In the context of Broad-Based Black Economic Empowerment (B-BBEE) in South Africa, the Flow-Through Principle and the Modified Flow-Through Principle are methods used to calculate the percentage of black ownership in a company.
In this blog, we break down the difference between each method and how to use them when calculating the percentage of black ownership in a company.
Flow-Through Principle
The Flow-Through Principle is a straightforward method for calculating the ownership percentages of black individuals in a company. It involves tracing the ownership directly through the chain of ownership to the individuals who ultimately hold the shares.
How it works:
- Identify the ultimate beneficiaries of the company’s shares.
- Determine the percentage of shares owned by black individuals at each level of ownership.
- Calculate the overall percentage of black ownership by multiplying the percentages through the ownership chain.
Example:
- Company A is owned by two shareholders: Company B (70%) and Individual C (30%).
- Company B is owned by Black Individual D (50%) and White Individual E (50%).
Using the Flow-Through Principle, the calculation for black ownership in Company A would be:
- Black ownership through Company B: 70% * 50% = 35%
- Direct black ownership by Individual C: 30%
- Total black ownership in Company A: 35% + 30% = 65%
Modified Flow-Through Principle
The Modified Flow-Through Principle is a variation of the Flow-Through Principle that allows for a more favourable calculation of black ownership in certain circumstances. This method is used to encourage and recognise the efforts of companies to improve black ownership at higher levels of the ownership chain.
How it works:
- Identify the ultimate beneficiaries of the company’s shares.
- Determine the percentage of shares owned by black individuals at each level of ownership.
- Apply the Flow-Through Principle up to the first level of black ownership, and then assume 100% black ownership at that level for further calculations.
Example:
- Company A is owned by two shareholders: Company B (70%) and Individual C (30%).
- Company B is owned by Black Individual D (50%) and White Individual E (50%).
Using the Modified Flow-Through Principle, the calculation for black ownership in Company A would be:
- Black ownership through Company B (assuming 100% at the first black ownership level): 70% * 100% = 70%
- Direct black ownership by Individual C: 30%
- Total black ownership in Company A: 70% + 30% = 100% (capped at 100%)
In summary
Flow-Through Principle: Calculates black ownership by tracing actual ownership percentages through each level of ownership.
Modified Flow-Through Principle: Assumes 100% black ownership at the first level of black ownership for more favourable calculations.
The Modified Flow-Through Principle is typically used to recognise the efforts of companies that have introduced black ownership at a higher level in the ownership chain, thus providing an incentive for companies to increase black ownership.
If your company needs guidance on B-BBEE practices, reach out to us today. As specialists in the field, we can help you maximise your B-BBEE scorecard while ensuring full compliance.