business unit only.
  8. Preferential Procurement score: calculation of the score for this element must measure procurement spent by the measured division/ business unit only. Note that incomes to an entity level B-BBEE scorecards for divisions, and intra-group procurement with the enterprise to which the division or business unit belongs is measurable as per Statement 500.

Exempted Small & Micro Enterprises and Qualifying Small Enterprises that are Related Enterprises

The following applies to exempted small and micro enterprises that are related:

o They MUST obtain either a consolidated B-BBEE scorecard as if they were a group structure or individual B-BBEE scorecards for each related enterprise if their combined turnover exceeds R5 million per annum.
o If their combined turnover is less than R5 million per annum, they can remain exempted from obtaining a B-BBEE scorecard.

Related Enterprises that are Qualifying Small Enterprises

o If their combined turnover exceeds R35 million per annum, they MUST obtain either a consolidated B-BBEE scorecard as if they were a group structure or individual B-BBEE scorecards for each related enterprise;
o If their combined turnover is less than R35 million per annum, they can comply only with the requirements of the Qualifying Small Enterprises scorecard in their individual capacity.

Unincorporated Joint Ventures

Unincorporated joint ventures may obtain a consolidated B-BBEE scorecard as if they were a group structure, provided that such a consolidated B-BBEE scorecard is prepared for every separate venture.

Transfer of B-BBEE compliance data on B-BBEE scorecards

o The following types of B-BBEE initiatives attach to the underlying assets of the initiating entity:

1.  Historical contributions under Code series 600 and 700; and 
2.  Historical contributions arising from Statement 102.

o Where a measured entity concludes any good faith transaction transferring ownership of all or part of its underlying assets, the measured entity may transfer the benefit of those historical contributions to the new ownership of those assets.

A written agreement recording the transaction must record:

o The details of contributions transferred on a contribution-by-contribution basis;
o The division between the parties if relevant; and
o Such transfer can only take place once.

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