The Modified Flow-Through Principle relates to the Ownership element of the B-BBEE Scorecard. In this article, we give a concise yet detailed breakdown and examples of this principle which is a critical component of many B-BBEE compliance strategies.
What is the Modified Flow-Through Principle?
The Modified Flow-Through Principle states that wherever in a chain of ownership Black Owners have a flow-through level of participation of at least 51%, then only once in the entire ownership structure of the measured entity this participation may be treated as if it were 100% Black.
This example chart explains the principle in practical terms:
In reality, the composition of shareholders will amount to :
| Non-B-BBEE Shareholding through Company C | 49% |
| Non-B-BBEE shareholding through Company D (49% of 51%) | 24.99% |
| B-BBEE Shareholding through Company D (51% of 51%) | 26.01% |
By making use of the Modified Flow-Through Principle an enterprise could be rated as a 51% Black-Owned company, while only parting with 26.01% of the total ownership in the enterprise. As a measured enterprise, where Black Participants enjoy more than 50.1% of the Economic interest and exercisable voting rights, it will be treated as if it is a black-owned company. The measured enterprise in the above example will be treated as a Black-Owned enterprise.
In some instances, with more complex enterprise structures, the principle can still be applied with a different outcome. This example illustrates such a scenario:
What does 51% Black Ownership mean?
The Codes have defined a 51% black-owned entity as an entity:
a) where black people hold at least 51% of the exercisable voting rights as determined under Code Series 100;
b) where black people hold at least 51% of the economic interest as determined under Code Series 100; and
c) that has earned all the points for Net Value under Code Series 100.
It should be noted that the Modified Flow-Through Principle will only apply to Economic Interest and Exercisable Voting Rights under paragraphs 2.1.1 and 2.2.2 of the Ownership scorecard. The standard flow-through principle applies to all other instances on the scorecard.
A word of caution when it comes to the Modified Flow-Through Principle
The Modified Flow-Through Principle should, however, be applied within context.
As stated above, the principle only applies to paragraphs 2.1.1 and 2.2.2 of the Ownership scorecard and its sole purpose is to enhance a measured entity’s score on these two indicators. It is primarily Large Enterprises (above R50 million annual turnover) that will adopt the Ownership scorecard as Qualifying Small Enterprises (QSEs) will opt to implement 51% Black Ownership to qualify for an automatic Level 2 status. Countless QSEs have been incorrectly advised to use the Modified Flow-through Principle to achieve 51% Black Ownership. It is illegal to use this principle for anything other than its intended purpose. It would be a misrepresentation for QSEs claiming to be 51% black-owned having applied the Modified Flow-through Principle. Such measured entities will now have to urgently rectify their Ownership structures to comply with legislation. We recommend that such enterprises immediately take the necessary steps to rectify their structure with the necessary expert assistance.
The B-BBEE Commission also had the following comments in respect of the Modified Flow-Through Principle:
And:
Always bear in mind that the restructuring of any enterprise may hold numerous consequences as far as tax is concerned and it is highly advisable to obtain the services of an expert to assist you with the restructuring of your enterprise.
Read the complete series of B-BBEE Compliance Basics here:
