Unpacking the significant implications for business of the latest amendments to the BBBEE Act and Codes Of Good Practice

1. PRESENTATION ON
THE AMENDMENTS
TO THE BBBEE ACT
53 OF 2003 AND THE
CODES OF GOOD
PRACTICE ISSUED IN
TERMS OF THE
BBBEE ACT
DATE: 29 AUGUST 2014

2. INTRODUCTION
 The Broad-Based Black Economic Empowerment Act 53 of
2003 (“BBBEE Act”) provides the legislative framework for
broad-based black economic empowerment (“BBBEE”) in
South Africa. The “Generic” Codes of Good Practice
(“Codes”) and Sector Codes are issued under the BBBEE
Act.
 Significant amendments to the BBBEE Act have been
proposed and were passed into law on 27 January 2014,
however the effective date of the amendments has not yet
been fixed.
 Amendments to the Codes were published on 11 October
2013 and will take effect from 1 May 2015. After 1 May
2015 BBBEE compliance measurement will be in
accordance with the Amended Codes or any applicable
Sector Code.
 Firms have a transitional period within which to review and
change their BBBEE strategies to take account of the
amendments to the Codes.
2

3. INTRODUCTION (cont’d)
 The BBBEE Act and Codes do not impose legally binding
obligations on firms to comply with BBBEE targets.
 They merely set out the methodology to be used when
measuring a firm’s BBBEE status.
 Fundamental principle for measuring BBBEE – substance
takes precedence over legal form.
 However a firm’s BBBEE rating is an important
consideration to successfully tender for Government or
public entity contracts, obtain certain licences (eg
mining and gambling) and public private partnerships.
Private sector firms try and score BBBEE procurement
points from their suppliers.
 BBBEE is accordingly an important factor to be taken
into account by any firm conducting business in South
Africa.
3

4. KEY AMENDMENTS TO THE BBBEE ACT
 Establishes a BBBEE Commission
Functions of the BBBEE Commission include, inter
alia, to:
oversee and supervise compliance with BBBEE;
receive and investigate complaints relating to
BBBEE, BBBEE transactions and “fronting
practices”;
apply to court to restrain a breach of the BBBEE
Act and/or a “fronting practice”;
maintain a register of BBBEE transactions above
a certain threshold.
4

5. KEY AMENDMENTS TO THE BBBEE ACT (CONT’D)
If the Commission believes that any matter it has
investigated involves the commission of a criminal
offence, it is obliged to refer the matter to the NPA
or an appropriate division of SAPS.
 Defines terms: “Knowingly”, “knowing” or “knows”
When used in the BBBEE Act, such terms mean that
the person (a) had actual knowledge; (b) was in a
position in which the person reasonably ought to
have (i) had actual knowledge; or (ii) investigated
the matter or taken other measures that would have
provided the person with actual knowledge.
5

6. KEY AMENDMENTS TO THE BBBEE ACT (cont’d)
 Defines term “Fronting Practice”
 "Fronting Practice" is very widely defined – a transaction,
arrangement or other act or conduct that directly or
indirectly undermines or frustrates the achievement of the
objectives of the BBBEE Act or the implementation of any
provision of the BBBEE Act including but not limited to
practices in connection with a B-BBEE initiative –
in terms of which black persons who are appointed to an
enterprise are discouraged or inhibited from substantially
participating in the core activities of that enterprise;
in terms of which the economic benefits received as a result of
the broad-based black economic empowerment status of an
enterprise do not flow to black people in the ratio specified in
the relevant legal documentation;
6

7. KEY AMENDMENTS TO THE BBBEE ACT (cont’d)
involving the conclusion of a legal relationship with a black
person for the purpose of that enterprise achieving a certain
level of broad-based black economic empowerment
compliance without granting that black person the economic
benefits that would reasonably be expected to be associated
with the status or position held by that black person; or
involving the conclusion of an agreement with another
enterprise in order to achieve or enhance broad-based black
economic empowerment status in circumstances in which –
 there are significant limitations, whether implicit or explicit, on the
identity of suppliers, service providers, clients or customers;
 the maintenance of business operations is reasonably considered
to be improbable, having regard to the resources available;
 the terms and conditions were not negotiated at arm’s length and
on a fair and reasonable basis.
7

