DealMakers - Q2 2022 (released August 2022)
The B-BBEE Commission (the Commission) was established to encourage and monitor the B-BBEE compliance of Corporate South Africa in order to drive strategic economic outcomes. It was designed to be restricted to exercising investigative powers only, approaching the courts for interdicts in the cases of identified fronting. The defining spirit of the Commission is the B-BBEE Act which, in turn, must be read together with the Promotion of Equality and Prevention of Unfair Discrimination Act (Equality Act).
The practice of fronting has been identified as a significant impediment to the spirit and development of B-BBEE, and alleged wrongdoers have been hotly pursued by the Commission under the leadership of Commissioner Zodwa Ntuli. More than 80% of complaints received by the Commission relate to this practice.
Over the last eight months, three cases of alleged fronting were brought before the High Court. In all three cases, the findings were almost entirely unfavourable towards the Commission.
In October last year, a case involving the Commission’s publication of a final report on alleged fronting by CRRC E Loco Supply (CRRC) was brought before the High Court in Pretoria. The company – a joint venture between Chinese-owned company CSR: Zhuzhou Electrical Locomotives and empowered entity, Matsete Basadi Consortium – had been investigated by the Commission following two separate complaints lodged by former directors of CRRC.
When the Commission’s final findings’ report duly indicated instances of fronting by CRRC, the company took the matter to the High Court in a bid to stop the report’s publication. While the court did not find grounds for the majority of the complaints made by CRRC, it did rule that the Commission could not publish its final findings’ report, pending the outcome of investigations by other regulatory bodies.
Following the CRRC matter, two further cases on alleged fronting identified by the Commission were heard before the High Court in January and July of this year. In both instances, the Commission’s reports were found to be substantially lacking in factual evidence.
The January court ruling was in favour of Cargo Carriers, a leading provider of supply chain and logistics solutions. It concluded a matter that had begun in 2015, when complaints were made to the Commission by owner-drivers contracted under the Cargo Carriers’ B-BBEE owner-driver initiative (ODI). The complainants alleged insufficient empowerment through the ODI, regarding access to funds, assets and management training. Following an investigation, the Commission concluded in April 2019 that Cargo Carriers had engaged in fronting and was thus in breach of the B-BBEE Act.
In its rulings, the High Court found that “not a single jurisdictional fact for fronting was established by the Commission.” The Court had also noted that despite further documentation provided by Cargo Carriers in response to the Commission’s preliminary findings in June 2018, the final findings in April 2019 were “a copy and paste of the preliminary findings.”
In June this year, a fronting case made by the Commission against Sasol Oil was declared invalid and set aside by the High Court. While the Commission had notified Sasol Oil in 2017 that it was commencing investigations following complaints made against it, the case had its roots in an empowerment transaction entered into in 2006. At the time, Sasol Limited and Sasol Oil entered into an agreement with empowered company, Tshwarisano LFB Investment Proprietary Limited (Tshwarisano), in which the latter acquired a 25% shareholding in Sasol Oil.
At the conclusion of the empowerment transaction in 2015, a complaint was made to Sasol Limited by one of Tshwarisano’s minority shareholders about what it deemed had been an unfair preference share agreement between itself and its funding partner at the time of its share acquisition. Sasol Limited was able to facilitate a settlement agreement between the minority shareholder, Awevest Investment Limited (Awevest), and its funding partner.
When the Commission approached Sasol Oil in 2017, it was to outline a complaint against Sasol Oil, stating that it had been responsible for the unfair terms set out in the original agreement between Awevest and its funding partner, and had thus knowingly engaged in and perpetuated a fronting practice by claiming black ownership points flowing from Awevest’s participation in Tshwarisano.
Upon notification by the Commission of its final findings of fronting and recommended remedial actions in 2019, Sasol Oil approached the High Court. The Commission’s report was invalidated by the High Court, which ruled that “the Commission’s decision was based on incorrect facts and not on admissible evidence. The Commission took irrelevant considerations into account and relevant considerations were not taken into account by the Commission.” Furthermore, the Court ruled that the Commission’s findings were “made arbitrarily or capriciously within the meaning of section 6(2)(e) of PAJA and were irrational within the meaning of the section 6(2)(f)(ii) of PAJA” and “unreasonable within the meaning of section (6)(2)(h) of PAJA”.
The actions of the Commission in all of the abovementioned cases raise concerns. In the case of CRRC, the Court’s rulings indicate, in part, that the Commission was not following due regulatory process; in other words, the Commission had not awaited the outcome of investigations by other regulatory bodies before intending to publish its final findings’ report. Those further investigations could well have had an impact on the Commission’s findings and subsequent recommendations.
In the cases of Cargo Carriers and Sasol Oil, the Commission seemed intent on finding instances of fronting at all costs, neither considering additional documentation supplied to it by both companies following its initial findings, nor balking in the face of poor evidence.
It is doubtful that the Commission’s setbacks will dim government’s quest to rout out fronting. Earlier this year, Minister of Trade, Industry and Competition, Ebrahim Patel reiterated that resistance to B-BBEE impedes other related policies that the government has introduced, or plans to introduce, in order to broaden economic participation and combat inequality. He said, "Legal challenges against B-BBEE policies have sought to stall through litigation and aggressive posturing, the necessary journey of transforming the economy. It is a dangerous strategy that will fail. It will ultimately undermine the social stability that democracy rests upon."
Fronting was criminalised in the BEE Amendment Act in 2013. Individuals deemed to have had actual knowledge of a fronting practice can face criminal sanctions that might include a fine and/or up to ten years’ imprisonment. Convicted individuals could be barred from doing business with organs of state for a period of ten years from the date of conviction. Companies could be given an administrative penalty of up to 10% of annual turnover, with awarded contracts with organs of state cancelled.
The Commission’s actions, found to be wanting according to South African law, could well undermine the confidence of companies to develop empowerment transactions without fear of prejudice at a later stage. Companies are, nonetheless and in good faith, obliged to seek out empowerment partners to contribute to South Africa’s transformation. In an environment where an organ of state appears, for all intents and purposes, to have gone somewhat rogue, yet remains firmly backed by the state, companies are advised to reach out to empowerment transaction experts so as to create robust, transparent and compliant transaction vehicles that will withstand any scrutiny.
Jeewan is a Corporate Finance Principal | Bravura.
Is the B-BBEE Commission overstepping its powers?
by Evon Jeewan
South Africa’s B-BBEE Commission – the “enforcer” of BEE compliance – has, in recent months, found itself on the wrong side of the law.
Separate rulings made by the High Court indicate that the Commission’s zealous and single-minded approach to fronting could well be at odds with its legislative mandate to function impartially, without fear, favour or prejudice.