Increasingly we are seeing small businesses introduce Broad-Based Black Economic Empowerment (BEE) ownership arrangements where there is obviously no intention for that arrangement to have substance. When the ownership is questioned or tested, the businesses often respond with surprise, indignation, and shock.
In the evolving landscape of BEE, businesses often focus on ticking boxes to achieve technical compliance. It is tempting to lean heavily on form — the structure and paperwork — when designing BEE ownership arrangements. However, as regulatory scrutiny deepens and jurisprudence develops, the maxim “substance over form” has never been more relevant.
This principle is particularly important in evaluating BEE ownership structures. Just because a BEE deal or arrangement is not expressly prohibited by BEE laws or codes, it does not automatically mean it will withstand scrutiny on a substance basis.
What is substance over form?
Substance over form means that the economic reality and genuine empowerment impact of a BEE structure is more important than its mere technical or legal form. The BEE framework aims to foster meaningful and sustainable black participation in the economy, not just compliance for compliance’ sake.
While a transaction might tick all the boxes on paper, if it is designed primarily to create an illusion of compliance or to circumvent the spirit and purpose of BEE legislation, it risks being invalidated, disregarded, or even penalised.
Gut-testing your BEE structure
To ensure your BEE ownership structure passes the substance test, consider these critical questions:
- But for the BEE credentials, would such an arrangement ever be contemplated?
- Has ownership truly transferred to the BEE partner? Does the partner understand their role, rights and responsibilities and are they able to exercise these?
- Is the BEE partner (including their decision-making and their discretion) under the major control or influence of another person?
- Taking into account the ownership percentages, where does operational control lie? Is it appropriate and proportional to the shareholding percentages?
- Who bears the economic risks and enjoys the rewards? Do black shareholders receive dividends, capital growth, and share downside risk?
- Is the arrangement transparent and consistent with the spirit of BEE? Or does it rely on technical loopholes or complex layering?
Companies are increasingly interrogating and testing the substance and validity of their supplier ownership arrangements, and tick-box compliance is no longer being accepted. South African BEE compliance is more than a formality — it is a strategic commitment to transforming the economy in a real and impactful way. Relying solely on technical compliance with BEE laws, without considering the substance of empowerment, risks reputational damage, sanctions, and invalidation of your structure.
The best approach to gut-test your BEE structure is to rigorously interrogate whether it delivers on the true purpose of BEE, beyond the paper trail. This way, your BEE deal will not only be compliant in form, but also sound and defensible in substance. Without any reference to underlying BEE laws, on a layperson’s understanding, does the BEE structure make sense. If the answer is not a resounding yes, then your gut may already be telling you something is wrong.