8. KEY AMENDMENTS TO THE BBBEE ACT (cont’d)
 Introduces various criminal offences and penalties
 Introduce criminal offences for knowingly misrepresenting
or providing false information regarding a firm’s BBBEE
status or engaging in a “fronting practice”.
 A contravention may result in:
a fine and/or up to 10 years’ imprisonment for individuals or
both; and
a firm may be fined up to 10% of its annual turnover;
any person convicted of an offence is banned from contracting
with any organ of state and/or public entity for 10 years.
 Introduces a right to cancel any contract/authorisation
 Introduce a statutory right for government and public
entities to cancel any contract or “authorisation” awarded
due to false information on BBBEE status.
8

9. KEY AMENDMENTS TO THE BBBEE ACT (cont’d)
 Imposes reporting obligations
Imposes an absolute obligation on government, organs of
state and public entities to:
take the Codes into account in developing their procurement
policies and criteria for issuing licences and authorisations and
for entering into public private partnerships (previously they
were only obliged to do so “as far as reasonably possible”).
The Minister may however grant an exemption;
report on BBBEE in their audited financial statements and
annual reports required under the PFMA.
Imposes an obligation on South African listed entities to
provide a report to the BBBEE Commission on their
compliance with BBBEE.
9

10. SIGNIFICANT
AMENDMENTS TO
THE CODES
10

11. CHANGES TO NUMBER OF BBBEE POINTS
REQUIRED TO ACHIEVE BBBEE LEVELS
BBBEE Level Amended Codes Current Codes
1 > 100 points > 100
2 > 95 but < 100
points
> 85 but < 100
3 > 90 but < 95 points > 75 but < 85
4 > 80 but < 90 points > 65 but < 75
5 > 75 but < 80 points > 55 but < 65
6 > 70 but < 75 points > 45 but < 55
7 > 55 but < 70 points > 40 but < 45
8 > 40 but < 55 points > 30 but < 40
Non-compliance < 40 points < 30
11

12. CHANGES TO NUMBER OF BBBEE ELEMENTS
 Current Codes have 7 elements that are taken into
account when calculating a firm’s BBBEE rating.
Amendments reduce the number of elements to five by
fusing enterprise development/preferential procurement
and management control/employment equity elements.
The new elements are:
Ownership
Management Control
Skills Development
Enterprise and Supplier Development
Socio Economic Development.
 Changes are set out in the following table.
12

13. CHANGES TO NUMBER OF BBBEE ELEMENTS
(cont’d)
Element Weighting Points
(Amended
Codes)
Weighting Points (Current
Codes)
Ownership 25 20 plus 3 bonus points
Management
15 plus 4 bonus
control
points
Management control - 10 plus
one bonus point
Employment equity – 15 plus
three bonus points
Skills
development
20 plus five bonus
points
Skills development – 15
Enterprise and
supplier
development
40 plus four bonus
points
Preferential procurement – 20
Enterprise development – 15
Socio-economic
development
5 5
Total 118 107
13

14. PRIORITY ELEMENTS AND MINIMUM
REQUIREMENTS OF PRIORITY ELEMENTS
 Changes indicate greater emphasis on three “priority
elements” namely: ownership, skills development and
enterprise/supplier development.
 Amendments impose minimum requirements on priority
elements:
 40% of the “net value” targets for the ownership element.
“Net value” measures the “debt free” portion of the BBBEE
ownership of a firm;
40% of the total weighting points for the skills
development element;
40% of the targets for the three subcategories of the
enterprise and supplier development element.
14

