7/30/2019 2004 Fronting.doc

1/2

2004 has been an interesting year in terms of what kind of fronting schemes came out of

the year. Fronting schemes arise due to peoples unwillingness to embrace the substanceof black economic empowerment. There is the added pressure from the affirmative

procurement trickle down effect throughout all sectors ranging from big and smaller

players in the sectors to actually transform. There is increased pressure on companiesfrom application of the leverage tools such as procurement, licencing and incentives from

both the public and the private sectors that requires companies to contribute to Broad-

Based BEE for them to benefit form the tools. There is fear in some entities that theirlimited contribution to BEE will not enable them to get the benefits from the leverage

tools mentioned above and that they could lose their businesses.

There have been some ingenious BEE schemes in the past year that were verysophisticated and others very close to being morally questionable. There has been great

move from the maid and gardeners being directors to sophisticated legal structures that

do not embrace the spirit of Broad-based BEE. The first type of structure that was being

contemplated by a white couple in order to meet BEE requirements involves adoptingAIDS children and setting up a trust for these children in order for them to benefit from

BEE. This trust would own shares in the company and the couple would be the soletrustees and also represent the beneficiaries on the trust on the board of the company. At

face value this looks very laudable as a mechanism to empower black children but when

you look for the economic substance in the trust deed and the loan agreements, itbecomes obvious that there is no change in the company and there is no intention to have

the economic benefits accruing to the AIDS children because the loan provisions may

make it impossible to have the benefit ever accruing to the children in their lifetime. One

has to ask the question if this type of scheme really facilitates the objective of trueempowerment which wants to see black people integrated into the mainstream of the

economy. This type of scheme does not facilitate that economic integration. The key forthis scheme to really empower there must be tangible benefits to accrue to the children intheir lifetime and have independent trustees representing their interest in the company.

The second scheme which could take the trophy for ingenuous BEE schemes in 2004involved a marriage. In this scheme a person approached me and asked what I thought of

the following a scheme he was advised to look into. I listened with keen interest to what

he had in mind as he explained the mechanics of the BEE Scheme. The scheme entailed

the businessman to divorce his white wife and marry a black lady who is a South Africancitizens and was able to vote on 27 April 1994. Shock registered on my face as he went

on explaining that they would draw up a prenuptial agreement. In terms of the agreement

he would transfer his shares in the business into her name and she would be appointed tothe board as the chairperson or a non-executive to overlook her interests. The lady would

not have to live with the said gentleman in an intimate way and he could live with his

divorced wife. The prenuptial agreement would include a clause that states that shouldBEE not be an issue the shares would revert to the husband and the marriage would be

ended in divorce so that he could remarry his wife. The bottom line is that the marriage

must coincide with the period of BEE. Whats in it for the black lady? She would earn

7/30/2019 2004 Fronting.doc

2/2

management and director fees for minimal effort as well as a portion of the dividend by

the company.

The proponent of this scheme believed that this was what empowerment was all about;

that he was empowering his new wife and was integrating her into the mainstream of the

economy by giving her a position as a director or a chairperson in his company. Onemust note that there are legitimate interracial marriages where shares are held in a family

trust and that is acceptable and legal. Legally how far do you delve into such schemes

without crossing the privacy boundary? One can only hope that we will not see any ofthese types of schemes in the future. I am happy to say that this man did not go ahead

with his scheme.