‘SUBSTANCE’ OVER ‘Legal Form’

THE SHIFT FROM ‘PAPER’ BASED INITIATIVES By: Yuneal Padayachy

‘Substance’ over ‘Legal Form’ is a crucial B-BBEE Verification

principle that separates the reality of a transaction and its true

intent from its economic impact. While ‘Legal Form’ is central

to the faithful representation and reliability of evidence at a

B-BBEE Verification, it can fly in the face of real and meaningful

transformation. ‘Substance’ may not necessarily meet the

paper-driven ‘Legal Form’ requirements at the other end

of the spectrum.

The disparity between ‘Substance’ and ‘Legal Form’ reveals

itself across all elements of the B-BBEE Scorecard. Sustainable

initiatives are critical to a successful B-BBEE Strategy; hence

organisations should avoid the once-off initiatives that look

good on paper. Essentially, the focus must be on extracting

‘Substance’, away from the ‘paper’ driven ‘Legal Form’, that

will benefit ‘Black’ People and yield a tangible return on

investment for organisations.

The concept of ‘paper’ driven ‘Legal Form’ refers to a B-BBEE

Strategy that crafts, then tracks, initiatives that focus on the

results of a B-BBEE Verification. Yet, when the results are

analysed, there is no meaningful impact other than the points on a

B-BBEE Scorecard.

Let’s investigate how the legislation views ‘Substance’ over ‘Legal

Form’ as an essential principle upon which a B-BBEE Rating

Agency centres its B-BBEE Verification process.

Clause 2.1 under Statement 000 of the Generic Codes of

Good Practice (The Codes) refers: The fundamental principle

for measuring B-BBEE compliance is that ‘Substance’ takes

precedence over ‘Legal Form’.

> The 2008 Verification Manual, although not currently

amended, refers to a B-BBEE Verification as: … processes

and activities conducted by a B-BBEE Rating Agency to

assess, verify and validate that the score awarded to an

organisation is a result of individual scorecard elements

supplied. It includes the evaluation of all transactions to

provide an indicative B-BBEE score and certification based on

the principles of The Codes.

Organisations should consider the concept of ‘Substance’

over ‘Legal Form’ when developing or evaluating their B-BBEE

Strategy as follows:

> Measuring and reporting results must showcase the economic

reality of an initiative rather than the ‘Legal Form’.

> The ‘Substance’ that takes precedence over the ‘Legal Form’

principle is tiered in its approach to evaluating compliance.

Firstly, it measures ‘Legal Form’ against the B-BBEE Act, The

Codes, the 2008 Verification Manual and peripheral legislation.

Upon meeting the ‘Legal Form’ criteria through the evidence

and then checking against ‘Substance’, a B-BBEE Rating

Agency will consider an initiative as tested.

If the evidence does not support a claim of ‘Substance’ or ‘Legal

Form’, a B-BBEE Rating Agency will not allow the claim, thus

will allocate no points. Each element of the B-BBEE Scorecard

necessitates evidence that within itself will illustrate the principle of

‘Substance’ over ‘Legal Form’.

Ownership Priority Element

More often than not, upon examination, there is a disconnect between the ‘Substance’ and ‘Legal Form’ of the Ownership Scorecard.

If a ‘Black’ Shareholder does not receive the benefits of Voting Rights, Economic Interest and Net Value, a B-BBEE Rating Agency will

not recognise the points. For example, ABC Traders has an individual shareholder with a 30% shareholding, a ‘Black’ Person as defined.

ABC Traders presents all the documentary evidence, such as the share certificates, share register and shareholder’s agreement, thus

presenting all necessary evidence.

However, during the B-BBEE Verification, the B-BBEE Rating Agency interviews ABC Traders’ ‘Black’ Shareholder. During the interview,

it is apparent that the shareholder was not aware of, and has never exercised, any Voting Rights. Furthermore, the Shareholder was

unaware of the Economic Interest due.

In this instance, it is clear there was no ‘Substance’ to the transaction; consequently, ABC Traders did not receive Ownership points for

Voting Rights or Economic Interest.

Evidence to substantiate ‘Substance’ over ‘Legal Form’ - non-exhaustive.

Share Registers An inspection of Share Registers to allocate the latest Shareholding of an organisation.

Share Certificates Inspection of Share Certificates to confirm the latest Shareholding of an organisation.

Shareholders or

Members Agreement

Trace the exercisable Voting Rights and Economic Interest in the hands of ‘Black’ People and ‘Black’ Women

against the shareholder or member agreement.

Declaration of the

outstanding acquisition

debt balance.

> Is ‘Black’ Shareholding structured as a debt? If so, how is the debt funded, for example, through the

organisation or via a third party?

> How long will it take for a ‘Black’ Shareholder to repay any debt obligation?

Interviews At a B-BBEE Verification, interviews with a sample of ‘Black’ Shareholders will determine whether they:

> Understand what their Voting Rights are;

> Independently exercised their Voting Rights; and

> Received their entitlement to Economic Interest

Management Control

In this element, the disconnect between real ‘Substance’ and ‘Legal Form’ occurs when employees are classified at a particular occupational

level on an organogram with an accompanying grading level, on paper only.

ABC Traders has a deficit of ‘Black’ Management and has no capacity to employ more people in this category. To meet their Employment

Equity and Management Control targets, they promote a ‘Black’ Employee from a Creditors Clerk to Financial Manager, in title only, reflecting

on the organogram. The employee remains on the same salary, does the same work, has the same responsibilities and reports to the same

manager as before.

