A B-BBEE ownership structure has to work in substance, not only on paper. The Broad-Based Black Economic Empowerment Act treats “fronting practices” as an offence.
What counts as fronting
The Act’s definition is wide. As summarised by Werksmans, it covers a transaction or arrangement that undermines the objectives of the Act, including:
- arrangements where the economic benefits of B-BBEE status do not flow to black people in the ratio set out in the legal documents;
- giving a black person a role or shareholding without the economic benefits that would reasonably go with it;
- agreements with significant limits on the choice of suppliers, service providers or clients, or terms that were not negotiated at arm’s length on a fair and reasonable basis; and
- arrangements where black people appointed to an enterprise are discouraged from taking real part in its core activities.
The same summary notes that a firm can be fined up to 10% of its annual turnover, and that individuals can face a fine, imprisonment of up to ten years, or both. Because the definition is wide, it can also catch genuine initiatives that are poorly structured, which is why a structure needs careful review.
A case on a token participant
In a High Court case about a PRASA locomotive tender, the court set aside the award. It found that the black-owned company was a token participant that was paid for the use of its rating, with no resources of its own and no transfer of skills, and that the work had in effect been given to its foreign partner. The court also held that fronting does not require a misrepresentation or the exploitation of a black person.
What to check before you sign
- Do the economic benefits actually reach the black shareholders, as the documents say?
- Does the empowerment partner take real part in the core activities of the business?
- Were the terms negotiated at arm’s length and are they fair and reasonable?
- Can the partner do what the structure says it will do?
- Does the paperwork match how the business is actually run?
This article is general information and is not legal advice. The law may have changed since it was published, and every matter turns on its own facts. Contact us about your own situation.