15. EFFECT OF FAILURE TO MEET MINIMUM
REQUIREMENTS OF PRIORITY ELEMENTS
 A Large Enterprise is required to be measured with regard to all
three priority elements.
 Large Enterprises presumably firms with total income greater
than R50m.
 A Qualifying Small Enterprise (QSE) is required to be measured
with regard to ownership as a compulsory element and either one
of skills development or enterprise and supplier development.
 QSEs are firms with total annual income between R10m and
R50m (previously it was between R5m and 10m).
 If a QSE or a Large Enterprise fails to comply with the 40%
minimum targets of any of the priority elements, their BBBEE
status will automatically be downgraded by 1 level eg. if its score
would have otherwise been a level 4 it will be downgraded to a
level 5.
 Existing BBBEE transactions will have to be reviewed to assess
the likelihood and effect of the downgrade.
15

16. MEASUREMENT OF QSEs and EMEs
 Exempted Micro-Enterprises (EMEs) are deemed to have
a level 4 rating and “start up” enterprises are measured
as EMEs. All shelf companies are start ups and have a
level 4 rating in the first year of incorporation or
formation.
 Ownership changes in relation to EMEs and QSEs:
 Threshold for qualifying as an EME has been increased
from R5m (or less) to R10m or less total annual income;
Threshold for being a Qualifying Small Enterprise has been
increased to between R10m and R50m total annual income
(from between R5m to R35m under the current Codes);
EME and QSEs that are 100% black owned will be deemed
to have a level 1 BBBEE status;
EMEs and QSEs that are 51% black owned will be deemed
to have a level 2 BBBEE status.
16

17. CHANGES TO THE CURRENT METHODOLOGY OF
CALCULATING OWNERSHIP
 Current Codes provide for one BBBEE ownership point (and
a 2.5% compliance target to earn that point) for an
economic interest in a firm held by “black-designated
groups”, employee share schemes and broad based
ownership schemes.
 The revised Codes scrap the bonus points but increase the
number of BBBEE ownership points to 3 with a 3% target.
This provides an incentive for firms to consider these
“broad-based” options.
 Under the revised Codes:
 two BBBEE ownership points (with a 2% compliance target)
have been allocated to the economic interest of “black new
entrants” in the firm;
 the definition of “Black New Entrant” has also been widened to
cover BBBEE owners who have not held equity in another firm
with a total value of R50m (R20m under the current Codes).
These changes widen the pool of new entrants and incentivise
firms to use new entrants in their BBBEE ownership transactions.
17

18. CHANGES TO THE CURRENT METHODOLOGY OF
CALCULATING ENTERPRISE/SUPPLIER
DEVELOPMENT
 The revised Codes introduce the concept of an “Empowering
Supplier” under the preferential procurement subcategory of the
enterprise and supplier development element.
 The requirements for an “Empowering Supplier” are unduly
complicated and include:
 being a “BBBEE compliant entity” and a “good citizen”,
 complying with “all regulatory requirements” and meeting at least
three (or for QSEs, one) of certain local procurement, job creation, raw
material transformation/beneficiation and skills transfer requirements.
 No preferential procurement points will be obtained if a supplier
does not comply with the above requirements.
 Ironically these changes will prejudice black-owned and controlled
firms that do not comply with the requirements for “Empowering
Suppliers”
 A firm’s BBBEE status will be automatically downgraded by one
level if it fails to meet the minimum 40% target for supplier and
enterprise development (even if the firm has made genuine
efforts to comply).
18

19. THE IMPORTANCE OF SECTOR CODES
 The BBBEE Act allows a sector of the economy to have its
own BBBEE code.
 The current Codes provide that a sector code has equal
status with any other code. This has led to confusion as to
whether a firm’s BBBEE status should be measured under
the sector code or the “generic” Codes.
 The Amendments (as well as the pending amendments to
the BBBEE Act) resolve this by providing that the BBBEE
status of a firm in a sector may only be measured in
accordance with the sector code for that sector (if any).
 It remains to be seen whether the existing (and future)
sector codes may be less onerous than the amended Codes
and whether Government will take steps to align the sector
codes with the revised generic Codes. DTI expects sector
codes to be updated but devil is in the detail and will this
be done by 1 May 2015?
19

