B-BBEE Sector Code Analysis: Defence Sector – Ownership Element

1. Introduction and Applicability

• 1.1 Sector Code Overview: The Defence Sector Code provides a framework for measuring B-BBEE compliance specifically within the South African defence industry. It aims to address the unique characteristics of this sector, including national security considerations and the dominance of state-owned enterprises.
• 1.2 Scope of Application: The Defence Sector Code applies to entities that provide goods and services to the South African National Defence Force (SANDF) and other organs of state involved in defence and security, including:
  • Manufacturers of military equipment and technology.
  • Providers of defence-related services (e.g., logistics, maintenance, training).
  • Research and development institutions focused on defence applications.
  • Excludes activities covered by other sector codes (e.g., general manufacturing, IT services) unless those activities are specifically tailored for defence applications.
• 1.3 Legal Basis: Section 9(1) of the Broad-Based Black Economic Empowerment Act (No. 53 of 2003, as amended) and the Defence Sector Code (it appears there have been drafts, but a final, gazetted version is difficult to locate publicly – see “Areas of Uncertainty” below).
• 1.4 Effective Date: Uncertain (see “Areas of Uncertainty” below).
• 1.5 Precedence: Once finalized and gazetted, this Sector Code would supersede the Generic Codes for entities within its scope.

2. Ownership Scorecard and Thresholds

This section relies on information from available draft versions of the Defence Sector Code and may not be entirely accurate if the final gazetted version differs.

Indicator	Weighting	Target
Exercisable Voting Rights (Black People)	4 points	25% + 1 vote
Exercisable Voting Rights (Black Women)	2 points	10%
Economic Interest (Black People)	4 points	25%
Economic Interest (Black Women)	2 points	10%
Economic Interest (Black Designated Groups/Broad-based schemes)	3 points	10%
Net Value	10 points	Likely based on a phased-in approach, similar to the Generic Codes.

• 2.1 Ownership Scorecard: See above – Total 25 points
• 2.2 Priority Element Status: Ownership is expected to be a priority element.
• 2.3 Subminimum Requirements: Likely 40% of the Net Value points, consistent with the Generic Codes.
• 2.4 Entity Size Thresholds: (Based on draft versions)
  • EME Threshold: Annual Total Revenue of R10 million or less.
  • QSE Threshold: Annual Total Revenue between R10 million and R50 million.
  • Generic Threshold: Annual Total Revenue above R50 million.
  • These thresholds are the same as the Generic Codes, but this could change in a final gazetted version.
• 2.5 Automatic Recognition for EMEs/QSEs:
  • The usual automatic levels are expected to 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? Based on available draft information, no, there are no specific restrictions like those in the Construction Sector Code for BEPs. However, this should be confirmed once a final gazetted version is available.

3. Specific Ownership Requirements and Interpretations

• 3.1 Unique Ownership Targets: Based on draft versions, the targets for voting rights and economic interest are generally aligned with the Generic Codes (25% + 1 vote and 25%).
• 3.2 Flow-Through and Modified Flow-Through: Standard Flow-Through and Modified Flow-Through Principles are expected to apply.
• 3.3 Exclusion Principle: Standard Exclusion Principle is expected to apply.
• 3.4 Treatment of Specific Entities: Draft versions suggest standard treatment of trusts, BBOS, and ESOPs, aligned with the Generic Codes.
• 3.5 Multinationals: No specific provisions beyond the Generic Codes are apparent in draft versions. Equity Equivalents would likely apply as usual.
• 3.6 Ownership by Qualified Professionals/Specific Roles:
  • Not a specific requirement in the draft versions.
  • Crucially: Are there any requirements for ownership to be held by individuals in specific roles (e.g., executive management, as in the Construction Code for BEPs)? Are there penalties for not meeting these requirements? Based on available draft information, no.
• 3.7 Sale of Assets: No specific deviations from the Generic Codes are apparent in the draft versions.
• 3.8 Private Equity Funds: Ownership by B-BBEE compliant Private Equity Funds is expected to be possible, provided the fund meets the requirements outlined in the Generic Codes (Statement 100, paragraph 3.10).
• 3.9 Other Unique Provisions:
  • National Security Considerations: The Defence Sector Code is expected to acknowledge the sensitive nature of the defence industry and the need for national security considerations. This might influence the implementation and interpretation of B-BBEE requirements, but specific details are unclear without a final gazetted version.
  • State-Owned Enterprises (SOEs): The significant role of SOEs (like Denel) in the defence industry is likely to be addressed, potentially through specific provisions or exemptions.

4. Areas of Uncertainty and Interpretation

• 4.1 Ambiguities: The biggest ambiguity is the lack of a readily available, finalized, and gazetted version of the Defence Sector Code. This makes it difficult to provide definitive answers. Many aspects of the Code’s interpretation will depend on the final wording.
• 4.2 Industry Practice: Industry practice is likely based on draft versions and engagement with the Department of Defence and Military Veterans, but this is not a substitute for a gazetted Code.
• 4.3 Potential Disputes: Once finalized, valuation disputes, challenges to ownership structures, and interpretation of any national security-related provisions are possible.

5. Deal Process, Parties, and Costs

• 5.1 Typical Deal Structures: Direct ownership, trusts, and potentially BBOS and ESOPs (depending on the final Code).
• 5.2 Key Parties Involved: Defence companies, Black investors, SOEs, legal advisors, financial advisors, B-BBEE verification agencies.
• 5.3 Deal Process Overview: Similar to the Generic Codes (due diligence, valuation, negotiation, legal documentation, implementation), but with potential additional complexities due to national security considerations.
• 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: Relying on draft versions of the Code, failing to meet the Net Value subminimum (if applicable), inadequate documentation, fronting. (Pay particular attention to any specific requirements like those for BEPs in the Construction Code). Not applicable based on available draft information.
• 6.2 Fronting Risks: High risk, given the strategic importance of the defence industry.
• 6.3 Best Practices: Thorough planning, expert advice, genuine commitment to transformation, careful structuring of ownership deals, ongoing monitoring of compliance. Staying informed about the finalization and gazetting of the Defence Sector Code is crucial.

7. Alternatives to Ownership
The other elements on the scorecard are expected to include:

• Management Control
• Skills Development
• Enterprise and Supplier Development
• Socio-Economic Development

8. Conclusion

The analysis of the Defence Sector Code is hampered by the lack of a readily available, finalized, and gazetted version. Based on available draft information, the ownership requirements appear to be broadly aligned with the Generic Codes, but with potential nuances related to national security and the role of SOEs. The most critical action for companies in the defence sector is to monitor the official gazetting of the final Code and seek expert advice once it is available.

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