Are trusts still safe to use for BEE purposes - cont.

In the previous article it was confirmed that our law allows and encourages the use of trusts in B-BBEE ownership structures. The practice note published on 18 May 2021 by the Minister of Trade, Industry and Competition was much needed to preserve a trust as an allowed mechanism to meaningfully transfer business ownership into black hands. It was confirmed that discretionary collective enterprises, which includes trusts, have benefited many black beneficiaries to access the economy and/or to enjoy economic empowerment. In this article, the practice note is discussed in more detail.

Beneficiary definition
It is important that the trust deed, the trust’s constitutional document, clearly stipulates the racial composition, otherwise the participants must be regarded as non-black. A defined class of black beneficiaries satisfies ownership for purposes of the B-BBEE Codes and beneficiaries need not be individually identified, such as Mr X with identity number…. The Minister stated that meaningful broad-based ownership by black people, communities and workers is often best served by identifying a natural class of persons to benefit from the scheme (typically done in a discretionary trust) as opposed to a list of individuals with vested rights.
The B-BBEE Codes place no restrictions on the nature of beneficiaries. Minors (under the age of 18) are therefore not prohibited from being beneficiaries. This is so because their ownership rights are exercised by the trustees (they are voting on behalf of all beneficiaries). The minors’ lack of legal capacity is therefore not relevant. The DTI has ruled that “without derogating from the generality of this statement, minors for example, are not restricted from being participants or beneficiaries in any way, whether as part of a defined class of natural persons or individually.”
Beneficiaries defined in a trust deed as “workers of the firm” may also satisfy the ownership provisions of the B-BBEE Codes. Annexure 100(C) of the B-BBEE Codes permit a trust which identifies the beneficiaries as employees of the company for as long as they remain in its employ. This enables the utilisation of a trust as an incentive for employees to remain with the business over the long term.
Although Annexure 100(C) requires that all accumulated economic interest of the scheme be payable to the beneficiaries at the earlier of a specified date or event, or the termination of the scheme, it does not require such an earlier date or event to be specified in the trust deed. The only requirement is that the accumulated economic interest of the trust ultimately goes to its beneficiaries and not to anybody else. It will therefore be sufficient if the trust deed stipulates that its accumulated economic interest must be distributed to one or more of the remaining qualifying beneficiaries on termination of the trust.

Discretion
Trustees are allowed to be given discretion to vest benefits in beneficiaries from time to time, and may even have a discretion in relation to the portion of the beneficiaries’ entitlement. It is therefore allowed for a trust deed to provide for the discretion of the trustees to distribute, in their sole and unfettered discretion, such portions of the trust’s income and capital as they deem fit from time to time, to some members of a defined class of natural persons to the exclusion of others. Due to discretion afforded to trustees, the trust may not be penalised for not having made any distributions in any particular year, as earnings retained and not distributed ultimately vest in the individual or defined class of natural persons.
Following the trustees’ exercise of their discretion, each beneficiary selected to benefit from a particular distribution acquires a vested right to such portion of the particular distribution allocated to them. The discretion afforded to trustees allow them to exclude a beneficiary, who have already benefitted, from future distributions and such beneficiary will not be automatically entitled to future distributions. This does, however, not mean that the trustees can benefit anyone outside of the defined class of beneficiaries in the trust deed.
If the trust deed expressly provides for a fixed percentage of distributions to vest in the “defined class of natural person”, it satisfies the rule of identifying the proportion of entitlement of beneficiaries by means of a “written record of fixed percentages of claim”, provided that the trust deed does not give the trustees the discretion to distribute less than that fixed percentage to beneficiaries who are members of the defined class of natural persons. The practice note also states that where a trust deed provides for a formula to determine the proportion of a claim of a “defined class of persons” or the entitlement of individuals selected out of that defined class and the trustees are not awarded a discretion to deviate from the formula, the scheme also complies with the rule that the trustees “may have no discretion” on the terms.

Reporting
The practice note also states that the requirement under the B-BBEE Codes that a trust’s financial reports be presented to beneficiaries at an annual trustee meeting implies that beneficiaries must be invited to the annual trustee meeting but does not require all beneficiaries to be present at the meeting in order for the trust to comply.

More challenges
The Minister noted that there is still a challenge to promote participation of individual entrepreneurs in order to improve the level and quality of representation of black South Africans in the economy to minimise exploitation of the B-BBEE provisions and to ensure that broad-black ownership strengthens transformation of the economy. Further guidance should be provided on this. But at least a trust is still a recognised form to be used in B-BBEE structures.