The Broad-Based Black Economic Empowerment (B-BBEE) Act of 2003 (the Act) is an important part of the South African legal landscape. One aspect of the Act used to measure compliance with the Act is how businesses are classified according to their B-BBEE level, ranging from the highest, Level 1, to the lowest, Level 8 (or worse, non-compliance). A point system is used to adjudicate a business' compliance with the Act and allocate a B-BBEE level.
Businesses receive points through several means, ranging from the shareholder or ownership makeup of the business, how the business procures services and products from previously disadvantaged suppliers to how skills development occurs in a service agreement or commercial relationship. For large businesses operating in South Africa, foreign and domestic, a clear understanding of how the B-BBEE points system works and the best ways it aligns with overall business strategy can create exciting commercial opportunities within South Africa's private and public sectors.
One such way a business can earn B-BBEE points is through the different options provided by Statement 102 of the B-BBEE Codes that form part of the Act. Statement 102 merits greater investigation because points earned under it allow the seller to claim the benefit of the sale for their B-BBEE scorecard.
What is Statement 102 and which transactions qualify?
Statement 102 refers to a business sold under its auspices as a Separately Identifiable Related Business (SIRB). A SIRB is defined as a “business that is related to the seller by being a subsidiary, joint venture, associate, business division, business unit, or any other similar related arrangements within the ownership structure of the seller".
Statement 102 addresses how B-BBEE points are assigned through the transfer of ownership of a company to previously disadvantaged persons by another company. Three qualifying transactions can lead to the ownership of a SIRB changing hands from one party to another. These are the sale of certain assets; equity instruments in an entity; and a business.
For ownership points to be recognised the qualifying transaction must:
- result in the creation of viable and sustainable businesses or business opportunities in the hands of black people; and
- result in the transfer of critical and specialised skills, managerial skills, and productive capacity to black people.
Critically, while a sale may meet the criteria of a qualifying transaction under Statement 102 at a high level, no B-BBEE points will be awarded if the transaction does not result in the transfer of critical and specialised skills, nor productive capacity, to previously disadvantaged communities. Furthermore, the business must be a viable and sustainable enterprise so that beneficiaries do not fall victim to fronting and other nebulous practices that seek to circumvent B-BBEE law. No unreasonable limits or conditions relating to conditions of sale should exist.
Transactions that do not qualify under Statement 102
As noted above, over the years numerous companies whether unknowingly or otherwise have sought to accrue B-BBEE points through practices that do not meet the conditions laid out in the B-BBEE Act. It can be quite costly for a business to engage in a transaction that they believe will improve their B-BBEE status when in reality it will go unrecognised according to the Codes and Statement 102. As such, it is informative to know which transactions do not qualify under the Statement as much as those that do.
The following transactions do not qualify under Statement 102:
- Business rights transferred through a license, lease or a similar legal mechanism that does not confer unrestricted ownership.
- A sale of a franchise by a franchisor to a franchisee (sales by franchisees to other franchisees or new franchisees however do qualify).
- If a repurchase transaction is entered into within a stipulated period after the transaction has been implemented, even if transaction implementation is deferred post-year.
Furthermore, ownership points under the Act are subject to existing contracts between the parties remaining in effect, subject to levels that represent expected and reasonable market norms.
When comparing the transactions that qualify under Statement 102 and those that do not, it becomes increasingly clear how the Statement and broader Act strive for meaningful change when ownership of a business changes hands in South Africa.
The excluded transactions are done so because they do not practically guarantee the beneficiaries of the transaction either the sustainable transfer of skills and/or meaningful business control that can be used as a platform for future wealth creation.
Given the opportunities presented by Statement 102 and the Act and its complexities some of which we have explored above, it is highly advised that when engaging in a transaction, sound legal advice is sought to ensure all parties benefit from its execution materially and within the B-BBEE framework.
This article was first published by DealMakers: DM Q3 2024 Understanding Statement 102 | DealMakersSA (dealmakerssouthafrica.com)
