South Africa: Black Economic Empowerment - Final BEE Codes

On Friday, 11 October 2013 the Department of Trade and Industry released the revised Broad-Based Black Economic Empowerment Codes of Good Practice ("the Final BEE Codes"). It has been a long and anxious wait from 5 October 2012, when the proposed amendments to the BEE Codes were first published for comment ("the Draft BEE Codes"). 

There is a transitional period of 12 months, from the date of promulgation of the Final BEE Codes until 11 October 2014, before the Final BEE Codes are applicable, although entities who elect to, may immediately use the Final BEE Codes to be measured, instead of the BEE Codes of Good Practice promulgated on 7 February 2007 ("the Old BEE Codes").  The Final BEE Codes provide, however, that where a sector code has been issued in terms of section 9 of the Broad-Based Black Economic Empowerment Act No. 53 of 2003, then a measured entity who falls within that sector may only be measured for compliance in accordance with that specific sector code (e.g. the Integrated Transport Sector Codes, Forestry Sector Code, Financial Services Sector Code, Property Sector Code, Construction Sector Code; Tourism Sector Code; Information and Communication Technology (ICT) Sector Code; Chartered Accountancy Sector Code and the Agri-BEE Sector Code). This is a change from the Old BEE Codes which stated that the Old BEE Codes had equal status with the various sector codes and, although somewhat ambiguous, it was largely assumed that a measured enterprise could choose to be measured either under the Old BEE Codes or the sector code applicable to it.

The Final BEE Codes contain the same general principles as the Old BEE Codes, however one major change, which was contained in the Draft BEE Codes is that of the "discounting principle" as set out below.

Priority Elements, Subminimum and Discounting Principle

• Non-compliance with certain threshold requirements for the Ownership element, Skills Development element and Enterprise and Supplier Development element will result in an entity's BEE status level being discounted by one level.  The details of these thresholds are set out in the respective Code Series for these elements and are summarised below.  Note that the Draft BEE Codes had provided that non-compliance with the aforementioned would result in a measured enterprise's BEE Contributor Status Level being dropped by two levels, whereas now this has been amended to one level. 
• The compliance of the threshold requirements of the abovementioned priority elements apply to a "Medium/Large Enterprise", whereas a Qualifying Small Enterprise ("QSE") is required to comply with only the minimum threshold requirements for Ownership as a compulsory element and either of Skills Development Element or the Enterprise and Supplier Development elements, in order to avoid the one level penalty. 

A high level summary of the Final BEE Codes are set out below:

• The seven elements of the BEE scorecard have been reduced to five elements.  The Ownership, Management Control (which now includes the previous employment equity elements), Skills Development and Socio-Economic Development Elements remain but the point weightings of the first three mentioned scorecards increase, while the Socio-Economic Development element remains at five points.  The Employment Equity and Preferential Procurement elements are deleted from the scorecard.  The Enterprise Development Element remains, but now includes supplier procurement (previously preferential procurement) and supplier development.  The name of this new element is Enterprise and Supplier Development and score for this new element is 40 points.  The new generic scorecard in the Final BEE Codes is set out below:

It should be noted that the new scorecard is out of 105 points plus there are 13 "bonus" points which can be achieved, as set out in the table above.

• The points per BEE Contributor Level Status has remained the same as in the Draft BEE Codes as set out below.  It should be noted that more points are now required, compared to the Old BEE Codes, to be recognised as a certain level of BEE Contributor, for example, a Level Three Contributor required between 75 and 85 points in terms of the Old BEE Codes, now the points required are between 90 and 95.

•  The turnover threshold for an entity to be recognised a QSE has been raised from between R5 million and R35 million to between R10 million and R50 million. QSE's may find themselves being measured more favourably than previously, in that the Final BEE Codes include "enhanced recognition" criteria whereby if a QSE is 100% black owned, it qualifies automatically as a Level One BEE Contributor and a QSE that is at least 51% black owned qualifies for a Level Two BEE Contributor status. 
• Exempted Micro Enterprises ("EME") are defined as entities with a turnover of less than R10 million (under the Old BEE Codes the threshold was R5 million). Similar "enhanced recognition" criteria apply as with QSE's and where an EME is more than 51% black-owned it will automatically have a Level Two BEE Contributor Status and those that are 100% black owned will automatically qualify for elevation to a Level One BEE Contributor Status.

