B-BBEE OWNERSHIP - A WARNING FROM THE B-BBEE COMMISSIONER
At the recent annual conference of the B-BBEE Commission, held on 14 March 2019, the age-old concept of “fronting” once again reared its head. It is the opinion of the B-BBEE Commission that fronting still prevails, primarily within the ownership element of B-BBEE.
So, what are typical indicators of fronting, as it relates to ownership? Let’s take the instance where you, as a company, have established that you need to implement B-BBEE ownership within your company in order to achieve a certain B-BBEE level. You now approach a black person to become a shareholder within your business – this person may be an employee, a venture capitalist, a family friend or even your domestic worker. You get all your documents in order and make sure everything is signed and looks pretty (on paper, that is). However, now you fail to involve this black person in your business, the way normal shareholders will be involved in a company. Maybe you fail to disclose all company information and documentation, including financial documentation, to your new shareholder or you deny them access to this information. Maybe you fail to hold regular shareholders meetings or at least an AGM or maybe you deny them the right to vote at these meetings. Maybe you deny them their proportionate share to dividends or maybe you decide that a dividend will not be declared without disclosing the reason therefore to all the shareholders in your company. Maybe, even, your black, so-called “shareholder”, is not even aware that he or she is a shareholder in your company.
Let’s be clear – this is Fronting.
If you have a trust, broad-based ownership scheme or employee share ownership plan involved within your B-BBEE ownership structure, the fiduciaries of these schemes, in a representative capacity, step into the shoes of the black shareholder. They represent the scheme’s beneficiaries, but it is the scheme beneficiaries that determine your company’s B-BBEE ownership base and, as such, the scheme beneficiaries need to be aware that they are contributing to your company’s black ownership and overall B-BBEE level.
Fronting has numerous pitfalls and severe sanctions, including massive financial penalties and jail time. Do not take it lightly. The B-BBEE Commission has indicated that it is clamping down hard on any instance of fronting, with specific focus on fronting within ownership of companies. You have been warned.
Contact Compliance Hub Consulting for expert advice in avoiding any allegation of fronting within your business.