Only real people count, the generous-but-narrow 51% rule, what happens to government shareholders, and why 'once empowered, always empowered' overstates the position.
Here is the first thing that surprises people. If your black shareholder is a company, the Codes do not stop there. They look through that company to see who owns it, and keep looking until they reach actual human beings. What ends up being counted is ownership held by black natural persons — real people — and the percentages multiply down the chain. This is called the flow-through rule.
Recognised schemes and trusts are not shut out by this. They are the permitted vehicles through which the tracing runs, each subject to its own rules (covered in the schemes and trusts guide).
The Amended Codes place the Flow-Through Principle at Statement 100, paragraph 3.3. Black ownership is traced through the chain of ownership to the black natural persons who ultimately hold the interest, and the percentage held is the product of the percentages down that chain. It is the reason a corporate shareholder never counts at its face percentage. You can read the provision in full on the sources.
A layer dilutes only to the extent that it is not itself fully black-held. A holding company that is 100% held by black individuals passes the full percentage through; one that is 60% black-held passes through 60% of it. So the question to ask about any interposed vehicle is not whether it exists but what percentage of it is black-held, and what the layer is for. Sometimes there is a good reason — a lender wants security over a separate company, or several investors are being brought together — but every partial layer has a cost.
The 51% rule, and its limits
There is one exception to the look-through rule, and it is generous — but narrower than people think. If black people hold at least 51% of a company in your ownership chain, that company can be treated as if it were 100% black. It can be applied only once in the whole structure.
This is the Modified Flow-Through Principle, at Statement 100, paragraph 3.4.3.1: where black people hold at least 51% of the shares of a “B-BBEE owned or controlled company” in the ownership chain, that company may be treated as if it were 100% black-owned — applied only once in the ownership structure. You can read the provision in full on the sources.
The limit is the important part. This rule can be used only for two lines on the scorecard: the votes of black people (item 2.1.1) and the economic interest of black people (item 2.2.1). Between them those are worth 8 points. It cannot be used for black women, for the designated-groups line, for new entrants, or — most importantly — for net value.
That boundary is set by Statement 100, paragraph 3.4.4: the modified flow-through applies only to the exercisable voting rights of black people (item 2.1.1) and the economic interest of black people (item 2.2.1), and does not apply to black women, designated groups, new entrants or net value. Because it reaches only those two lines, it does nothing for the sub-indicators most structures actually fail on. You can read the provision in full on the sources.
So the 51% rule cannot rescue a structure that is failing on net value — which is the thing most structures fail on. That is the single most useful sentence to remember about it.
Two honest uncertainties worth knowing
We flag two points where the gazette is not clean, so you are not surprised later. First, the text describes the rule as applying to a “B-BBEE owned or controlled company” in the ownership of the measured entity. It supplies no basis for applying the rule where the link in the chain is a trust rather than a company. Unless an authoritative instrument or judgment establishes otherwise, do not assume a 51%-black-beneficiary trust can be treated as 100% black.
Second, a business applying the rule “cannot benefit from the Exclusion Principle” — the elective right to leave certain “mandated investments” (pension funds, collective investment schemes, long-term insurers and similar holdings) out of the calculation, up to 40% of ownership. That prohibition is written generally. What the Codes do not resolve cleanly is how it sits with the compulsory exclusion of state shareholdings (dealt with in the next section). If your shareholder base includes an organ of state, or a mandated investment, and you also want to use the 51% rule, that combination needs advice on your actual facts rather than a general answer.
The elevation test lives at Statement 000 (GenN 306 of 2019), paragraphs 4.4.1, 4.4.2, 5.3.1 and 5.3.2: an EME or QSE that is at least 51% black-owned qualifies for elevation to Level 2, and one that is 100% black-owned to Level 1 — measured on ordinary flow-through ownership. That is the basis the 51% rule expressly does not reach. You can read the paragraphs in full on the sources.
Government shareholders
If an organ of state or a public entity holds shares in your business, that shareholding is taken out of the calculation before anything else is done. The remaining shareholders are then measured against the smaller base — so the same black shareholders can end up counting for a larger slice of what is left.
This rule lives at Statement 100, paragraph 3.5: the shareholding of an organ of state or public entity is excluded from the measured entity’s ownership before the ownership indicators are measured, and the remaining ownership is measured against the reduced base. You can read the provision in full on the sources.