The individual scorecards for the five elements have also been amended, the more striking amendments can be summarised as follows:

• Ownership
  • As was introduced by the Draft BEE Codes, the points under "net value" have increased from seven points to eight points and the one point for "ownership fulfilment" has been dropped.  The points for voting rights have also been increased.
  • The minimum threshold requirement for ownership to be met, so as to ensure that the discounting of BEE Contributor Status level does not apply, is that the measured entity must achieve a minimum of 40% of the annual "net value" prescribed in the BEE Codes.  BEE deals that are heavily burdened with debt may find the discounting of one BEE Contributor Status level applying to them.
  • A measured entity that applies the Modified Flow-Through Principle cannot also benefit from the Exclusion Principle, and vice versa.
  • The requirements for employee ownership schemes remain the same but the requirements for broad-based ownership schemes have increased.
  • There are substantial changes that apply to the recognition of Private Equity Funds. These changes are not covered herein in any detail.
  • The Final Codes have not included a statement for Recognition in the Sale of Assets and a statement for the Recognition of Equity Equivalents for Multinationals. This begs the question as to whether these have been repealed or whether the provisions of the Old BEE Codes with regard to these issues remain in force.
     
• Management Control
  • As stated above, the employment equity scorecard has now been incorporated into the management control scorecard. 
  • The concept of the adjusted recognition for gender has been deleted from the management control scorecard.  
  • Measurement of management (excluding the board of directors and executive management) is based on the overall demographic representation of black people as defined in the Regulations of the Employment Equity Act as amended from time to time, i.e. Africans, Coloureds and Indians.
  • The measurement of voting rights of board members have now been broken down into black board members (2 points for 50% of all voting rights), black female board members (1 point for 25% of all voting rights), black executive board members (2 points for 50% of all executive board members) and black female executive board members (1 point), black senior management (2 points), black female senior management (1 point for 25% of all executive board members).
  • The compliance target for senior management is now 60% black and 30% black female and for middle management it is 75% black and for junior management it is 88% black.  The compliance target for black disabled employees remains 2%.
     
• Skills Development
  • The compliance target has been increased from 3% to 6%.
  • The adjusted recognition for gender is no longer used.
  • Measurement is also now based on demographics as with the management control scorecard.
  • The minimum threshold requirement for skills development to be met, so as to ensure that the discounting of BEE level status does not apply, is that the measured entity must achieve a minimum of 40% of the target set out in the skills development scorecard.
  • There are 5 bonus points if 100% of black people on learnerships are absorbed as employees by the measured entity or an entity in the same industry.
  • A number of other elements on the skills development scorecard have been amended, as well as a number of the key measurement principles.  These are not dealt with herein.
     
• Enterprise and Supplier Development
  • This new scorecard merges the previous preferential procurement scorecard and the enterprise development scorecard.
  • There are a number of detailed changes to the points allocated and weightings in the Final BEE Codes as compared to the Draft BEE Codes.  A concept of an "Empowering Supplier" has been introduced, which serves as a category of persons who contribute to procurement score.  This definition will have to analysed and understood carefully for points to be achieved.
  • Measured enterprises are now required to spend 2% of their net profit after tax annually on supplier development and a further 1% of the net profit after tax on enterprise development and sector specific programmes.  These two categories together make up the 15 points that was previously attainable under Enterprise Development.
  • The minimum threshold requirement for Enterprise and Supplier Development to be met, so as to ensure that the discounting of BEE level status does not apply, is that the measured entity must achieve a minimum of 40% on three of the specific sub-categories on this scorecard.
  • There are a number of changes to the key measurement principles for preferential procurement and enterprise development, however these are not set out herein.
     
• Socio-Economic Development
  • An average is no longer applied to socio-economic spend, 1% of the net profit after tax is required to be spent annually in order to obtain up to five weighting points.
  • The full value of socio-economic development contributions are recognised if at least 75% of the value directly flows to black people, not 100% as proposed in the Draft BEE Codes (note this remains unchanged from the Old BEE Codes).

In addition to the above, a number of new definitions have been introduced and a number of definitions have been amended.

It is interesting to note that the Old BEE Codes contained a paragraph relating to the fact that the BEE Codes would be revised by the Minister after a period of 5 years, however the new Final BEE Codes do not contain such a provision and merely state that they shall remain in effect until amended, substituted or repealed and that the Minister may review them at any time. It therefore appears that BEE is still far away from a "sunset" clause and the various sectoral codes should be next on the Department's agenda to bring them in line with the Final BEE Codes.

The Final BEE Codes also refers to the concept of "fronting" that is to be introduced by an amendment to the Broad-Based Black Economic Empowerment Act of 2005.  The amendments to this Act have not been made law yet.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.