Are draft B-BEE thresholds unclear as to what constitutes a B-BBEE transaction? - Preparing you for the future of work.

Are draft B-BEE thresholds unclear as to what constitutes a B-BBEE transaction?

January 2017, the Department of Trade and Industry published, for public comment, a notice containing draft thresholds for major B-BBEE transactions.

In order to understand the draft thresholds and their implications, one has to consider them in context of the B-BBEE Act and the B-BBEE Regulations. The Act and the regulations are already law. The draft thresholds are not.

The draft thresholds are problematic in a number of respects, including that they compound an existing cause for concern - it is not clear in some instances as to what constitutes a B-BBEE transaction and when such transactions should be registered.

The draft thresholds purport to give meaning to what constitutes a major B-BBEE transaction, which is required to be registered in terms of the Act. The legislature clearly intended that the obligation to register an empowerment transaction, and the legal consequences which are to flow therefrom, should only apply to significant empowerment transactions.  To qualify, a transaction must satisfy two elements: it must be a “B-BBEE transaction” and it must be “major”. Unfortunately the Act, the regulations and the draft thresholds give rise to a number of unintended consequences.

A new layer of regulation applicable exclusively to those involved in acquisition transactions with empowered persons and entities has been created. The notice and the regulations are predicated on the notion that every transaction in which an empowered person or entity acquires some degree of ownership is intended to be an empowerment transaction. The possibility that empowered persons and entities may from time to time engage or wish to engage in acquisition transactions that have no empowerment motivation appears to have escaped the DTI.

The definition of “a major B-BBEE transaction” in the B-BBEE regulations refers to transactions that must be registered in terms of the Act, namely transactions above a threshold determined by the Minister. The notice in turn refers to “all major B-BBEE ownership transactions, as per code 100 of the Codes of Good Practice” which “equals or exceeds R100 million, calculated by either combining the annual turnover of both entities or their assets value.”

Code 100 also does not define what constitutes a B-BBEE transaction. Rather, it prescribes the general principles for measuring the ownership element of B-BBEE. In addition, the notice omits to prescribe for which period the turnover, and at what date the asset value, is to be determined, and how turnover and asset value is to be calculated.

The notice also does not take into account transactions in which multiple parties are involved - which is more often than not the case in empowerment transactions. Unfortunately, it will be difficult to determine what constitutes a B-BBEE transaction, and whether it should be registered.

The obligation to register a qualifying transaction rests on each party to the transaction, and not only the empowerment investor/s or the target. As a result, funding banks, escrow agents and other parties connected to the transaction may be caught by this obligation. This in inappropriate, particularly given the difficulty in determining what constitutes a qualifying transaction. In such circumstances, the obligation to register should rest solely on the empowerment investor concerned.

The R100 million combined turnover or asset threshold is also low in today’s terms. Not only that, the threshold matrix is such that it omits to give consideration to the nature and value of the transaction or the acquirer. So for example, a black South African of modest wealth who acquires a small parcel of shares in a JSE top 40 listed company as part of his retirement planning will find himself subject to the Act and the regulations and, consequently, have to register his acquisition with the Commission. An alternative would be to adopt an approach which sets a value threshold for the acquirer and a percentage ownership threshold for the proposed transaction itself. This would have the effect of excluding “corner store” transactions and small investments in large companies, which must have been the original intention behind the regime.

The notice has retrospective effect in that it proposes that qualifying transactions concluded on or after the date of proclamation of the Act, namely 24 October 2014, but before publication of the final thresholds will have to be registered within 30 days of the date of publication of a final notice. This no doubt will leave many scrambling when the final thresholds come into force.

The draft thresholds need to be revised to deal with the unintended consequences and issues raised.

Andrew Cadman is a Director at PwC Legal.


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