Understanding the use of trusts in B-BBEE ownership initiatives

In a previous article dated 20 July 2020, we discussed the use of Broad-based Ownership Schemes (B-BOS) as an example of use in B-BBEE matters. In this article we will focus on the use of Trusts in B-BBEE.

Reference documents:

BEE Act, as amended
B-BBEE Codes of Good Practice

What is a Trust?

A Trust typically refers to an arrangement in terms of which a person, often the Founder or Trustee, holds property or asset for the benefit of another, commonly known as a beneficiary, and can be for charity or estate planning, amongst other reasons. Under the B-BBEE Act, a Trust can be used to facilitate ownership by employees, communities or other similar collective groups.

Requirements for recognition of Trusts in ownership transactions

For the purposes of achieving B-BBEE objectives, black people may hold their rights of ownership in a measured entity through some form of a vehicle such as a Trust. To ensure that black people effectively own, control and manage the ownership rights held through the Trust and to prevent avenues for circumvention of the B-BBEE Act by measured entities, the B-BBEE Codes of Good Practice provide rules for the Trusts. These rules apply to Trusts as well as to transactions that involve Broad-Based Ownership Schemes and Employee Share Ownership Programmes that are structured in a form of a Trust.

While Trusts can be used to facilitate ownership, the transaction in question must still meet the requirements for recognition of ownership, which comprises of excisable voting rights, economic interests and net value in the hands of black people as a result of direct or indirect participation in the measured entity. The measured entity may on an annual basis recognise points for as long as the black shareholders still hold rights of ownership in the entity.

Broad-Based Ownership Scheme

Broad-Based Ownership Scheme refers to a collective ownership scheme constituted with the view to facilitating the participation of specified natural persons in the benefits flowing from the ownership by that scheme or by its fiduciaries of an equity interest in an entity, which could be in a form of a community or stokvel or group of enterprises. A Broad-Based Ownership Scheme may be created in a form of a Trust, and in that case it must meet both the rules for Broad-Based Ownership Scheme and for Trusts as set in the Codes of Good Practice.

Broad-Based Ownership Scheme must meet the following requirements:

Nomination of Trustees

At least 50% of the fiduciaries of the scheme must be independent persons having no employment with or direct or indirect beneficial interest in the scheme, at least 50% of the fiduciaries of the scheme must be black people with at least 25% being black women and the chairperson of the scheme must be independent.

Black participants and portion of entitlement

Codes Series 100, requires the trust to define participants and the portion of their entitlement to receive distribution of the economic interest. It is important for each participant to know in advance the portion of their entitlement, and during B-BBEE measurement, proof of payment will be produced. The trustees do not have discretion with regard to changing the participants and their portion of entitlement. Beneficiaries cannot be selected each year to receive benefits in a form of dividends from the measured entity, for payment of their education, training or social upliftment projects which are matters that should be catered for under skills development corporate, social investments or socio-economic development.

Trust proceeds

A trust is a broad-based scheme and must adhere to the requirements of both annexures 100 (B) and (D). The trust deed must provide guidance as to how the beneficiaries will receive the proceeds and must adhere to paragraph 1.1.7 of Annexure 100 (B) which states that 85% of the value of the benefits allocated to the trust must accrue to black people. This then means only 15% of the proceeds payable to the trust can be utilised for administrative and operational management of the trust.

Financial reports of the scheme

The trustees as the representatives of a trust have an oversight role over the financial reports of a trust. Trustees have a duty to inform the participants on the status of such reports at the annual general meeting of the scheme. Further, the trustees must hold a meeting with the black participants for the purpose of updating them on the status of accounts of the trust. Paragraph 1.1.12 of Annexure 100(B) provides that the scheme’s fiduciaries must present the financial reports of the scheme to participants yearly at an annual general meeting of the scheme. 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.

Documents governing the scheme

The Constitution of the scheme must be available on request to any participant in an official language in which that person is familiar.

Minors or Children as beneficiaries or participants

Whilst black children satisfy the definition of black people as per the B-BBEE Act, this does not mean that true empowerment will be achieved in instances where children are sighted as beneficiaries.

Children are regarded as financial beneficiaries and not indirect shareholders through the trust as they are not able to exercise voting rights in a manner that is consistent with real ownership, and only enjoy a financial benefit.

B-BBEE transformation cannot be accelerated through recognition of black children, as they have no capacity to act legally, and therefore cannot delegate or appoint proxies and cannot use exercisable voting rights as one of the key requirements for ownership.

Including under-age children as beneficiaries will be regarded as circumvention of the B-BBEE Act as they have no capacity to exercise rights flowing from such ownership.

Author Craig Tonkin

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