This article summarises the basics of a Trust for B-BBEE purposes. A previous article found via link “https://beeratings.com/understanding-the-use-of-trusts-in-b-bbee-ownership-initiatives/” explains Trusts from another perspective too.
Also read this article for further info: “https://beeratings.com/the-use-of-a-b-bos-in-b-bbee-ownership-structures/”
Statement 100 of the Generic Codes states that Black participants in a Trust holdings rights of ownership in a measured entity may contribute:
- a maximum of 40% of the total points on the ownership scorecard of the measured entity if the trust meets the qualification criteria in Annexe 100(0).
- 100% of the total points on the ownership scorecard of the measured entity if the trust meets the additional qualification criteria in Annexe 100(0).
Where ownership is facilitated through a Trust, whether such Trust is a Broad-Based Ownership Scheme, Employee Share Ownership Programme, or just a Trust, the Trust must meet the Trust Rules set in the Codes of Good Practice. This means a Trust that is set up as a Broad-Based Ownership Scheme or Employee Share Ownership Programme must meet the rules for Trusts and in addition to that, the rules for Broad-Based Ownership Scheme or Employee Share Ownership Programme as the case may be.
The qualification criteria for the recognition of Trusts are as follows:
- the Trust Deed must define the beneficiaries and the proportion of their entitlement to receive distributions:
- a written record of the names of the beneficiaries or the use of a defined class of natural person satisfies the requirement for identification;
- a written record of fixed percentages of entitlement or the use of a formula for calculating entitlement satisfies the need for defining proportion of benefit;
- the Trustees must have no discretion on the above-mentioned terms; and
- on winding-up or termination of the trust, all accumulated Economic Interest must be transferred to the beneficiaries or to an entity representing the interest of the participants or class of beneficiaries.
The additional criterion for trusts is that the Trust must obtain a certificate from a competent person to the effect that the Trust was created for a legitimate commercial reason, which has been disclosed, and the terms of the trust do not directly or indirectly seek to circumvent the provisions of the Codes and the Act.
The Codes of Good Practice allow for establishment and recognition of family trusts to facilitate ownership. For a Family Trust to receive B-BBEE recognition status, the trust deed must define the beneficiaries and the proportion of their entitlement to receive distributions. A written record of the names of the beneficiaries or the use of a defined class of natural person satisfies the requirements of defining beneficiaries; only the trustees have discretion on the operations and terms of the trusts. On winding-up or termination of the trust, all accumulated Economic Interest must be transferred to the beneficiaries or to an entity representing the interest of the participants or class of beneficiaries.
In practice, this means that the Trust must be seen as an independent shareholder. The Trust deed must be implemented as a “living document” and trustees need to hold trustee meetings, attend board and shareholder meetings and report to participants.
Where measured entities create Trusts that have the effect of circumventing the B-BBEE Act, for instance by putting in place evergreen structures where shares never vests, ceding voting rights of participants to the measured entity or its appointed representatives, limiting involvement or active participation of beneficiaries in the measured entity through the Trustees or relevant fiduciaries, these would amount to fronting practices and misrepresentation of the B-BBEE status where such Trusts have been recognised for B-BBEE points or presented as real black ownership.
Should you want further information about trusts from a financial perspective, please access the two links below.