There is an exception. The Minister can designate an organ of state or public entity as a “B-BBEE Facilitator” by notice in the Gazette. Where that has happened, its shareholding is treated as held 100% by black people, 40% by black women, 20% by black designated groups, and without any acquisition debts or third-party rights. In other words, a facilitator’s shares are counted at their most favourable, rather than stripped out.
The exception lives at Statement 100, paragraphs 3.6.1.1 to 3.6.1.5: where an organ of state or public entity is designated a B-BBEE Facilitator by the Minister by notice in the Gazette, its shareholding is deemed to be held 100% by black people, 40% by black women and 20% by black designated groups, and to carry no acquisition debts or third-party rights. That last part matters — the holding is treated as fully paid and unencumbered, the two things that ordinarily depress the net-value line. You can read the paragraphs in full on the sources.
What happens when your black shareholder leaves
You have probably heard the phrase “once empowered, always empowered”. It overstates the position considerably.
The three conditions are set by Statement 100, paragraph 3.8.1: continued recognition of black ownership after the exit of black participants applies where the participants held their shares for at least three years, value was created in their hands, and transformation occurred in the measured entity during the period they held the shares. Two hard ceilings then follow, at paragraphs 3.8.2 and 3.8.3.2 — the points recognised may not exceed 40% of the total ownership points (10 of 25), and may not be claimed for longer than the participants actually held the shares. You can read all three paragraphs in full on the sources.
And the points are not simply the points you used to have. The Codes require you to multiply three things together: the value created in the black participants’ hands as a percentage of the total value of their shareholding at the date of sale; your B-BBEE status on the balanced scorecard at the date of measurement; and the ownership points attributable to your business on the date of sale. The 40% figure is a ceiling on the result of that calculation, not the starting point.
Statement 100, paragraphs 3.8.4.1 to 3.8.4.3 set out the calculation: the recognised ownership contribution is the product of the value created in the participants’ hands as a percentage of the total value of their shareholding at the date of sale, the measured entity’s B-BBEE status at the date of measurement, and the ownership points attributable to the entity at the date of sale. You can read the paragraphs in full on the sources.
This paperwork requirement is set by Statement 100, paragraph 3.8.3.1: where the black participants funded their acquisition by way of a loan, there must be a written agreement between the measured entity, the black participants and the lender recording the loan arrangements — save where the measured entity was itself the lender. You can read the provision in full on the sources.
Frequently asked questions
No. The Codes look through the shareholding company to the actual human beings behind it, and count only ownership held by black natural persons — multiplying the percentages down the chain. A company that holds 30% of your business but is itself only 60% black-owned passes through 60% of 30%, which is 18%, not 30%. A layer that is 100% black-held passes the full percentage; one that is 60% black-held passes 60% of it. This is the flow-through rule.
No — and that is its most important limit. If black people hold at least 51% of a company in your chain, that company can be treated as if it were 100% black, but only once in the whole structure and only for two scorecard lines: the votes of black people (item 2.1.1) and the economic interest of black people (item 2.2.1). It cannot be used for black women, the designated-groups line, new entrants or net value. Because net value is the line most structures fail on, the 51% rule cannot rescue them.
An organ of state or public entity shareholding is taken out of the calculation first, and the remaining shareholders are then measured against the smaller base. The exception is a “B-BBEE Facilitator” — a body the Minister has designated by notice in the Gazette, whose shareholding is then treated as held 100% by black people, 40% by black women, 20% by black designated groups, and free of any acquisition debts or third-party rights.
It overstates the position considerably. The Codes do let you keep claiming black ownership after a black shareholder has left, but only if they held the shares for at least three years, real value was created in their hands, and transformation actually happened in your business while they held the shares. Even then, the continued recognition is capped at 40% of your ownership score — 10 of the 25 points — and cannot be claimed for longer than they actually held the shares. Where there was a loan, a written agreement between the business, the shareholder and the lender must have existed from the start.
Why you can trust this: Martin Kotze has been an admitted Attorney of the High Court of South Africa, registered Conveyancer, and Notary Public since 2014, practising from Pretoria. The firm is regulated by the Legal Practice Council under firm registration 17444.
This guide is general information, not legal advice for your specific matter.
Structure black ownership that scores — and stays clear of fronting
Martin Kotze structures B-BBEE ownership deals end-to-end — the share sale or scheme, the funding, the trust or company, and the shareholders’ agreement. General guidance on this page is not a substitute for advice on your facts.