20. THE IMPORTANCE OF SECTOR CODES (cont’d)
 Reliance on sector codes may (to the extent that they
are less onerous) mitigate the effects of the
Amendments.
 However firms operating in sectors whether there is no
sector code will be measured according to the
Amendments (and may be incentivised to develop a
sector code).
20

21. CONCLUSION
 The amendments to the Codes and the BBBEE Act
fundamentally change the current BBBEE framework
and are a powerful expression of the Government’s
intention to promote and implement BBBEE.
 The new Codes are due to take effect from 1 May 2015.
 It is important that firms use the interim period to
review and reassess their BBBEEE strategies to mitigate
(and preferably avoid) any adverse effects resulting
from the changes.
21

22. THANK YOU
Pieter Steyn and
Irma-Dalene Gouws
Legal notice: Nothing in this presentation should be construed as formal legal advice
from any lawyer or this firm. Readers are advised to consult professional legal advisors
for guidance on legislation which may affect their businesses.
© 2014 Werksmans Incorporated trading as Werksmans Attorneys. All rights reserved.

23. THE OWNERSHIP PROVISIONS OF THE
NEW CODES WITH SPECIFIC
REFERENCE TO PRIVATE EQUITY
DYLAN CUNARD
29 AUGUST 2014

24. SUMMARY
 Impact of New Codes on Private equity
Meaning of Private Equity under the Codes
Requirements for an investment by a fund to be classified
as “Black”
 Key changes to measurement of Ownership generally
 Priority elements and subminimum requirements
Modified Flow-through principle and other key principles
Once empowered always empowered principle
 Equity Equivalent Programmes
24

25. WHAT DO WE MEAN BY PRIVATE EQUITY?
 Private equity fund is defined in the Codes of Good
Practice as "a third party fund through which
investments are made on behalf of the actual owner of
the funds pursuant to a mandate given by that person
to the private equity fund."
 Broad definition which could theoretically catch a whole
range of funds, some of which typically fall outside of
the private equity industry, including dent funds and
collective investment schemes offered to the general
public.
25

26. TYPICAL PRIVATE EQUITY FUND STRUCTURE
26

27. OWNERSHIP - PRIVATE EQUITY PROVISIONS
 A Measured Entity may treat any of its Ownership
arising from a Private Equity Fund as if that Ownership
were held by Black people, where the Private Equity
Fund meets the following criteria –
 at least 51% of any of the private Equity Managers’
Exercisable Voting Rights associated with the Equity
Instruments through which the Private Equity Fund holds
rights of Ownership, must be held by Black people;
 at least 51% of the Private Equity Funds’ Executive
Management and Senior Management must be Black
people;
 at least 51% of the profits made by the Private Equity
Fund Manager after realising any investment made by it,
must by written agreement, accrue to Black people; and
 the Fund Manager invests a proportion of the funds it
manages in black influenced portfolio companies..
27

28. INVESTMENT IN BLACK INFLUENCED PORTFOLIO
COMPANIES
 To maintain BEE status as a the fund manager is
required to seek to invest a proportion of the value of
its funds under management in companies that have at
least a 25 percent direct black shareholding (using flow
through principle and taking account the cost of the
investment made) as follows –
5% of funds within 1 year;
10% of funds within 2 years;
20% of funds from day 1 Year 3 – last day Year 4;
30% of funds from day 1 Year 5 – last day Year 6;
40% of funds from day 1 Year 7 – last day Year 8; and
51% of funds from day 1 Year 9 and beyond.
28

29. PRIORITY ELEMENTS AND SUBMINIMUM
REQUIREMENTS
 The priority elements are - ownership, socio-economic
development and enterprise/supplier development.
 If a QSE or a Large Enterprise fails to comply with the 40%
minimum target for any of the priority elements, it’s
BBBEE status will automatically be downgraded by one
level.
 By way of example, if its score would have otherwise been
a level four, it will be downgraded to a level five.
29

