The person who thought of this scheme is cleverer than me, I think I need to apply for apprenticeship in her office (if it is in fact a her). This structure was explained to me about a year and a half ago by a guy who had got it from someone in Bloem. It is an application of the modified flow through principle which needs to be explained
Modified flow through principle (MFT)
The modified flow through principle applies to any BEE owned or controlled company.
"BEE controlled company" means a juristic person, having share holding or similar members’ interest in which black participants enjoy a right to EXERCISABLE VOTING RIGHTS that is at least 51% of the total such rights measured using the flow through principle.
“BEE owned company" means a juristic person, having share holding or similar members’ interest, that is BEE controlled, in which black participants enjoy a right to ECONOMIC INTEREST that is at least 51% of the total such rights measured using the flow through principle.
It follows that a BEE owned company is placed higher in the ownership hierarchy as this company enjoys both black voting rights and economic interest.
Yes but also note…..
A 51% black owned entity must enjoy 51% of the voting rights and economic interest AND have earned all the points for Net Value. The simple way to view this is that the shares must be paid for, the formula tends to favour this approach.
We know that for once in the ownership chain, if the exclusion principle is not used (I'll let you trawl through bolshie's bollocks to figure what this is), the 51% black owned may be viewed as being 100% owned.
Back to the diagram. I think this structure is best suited for businesses that turn over less than R50m and have few assets in the company, in other words the assets reside in a vehicle outside the company, a thing which is very commonplace in many businesses. The reason why I say this is that the rules state that you cannot claim the 51% ownership until all the net value points have been awarded. I'll talk a little bit more about this earlier.
Let's say the proverbial measured entity (PME) needs to get to that holy grail of ownership which is 51% for now, but watch out for gross arbitrariness from the incompetently run state owned entities that might change this level on a whim. This is the route they might follow.
- Establish a company called Holding Company. Shareholders of this company need to be 51% black and the balance held by the shareholders of the PME. If a trust is established for this purpose the beneficiaries must be 100% black as defined. If it is any less than that you can use the MFT to make sure that Holding is 51% black owned but the MFT ends there.
- Holding company buys 51% of PME. The original shareholders hold 49% of PME.
- The application of the MFT says that PME is now 51% black owned, subject to the conditions of measuring net value.
There you go. Simple so far. There are technicalities that you need to consider.
- The true definition of 51% black ownership means that the shares must be paid for. Holding company is a start-up and worth nothing, there is no reason why the black shareholders should be indebted at that level. In fact Holding does nothing other than own PME or any other company. It doesn't need to register for VAT and it doesn't trade.
- This also applies to the ownership of PME. The codes say that in order to claim 51% black ownership all the net value points must be awarded.
- On the issue raised by a and b, my good friend David says the shares should be given away. If the company has no assets then it's not worth that much anyway.
- Note that the DTI declaration states that the PME is 51% black owned. See the definition of black owned above, if the shares are indebted in any shape or form then that is quite possibly fraud. There's nothing stopping anyone checking a little deeper to take a look at this. I would go with what David suggests here. Give the shares away to Holding.
- It's quite difficult for anyone looking at your BEE declaration to know that the modified flow through principle has been used.
This structure is code-worthy. It's messy and requires the management of two companies but it gets you to that level 2. Now the only issue is the incompetent SOEs insisting on BEE certificates when affidavits will do. As an aside - surely I don't need to precede SOEs with the word incompetent, it's implied. Our dear BEE Commissioner sis zod has addressed this in her surprisingly well written the Whistle. I'll let you find it and read it yourself.
And on a completely un-related note, other than SOEs and their predilection for state capture, this document is a discussion of the guptas, zuma and bell pottinger. Read it and puke.
And I am marching tomorrow. I hope you do too.