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Forestry Sector – Ownership Element

1. Introduction and Applicability

  • 1.1 Sector Code Overview: The Amended Forest Sector Code (FSC) provides a framework for measuring B-BBEE compliance specifically within the forestry industry in South Africa. It aims to address the unique characteristics of this sector, including its long-term investment horizons, the importance of land ownership, and the role of communities.
  • 1.2 Scope of Application: The FSC applies to a wide range of forestry-related activities, including:
    • Growing of timber (plantations)
    • Harvesting of timber
    • Processing of timber (sawmills, pulp mills, etc.)
    • Forestry contracting services
    • Chartering activities relating to the forestry sector
    • Note: There is potential overlap with the AgriBEE Sector Code for activities that could be considered both agriculture and forestry (e.g., growing trees for fruit). The primary activity usually determines which code applies.
  • 1.3 Legal Basis: Section 9(1) of the Broad-Based Black Economic Empowerment Act (No. 53 of 2003, as amended) and the Amended Forest Sector Code (Government Gazette No. 40485, 09 December 2016). There was a later amendment in Government Gazette 40910 in 2017 clarifying certain aspects.
  • 1.4 Effective Date: 09 December 2016 (with clarifications in 2017).
  • 1.5 Precedence: This Sector Code supersedes the Generic Codes for entities within its scope.

2. Ownership Scorecard and Thresholds

IndicatorWeightingTarget
Exercisable Voting Rights (Black People) 5 points 25% + 1 vote
Exercisable Voting Rights (Black Women) 3 points 10%
Economic Interest (Black People) 5 points 25%
Economic Interest (Black Women) 3 points 10%
Economic Interest (Black Designated Groups/Broad-based schemes/ESOPs/Communities) 4 points 10%
Net Value 10 points See Below
Total30 pointsNet Value Target: Based on a phased-in approach, linked to “years of recognition.” The target is expressed as a percentage of 25%.
  • 2.1 Ownership Scorecard:
  • 2.2 Priority Element Status: Ownership is a priority element.
  • 2.3 Subminimum Requirements: 40% of the Net Value points (i.e., 40% of 10 points = 4 points).
  • 2.4 Entity Size Thresholds:
    • EME Threshold: Annual Total Revenue of R10 million or less. (Same as the Generic Codes).
    • QSE Threshold: Annual Total Revenue between R10 million and R50 million. (Same as the Generic Codes).
    • Generic Threshold: Annual Total Revenue above R50 million. (Same as the Generic Codes).
  • 2.5 Automatic Recognition for EMEs/QSEs:
    • The usual automatic levels apply (Level Four for EMEs, Level One/Two for 100%/51%+ Black-owned EMEs and QSEs).
    • Crucially: Are there any conditions or restrictions on this automatic recognition? No. The Forestry Sector Code does not have a similar provision to the Construction Sector Code’s Clause 3.1.3 (restricting automatic recognition for BEPs).

3. Specific Ownership Requirements and Interpretations

  • 3.1 Unique Ownership Targets: The FSC has a higher overall points allocation for ownership (30 points) compared to the Generic Codes (25 points). The targets for voting rights and economic interest are generally aligned with the Generic Codes (25% + 1 vote and 25%), but there’s a greater emphasis on broad-based ownership and participation by Black designated groups, including communities.
  • 3.2 Flow-Through and Modified Flow-Through: Standard Flow-Through and Modified Flow-Through Principles apply.
  • 3.3 Exclusion Principle: Standard Exclusion Principle applies.
  • 3.4 Treatment of Specific Entities: The FSC provides specific recognition criteria for:
    • Broad-Based Ownership Schemes (BBOS): Must meet specific criteria outlined in the Code.
    • Trusts: Must meet specific criteria outlined in the Code.
    • ESOPs: Must meet specific criteria.
    • Communities: The Code specifically recognizes the importance of community involvement in the forestry sector.
  • 3.5 Multinationals: No specific provisions beyond the Generic Codes. Equity Equivalents would likely apply as usual.
  • 3.6 Ownership by Qualified Professionals/Specific Roles:
    • Not a specific requirement.
    • Crucially: Are there any requirements for ownership to be held by individuals in specific roles (e.g., executive management, as in the Construction Sector Code for BEPs)? Are there penalties for not meeting these requirements? No.
  • 3.7 Sale of Assets: No specific deviations from the Generic Codes.
  • 3.8 Private Equity Funds: Ownership by B-BBEE compliant Private Equity Funds is possible under the Forestry Sector Code, provided the fund meets the requirements outlined in the Generic Codes (Statement 100, paragraph 3.10). No specific provisions prevent or modify this.
  • 3.9 Other Unique Provisions:
    • Community Involvement: The emphasis on community participation is a significant feature of the FSC.
    • Long-Term Investments: The Code recognizes the long-term nature of investments in forestry.
    • Sale of Land and/or Assets: The FSC has specific provisions.

4. Areas of Uncertainty and Interpretation

  • 4.1 Ambiguities: As with the Generic Codes, valuation methodologies and the application of the Flow-Through Principle can be areas of interpretation. The specific rules for BBOS, Trusts, ESOPs, and community involvement may also require careful interpretation. The overlap with the AgriBEE Sector Code can create ambiguity in some cases.
  • 4.2 Industry Practice: Industry practice is developing, and engagement with the Forestry Sector Charter Council is important.
  • 4.3 Potential Disputes: Valuation disputes, challenges to the legitimacy of ownership structures, and interpretation of the specific rules for various entities.

5. Deal Process, Parties, and Costs

  • 5.1 Typical Deal Structures: Direct ownership, trusts, BBOS (including community trusts), and ESOPs.
  • 5.2 Key Parties Involved: Forestry companies, Black investors, communities, legal advisors, financial advisors, B-BBEE verification agencies.
  • 5.3 Deal Process Overview: Similar to the Generic Codes: due diligence, valuation, negotiation, legal documentation, and implementation.
  • 5.4 Cost Considerations: Similar to the Generic Codes: legal fees, valuation fees, advisory fees, B-BBEE verification fees, and the cost of the ownership transaction itself.

6. Gotchas and Best Practices

  • 6.1 Common Mistakes: Failing to meet the Net Value subminimum, inadequate documentation, fronting, not understanding the specific rules for various entities (BBOS, Trusts, ESOPs, communities). (Pay particular attention to any specific requirements like those for BEPs in the Construction Code). Not applicable here.
  • 6.2 Fronting Risks: High risk, particularly given the emphasis on community involvement and broad-based empowerment.
  • 6.3 Best Practices: Thorough planning, expert advice, genuine commitment to transformation, careful structuring of ownership deals, ongoing monitoring of compliance.

7. Alternatives to Ownership
Other elements include:
* Management Control
* Skills Development
* Enterprise and Supplier Development
* Socio-Economic Development

8. Conclusion

The Forestry Sector Code builds upon the Generic Codes but introduces several important distinctions, including a higher overall points allocation for ownership, a strong emphasis on community involvement, and specific rules for various types of ownership structures. Crucially, it does not impose restrictive ownership requirements based on professional registration and executive management roles, unlike the Construction Sector Code for BEPs. The potential overlap with the AgriBEE Sector Code needs careful consideration.

Please contact us for a confidential discussion around your unique BEE ownership needs.

Chapter: Sector codes:
Chapter: Sector codes:
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