30. OWNERSHIP - COMPLEX FORMULAE
 The Codes contain a multitude of formulae that are to be
used when calculating the Ownership score. Separate
formulae are provided for –
 measuring voting rights;
 measuring economic interest;
 calculating the deemed value for all Black Participants;
 calculating the Net Value, which is determined as the lower
result achieved by the application of two different formulae;
and
 calculating the recognition of ownership after the sale or loss
of shares by Black Participants
30

31. KEY CODE AMENDMENT: OWNERSHIP (cont.)
 “NET VALUE” is the portion of ownership interest of Black people
within a firm which is not subject to outstanding acquisition debts.
31
 A Measured Entity is required to achieve a minimum of 40% on
Net Value points for the Ownership Element otherwise it will drop
a BEE status level.
 This fundamental change in the calculation of the ownership
interest will require an overhaul of the traditional funding
mechanisms for BBBEE transactions and may in fact stifle BBBEE
transactions.

32. POINTS AWARDED FOR BLACK NEW ENTRANTS
 Two BBBEE ownership points (with a 2% compliance target) have
been allocated to the economic interest of “Black New Entrants”.
 The definition of “Black New Entrant” has also been widened to cover
BBBEE owners who have not held equity in another firm with a total
value of R50m (R20m under the current Codes).
 Incentive to use new entrants in their BBBEE ownership transactions
but the increase in value to R50m has led to some criticism.
32

33. KEY CODE AMENDMENT: OWNERSHIP
Ownership represents 25 of the 118 points which it is
possible to achieve under the amended Codes.
33

34. B-BBEE RECOGNITION LEVELS
34
B-BBEE STATUS QUALIFICATION B-BBEE RECOGNITION
LEVEL
Level One Contributor
≥ 100 points on the Generic
Scorecard 135%
Level Two Contributor
≥ 95 points on the Generic
Scorecard 125%
Level Three Contributor
≥ 90 points on the Generic
Scorecard 110%
Level Four Contributor
≥ 80 points on the Generic
Scorecard 100%
Level Five Contributor
≥ 75 points on the Generic
Scorecard 80%
Level Six Contributor
≥ 70 points on the Generic
Scorecard 60%
Level Seven Contributor
≥ 55 points on the Generic
Scorecard 50%
Level Eight Contributor
≥ 40 points on the Generic
Scorecard 10%
Non-Compliant Contributor
‹ 40 points on the Generic
Scorecard 0%

35. OWNERSHIP - GENERAL PRINCIPLES
 Black people may hold their rights of Ownership in a
Measured Entity as direct Participants or as Participants
through some form of Entity such as –
a Company;
 a Close corporation;
 a Co-operative;
 a Trust;
 a Broad-Based Ownership Scheme;
 an Employee Share Ownership Programme;
 a Partnership or other association of natural persons; and
 any other form of juristic person recognised under South
African law.
35

36. OWNERSHIP - FLOW-THROUGH PRINCIPLE
 As a general principle only rights held by natural persons are relevant. If the
rights of Ownership of Black people pass through a juristic person, then the
rights of Ownership of Black people in that juristic person are measurable.
 This principle applies across every tier of Ownership in a multi-tiered chain of
Ownership until that chain ends with a Black person holding rights of
Ownership.
 The Flow Through Principle is applied to ownership in all instances apart from
the calculation of the Voting Rights of Black people and the Economic Interest of
Black people in which case the Modified Flow-Through Principle applies.
36

37. OWNERSHIP – FLOW THROUGH PRINCIPLE
37

38. MODIFIED FLOW-THROUGH PRINCIPLE
38
BEE 1 BEE 2
51% 60%
Company A Company B
15%
10%
Original Codes - %BEE = (100% x 15%) + (100% x 10%)
= 15% + 10%
=25%
Amended Codes - %BEE = (100% x 15%) + (60% x 10%)
= 15% + 16%
=21%
Application is only once in an entire structure rather than once in a chain

