Subsidiary B-BBEE ownership transactions
Very often, a group of companies wishes to empower one of its subsidiaries in a different way to the rest of the group – for instance if there are unique supply contracts that require a unique B-BBEE structure, or if there are separate international businesses that are excluded from the local entity.
However, care must be taken to clearly delineate the subsidiary company.
The DTI has provided clarity with the following “red-flags” highlighting whether an intermediary company has fronting indicators:
- An enterprise only conducts peripheral functions and does not perform the core functions reasonably expected of other, similar, enterprises;
- An enterprise relies on a third-party to conduct most core functions normally conducted by enterprises similar to it;
- An enterprise cannot operate independently without a third-party, because of contractual obligations or the lack of technical or operational competence;
- The enterprise displays evidence of circumvention or attempted circumvention;
- An enterprise buys goods or services at a significantly different rate than the market from a related person or shareholder;
To deal with these concerns, we would recommend you look to establish a ring-fenced entity, which has its own operations and commercial relationships, including arms-length supply relationships with the holding company.
The company should be the primary provider of the particular service offering in the group – in other words, there shouldn’t be a B-BBEE company that is used for all business requiring a B-BBEE ceritificate, alongside a company offering the same services, that is used for all other business.
Stand alone business
To prove that the business is stand-alone, the company should have, among other things:
- A clear business rationale, including profitability that is reasonable relative to revenue.
- A clear staff organogram with staff employment contracts in the name of the company.
- While these staff could report internally through the normal the holding company management channels, the company would need to have its own management team that would meet periodically. We would recommend that the B-BBEE shareholders attend the monthly management meetings, as well as a separate B-BBEE Services meeting.
- The company should be housed in separate office space. This could be in the same building as the holding company, but should be separately identifiable.
- An exercise should be performed clearly delineating the assets and liabilities of the company.
- The company should maintain a separate set of accounts with audited annual financial statements. We would recommend that monthly management accounts be submitted to the B-BBEE shareholders for their review.
- All customer and supplier agreements should be in the name of the company.
- On occasion, there may be inter-linked assets and processes with other subsidiaries. It would be important to have clear arms-length agreements based on normal market terms, delineating the various roles and responsibilities of the holding company, the B-BBEE parties and the subsidiary concerned. These could include, inter alia:
- A shareholders’ agreement governing the relationship between the holding company and the B-BBEE parties
- Reasonable, arms-length management fees – which are comparable to other companies in the broader group. This would need to be motivated and rational, comparable to the market. We would likewise recommend a reasonable, arms-length management fee paid to the B-BBEE parties for services;
- Reasonable working capital funding from the holding company, if any;
- Licence maintenance agreement
- Agreement delineating clear arms-length terms of the company’s services
- Relative to technology supply agreements, there needs to be a reasonable profitability in the company providing the service, with justification for such services. This could look like the company having some form of exclusive contract for the supply of the technology.
Disclaimer: Empower Capital take no liability with respect to the appropriateness of any of these statements to your company or your structure. We would be happy to engage with you in assessing your business in more detail regarding what B-BBEE structure would be appropriate in your circumstance.
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