At the time of ABC Traders’ B-BBEE Verification, analysis reveals the shortfall in the ‘Black’ Employee’s salary band, job scope and

responsibilities, which vastly differ from his non-’Black’ counterpart.

The findings were that there was no ‘Substance’ to the position held by the ‘Black’ Employee. Thus, ABC Traders received no points for the

transaction under ‘Black’ Management for that employee claim.

Evidence to substantiate ‘Substance’ over ‘Legal Form’ - non-exhaustive.

EEA2 & EEA4 Reports Agree on the total number of employees and positions as per the payroll.

COR39 Ensure that all Director information on the registration forms corresponds correctly and aligns with the evidence

an organisation presents.

Employee list and

payroll

Confirm the responsibilities, accountabilities and rewards of ‘Black’ Directors and Managers, including all non-

'Black' people at the same occupational level.

Minutes of Board

Meetings

Ensure the minutes of Board Meetings record and correspond with the people and occupational level of those

responsible for strategic decisions.

Interviews At a B-BBEE Verification, interviews with a sample of ‘Black’ Employees at all occupational levels will determine

that information presented is sound.

Skills Development Priority Element

The disconnect between ‘Substance’ and ‘Legal Form’ for Skills Development is about the benefit of the skill vs the skills intervention.

For example, ABC Traders had a unique Skills Development opportunity to provide a ‘Black’ Apprentice with a meaningful 12-month skills

intervention with its European counterpart. The skill, due to the training, would positively impact the career of the apprentice and allow ABC

Traders to expand its business operation.

At the time of ABC Traders’ B-BBEE Verification, the evidence did not support that the training provider was SAQA registered. The result was

that the skills intervention did not qualify as a claim.

In this case, there was a ‘Substance’ that did not meet the ‘Legal Form’; thus, ABC Traders could not claim this skills intervention as a contribution.

Evidence to substantiate ‘Substance’ over ‘Legal Form’ - non-exhaustive.

Categorisation of Training

Initiatives

A sample of descriptions of training intervention spend for each category according to the Learning

Programme Matrix to confirm the viability of each claim.

Learnership, Internship or

Apprenticeship (LIA) Programmes

Samples of LIA Agreements are necessary to evaluate the overall progress.

Proof of Attendance Samples of attendance registers to confirm attendance of Beneficiaries. The exact process verifies

internal and external training interventions.

Proof of cost incurred A sample of invoices confirming Skills Development spend.

Interviews At a B-BBEE Verification, interviews with a sample of ‘Black’ Beneficiaries will determine that sufficient

claims for 'Black' People were prorated against non-'Black' Skills Development spend for each

intervention for all training.

Enterprise & Supplier Development Priority Element

Vital to the desired Enterprise & Supplier Development outcome of B-BBEE is developing small businesses. However, the approach to

Enterprise Development or Supplier Development interventions is such that, more often than not, it leaves the Beneficiaries worse off

than before the intervention.

For example, ABC Traders enters into an Enterprise Development contract with Company A. They decide to contribute an interest-free

loan. However, following a change of heart, they choose to pay a training provider to upskill the Administration Department at Company

A, although the department runs smoothly.

The ‘Legal Form’ allows for ABC Traders to outsource their Enterprise Development contribution. Yet, there is no ‘Substance’ to the

assistance as the administration department runs adequately. For example, ‘Substance’ would have been an interest-free loan for the

same amount, which would have enabled Company A to invest in equipment to improve their service offering.

Evidence to substantiate ‘Substance’ over ‘Legal Form’ - non-exhaustive.

List of active Suppliers Obtain a schedule of all B-BBEE suppliers that form part of an organisation’s Preferential

Procurement Spend and the total spend with all other suppliers. B-BBEE recognition status and

proof thereof is necessary.

Enterprise Development

and Supplier Development

Agreements

Inspect all Enterprise Development and Supplier Development Agreements to ensure they comply

with the criteria stated under Statement 400. Ensure evidence exists that Enterprise Development

or Supplier Development contributions have been initiated and implemented within the relevant

financial period.

Evidence of contribution Evidence that the contribution has been made, for example, a proof of payment.

Socio-Economic Development

The desired outcome of Socio-Economic Development is to create income-generating activities for ‘Black’ People. However, an

organisation’s approach to ‘Legal Form’ more often than not leaves Beneficiaries worse off following the intervention.

For example, ABC Traders agrees to provide food parcels to a non-profit organisation whereby the benefit of the contribution will reach

100% ‘Black’ People. An initiative such as this would qualify as Corporate Social Investment or Corporate Social Responsibility and does

not meet the ‘Substance’ required for Socio-Economic Development which necessitates income-generating activities.

Evidence to substantiate ‘Substance’ over ‘Legal Form’ - non-exhaustive.

Agreement or

Acknowledgement of Receipt

> Inspect all of the Socio-Economic Development Agreements; and

> Confirm that all activities comply with the criteria stated under Statement 500.

Confirmation of percentage

‘Black’ People as Beneficiaries

Ensure that sufficient and appropriate evidence exists to support that at least 75% of the value of

the Socio-Economic Development contributions directly benefit ‘Black’ People.

Proof of Cost incurred Evidence must indicate that the cost was incurred, for example, in the form of a proof of payment.

Thus, when organisations take their B-BBEE Strategy into 2022 and beyond, each should bear in mind that paper-driven ‘Legal Form’ is,

more often than not, more straightforward to administer than ‘Substance’. However, the ‘Substance’ yields meaningful and sustainable

transformation, which is precisely what will produce a return on investment for all and have an impact on the livelihood of ‘Black’ People.