New BB-BEE amendments demand careful scrutiny

The freight and trade industries and associated businesses are going to have to pay the keenest attention to the latest Amendment Bill to the Broad-Based Black Economic Empowerment (BB BEE) Act 53 of 2002, according to two specialist lawyers who talked to FTW. Said Andrew Pike, maritime lawyer and partner in Van Velden Pike Incorporated: “The ambit of the new bill is very far reaching and would definitely have an impact on South African companies operating in the maritime, trade and transport sector. “The most important issue appears to be the requirement for economic benefit to flow back in the ratio of purported equity held in an enterprise by a black person. Accordingly, it will not assist companies in their BB-BEE ratings simply to appoint black directors and give them say 25% of the voting rights in a company unless they are also earning 25% of the profits of the company.” Also, unless actual equity is held in companies, they will automatically be downgraded on their existing BB-BEE scores, whereas in the past it was possible to get reasonably good overall scores by loading scoring areas other than equity. Another point to bear in mind is where tenders are entered into in joint ventures of separate enterprises, with the higher BB-BEE scoring one being used to bolster the overall BB-BEE score of the other. “This,” Pike added, “will be regarded as fronting if the higher scoring enterprise is not earning proportionately the amount indicated to be its share of the joint venture.” So, although there is nothing which is industry specific in this section of the bill, it will affect all joint ventures and other enterprises doing state or parastatal business. Inevitably, as these enterprises try to increase their own BB-BEE scores by ensuring that they use highrated BB-BEE suppliers and contractors, the latter will also need to be careful not to be fronting. Pike also noted that, in terms of the 2007 Regulations to the National Ports Act, Transnet National Ports Authority (TNPA) is required to ensure that 75% of all agreements, concessions, licences etc with the port are with enterprises that have reached BB-BEE level 4 to ensure economic participation by blacks in the port sector. “Accordingly,” he said, “the BB-BEE ratings of all participants in the ports are likely to be scrutinised more closely and many are likely to fall short, especially those who have been fronting to attain their ratings.” Erika Petersen-Holmes, partner in the commercial and corporate law department at Shepstone & Wylie, also highlighted a number of points that will have an impact on the freight industry. “Of interest to the freight, transport and forwarding industries,” she told FTW, “is the clarification of the status of the sector-specific Codes of Good Practice. (Such a code for the Transport Industry – with sub-codes for, amongst others, the Forwarding and Clearing sector and the Maritime Transport and Services Industry – was published in the Government Gazette on August 21, 2009.) “Currently, much confusion exists as to whether an enterprise falling within a sector that has published its own sector code must choose to be evaluated on either the generic Codes of Good Practice or the sector-specific codes. This has resulted in ‘agencyshopping’ as different verification agencies apply different interpretations to this. The Amendment Bill confirms that such an enterprise must be evaluated on the sectorspecific codes.” Petersen- Holmes described this as good news for both the forwarding and clearing and the maritime transport industries, as these sector codes will not be subject to the pending changes to the generic Codes of Good Practice, which in many respects make compliance with BEE more difficult, particularly in relation to ownership. “In addition,” she added, “the Amendment Bill requires every enterprise operating in such a sector to report annually on their compliance with BEE to the sector council established by the sector-specific codes. The Transport Sector Code proposes the establishment of a Transport Sector BEE Council, although it does not appear to be operational yet.” Both our sources stressed that there were stringent penalties to be imposed on companies (and possibly their directors) for engaging in fronting practices. Fronting, they added, now has a definition and includes any transaction, arrangement or other act of conduct that directly or indirectly undermines or frustrates the achievement of the objectives of the BEE Act. Pike noted that, prior to the act, the department of trade and industry (DTI) lacked the necessary facilities to investigate fronting or to stamp it out. “But, with the existence of a B-BBEE Commissioner and penalties for offences, fronting will become a very risky activity,” he said. The BB-BEE Amendment Bill has been passed in parliament. It now goes to the Council of Provinces before the President signs it into law. As with any new legislation, it still must be tested in a court of law. But, warned our lawyers, you need to be aware of the aspects of the bill they have highlighted, before you and/ or your company, end up in court facing some pretty severe penalties. INSERTS No benefit in appointing black directors and giving them say 25% of the voting rights in a company unless they are also earning 25% of the profits of the company. Unless actual equity is held in companies, they will automatically be downgraded on their existing BB-BEE scores.