On 31 March 2017 the B-BEE Commission (“the Commission”) released a Practice Guide (“the Practice Guide”) on the enhanced recognition of Exempted Micro-Enterprises (“EMEs”) and Qualified Small Enterprises (“QSEs”) when applying the Modified Flow Through Principle (“the MFTP”).
The BEE Codes provide that when an entity is majority black owned such entity may be regarded as 100% black owned. By way of example: Company A is a 100% black owned company owning 51% share equity in Company B. Company B owns 51% share equity in Company C. Therefore, by applying the MFTP, Company B will be regarded as 100% black owned (as it is majority black owned) and consequently Company C will be regarded as 51% black owned, whilst the effective black shareholding of Company C (in terms of the general “flow through principle”) is only 26% (51% x 51%).
If Company C is a EME / QSE it will (when applying the MFTP) automatically qualify as a level 2 BEE contributor for being 51% black owned and is then only required to obtain a sworn affidavit confirming same (this is referred to as “Enhanced Recognition”). The Practice Guide serves as confirmation that it is the Commission’s interpretation that in such instance the MFTP may not be applied when seeking Enhanced Recognition and that such application undermines the objectives of the B-BBEE Act and / or BEE Codes.
It is important to note that the Commission’s Practice Guide is a non-binding guide and that the BEE Codes does not limit the application of the MFTP by QSE’s and / or EME’s. The only limitation for application of the MFTP in terms of the BEE Codes, is that the said principle may only be applied once in the entire ownership structure of a measured entity. However, should be wary of the aforesaid interpretation by the Commission while restructuring the company’s ownership structure to achieve Enhanced Recognition.