39. OWNERSHIP – CHANGES TO THE MODIFIED
FLOW-THROUGH PRINCIPLE
 In calculating Exercisable Voting Rights of Black people
and Economic Interest of Black people the following
applies –
Exclusion Principle can no longer be applied with the
Modified Flow-Through Principle
where in the chain of Ownership, Black people have a
flow-through level of participation of at least 51%
(previously it was more than 50%)
and then only once in the entire ownership structure
(previously it was once in a chain) of the Measured
Entity, such Black participation may be treated as if it were
100% Black
39

40. OWNERSHIP - MANDATED INVESTMENTS
 Mandated Investments defined in the Code (e.g.
pension funds, medical schemes, insurers, banks) may
be excluded.
 An election to exclude one Mandated Investment is an
election to exclude all Mandated Investments and vice
versa.
 A Measured Entity applying the Exclusion Principle to
Mandated Investments cannot benefit from the Modified
Flow-Through Principle.
40

41. OWNERSHIP - BBBEE FACILITATOR STATUS
 The Minister may by notice in the gazette, designate
certain organs of State or Public Entities as BBBEE
Facilitators. In calculating their Ownership score,
Measured Entities must treat BBBEE Facilitators as having
rights of Ownership held –
 100% by Black people;
 40% by Black woman;
 20% by Black designated groups (previously this was
10%);
 without any acquisition debts; and
 without any third-party rights.
41

42. SIGNIFICANT CHANGES TO BROAD-BASED
OWNERSHIP SCHEMES
 The Codes contain detailed rules (and additional
criteria) for –
 Broad-Based Ownership Schemes – (there are now
additional requirements for Broad-Based Schemes)
 Trusts; and
 Family Trusts
42

43. OWNERSHIP –DILUTION OF ONCE EMPOWERED
ALWAYS EMPOWERED PRINCIPLE
 A Measured Entity is allowed to recognise a portion of
Black Ownership after a Black participant has exited
through the sale or loss of shares.
 Share to be held for a minimum of 3 years by the Black
participant.
 Black participation arising from continued recognition of
Black Ownership cannot contribute more than 40% of
the score on the Ownership scorecard.
 Previously on a loss of shares only continued recognition
was limited to the period the shares were held.
 Now this applies on a sale of shares as well- cuts
through the “Once Empowered Always Empowered
Principle
43

44. Equity Equivalents
 Multinationals may struggle to comply with changes on
ownership and may consider Equity Equivalent
Programmes as an alternative .
 Equity Equivalent Programmes
 Require DTI approval for the multinational to be awarded
ownership points
 encourage participation in the South African economy through
various government plans.
44

45. THANK YOU
Dylan Cunard
Date
Legal notice: Nothing in this presentation should be construed as formal legal advice
from any lawyer or this firm. Readers are advised to consult professional legal advisors
for guidance on legislation which may affect their businesses.
© 2013 Werksmans Incorporated trading as Werksmans Attorneys. All rights reserved.

46. RECOMMENDED
STEPS
DATE: 29 AUGUST 2014

47. RECOMMENDED STEPS
 Understand impact of amendments on firm’s BBBEE
rating
 identify strengths/weaknesses.
what makes commercial sense?
what BBBEE rating is required commercially (eg what do
customers want?)
 Is the firm a QSE/EME?
 Review BBBEE strategy and focus on
priority elements (ownership, skills development and
enterprise/supplier development
 consider broad based/employee share ownership schemes
47

48. RECOMMENDED STEPS (cont’d)
 work with reputable advisers and accredited verification
agent;
 ensure management/employees are fully aware of the new
criminal offences under the BBBEE Act (ie fronting
practices and misrepresenting BBBEE status) – consider
compliance programmes/seminars for management and
employees and internal procedures/systems for the firm’s
own BBBEE rating/verification
 substance over form approach.
48

49. THANK YOU
Pieter Steyn
Legal notice: Nothing in this presentation should be construed as formal legal advice
from any lawyer or this firm. Readers are advised to consult professional legal advisors
for guidance on legislation which may affect their businesses.
© 2014 Werksmans Incorporated trading as Werksmans Attorneys. All rights reserved.