Navigating B-BBEE compliance can be tricky, but understanding the Modified Flow-Through Principle can help you increase your ownership score. Let’s break it down into simpler terms.
What is the Modified Flow-Through Principle?
The Modified Flow-Through Principle allows a business entity which has more than 51% black ownership in a multi-tiered structure to be treated as having 100% black ownership—but only once in the entire structure. This can boost your B-BBEE score without making any changes to your actual ownership.
How Does the Modified Flow-Through Principle Work?
This principle works by letting one black-owned entity within your ownership structure be recognised as 100% black-owned. To qualify, the following conditions must be met:
- Black-Controlled: A black person must own more than 51% of the voting rights in the entity.
- Black Ownership: Black people must hold more than 51% of the economic interest in the entity.
It’s important to remember that this principle cannot be used for trusts because the rights of trust beneficiaries differ from those of entity shareholders.
How is the Modified flow–through principle applied in practice?
Firstly, the ownership percentage of all upstream business entities must be determined, so one would need to do the following:
- Start by creating an organogram that shows the different ownership chains within your business.
- Determine the black ownership of each chain.
- Mark the entities where black people hold more than 51% of the voting rights and more than 51% of the economic interest.
- Choose a one entity in the ownership structure that is black-owned or black-controlled and recognise that entity’s participation as 100% black-owned.
- After making this adjustment, calculate the overall black ownership in the structure.
This principle’s application is limited to black people’s voting rights and economic interests and is not available for black women indicators. This principle thereby allows black owners to increase their ownership points on the above-mentioned voting rights and economic interest sub-indicators.
Author:
Solita Narayan
SEESA BEE, CAT Senior Legal Advisor – Research and Training
LLB, Admitted Attorney.
Need assistance? Call 080 001 1130 or visit https://bit.ly/4ccqQ0z for a call back. SEESA will help you maximise your ownership points and boost your B-BBEE score.