What important points to look at if a trust holds a CC membership

Few people know that although historically only natural persons may have been members of a close corporation (CC) and not any juristic person or trustee of an inter vivos trust in that capacity, since 11 January 2006, a natural or juristic person in the capacity of a trustee of an inter vivos trust may be a member of a CC; but only if certain requirements are met. Some estate planners and trustees are, however, unaware of the ongoing requirements, consequences and possible risks as a result of this allowance, which are discussed in this article.
 
When can inter vivos trusts be members of CCs?
Before 2006, only testamentary trusts were permitted to own members’ interests in close corporations. Since 11 January 2006, in terms of the Close Corporations Amendment Act 25 of 2005 and Practice Note 1 of 2006 of CIPC, an inter vivos trust can own member’s interest in a CC if the following conditions were met:
·       A juristic person, for example, a company or a close corporation, cannot be a beneficiary of the trust. The trustees have to be aware of this requirement when the trust acquires the membership and also when any trust deed amendments are made.
·       The close corporation is not bound by any clauses in the trust instrument. The estate planner can therefore not prescribe in the trust instrument how the CC ought to be managed by the trustees. The representative trustee (discussed below) can also bind the trust. If the representative trustee, therefore, acts outside of the trust deed and binds the trust, it will be up to their co-trustees to handle the matter outside of the CC.
·       The close corporation has no obligations in terms of the trust instrument. Therefore, beneficiaries can only look to trustees for their rights and not to the close corporation itself. This may often lead to conflict as the representative trustee of the CC may keep information away from beneficiaries, and sometimes even from co-trustees.
·       If at any time the number of beneficiaries of the trust when added to the number of members of the CC is greater than ten, the membership of the trustees will cease. Once this happens, no trustee of the trust will ever be eligible for membership of the CC again, even if the number of beneficiaries drops below ten. The trustees have to be aware if this requirement and, on a regular basis, calculate the total number of beneficiaries of the trust, especially if beneficiary classes include “the descendants of”.
 
Fiduciary duty of members
In terms of Section 42 of the Close Corporations Act 69 of 1984 (the Act), each member of a CC shall stand in a fiduciary relationship to the CC, and shall therefore act honestly and in good faith, and exercise such powers as they may have to manage or represent the CC in the interest and for the benefit of the CC. If the trust is not the only member, then the trustee will be expected to act in the interests of all the members and not only in the best interest of the trust – that may create a conflict between what is best for the CC and what is best for the trust. Each member shall also not act without or exceed the powers provided to them. Each member shall avoid any material conflict between their own interests and those of the CC.
 
The representative trustee - a potential risk
Because a trust is not a legal person, the trustees will be the member of the close corporation, not the trust. In the case of multiple trustees, an originally signed special power of attorney by each of the trustees appointing one of them as the representative of the trustees for purposes of holding and dealing with the member’s interest in the CC has to be lodged with CIPC. Such power of attorney provides such trustee with great powers. The name of the trustee representing the trust’s interests must be disclosed in relation to trust matters, and it must be stated that the person is acting as a trustee.
 
The estate planner and trustees, therefore, have to be mindful of the powerful position of such a representative trustee. They will be the person on record with CIPC, the CC’s bank and represent the CC in all legal matters. They basically ‘carry the cheque book’ for the CC if the trust is its only member. If the trustees want to replace them for whatever reason, it may prove difficult in certain circumstances, such as where there are only two trustees, as a decision to make a change will have to be unanimous, which will clearly be resisted by the current representative trustee. If there are more than two trustees, such decisions may require a unanimous decision, which may be blocked by the trustee concerned.
 
Estate planners and trustees should also realise that a member of a CC shall (if the trust is not the only member in the CC) be liable to the CC for loss caused by their failure in the carrying on of the business of the CC to act with the degree of care and skill that may reasonably be expected from a person of their knowledge and experience in terms of Section 43 of the Act. The representative trustee may, therefore, expose the trust to risk. This may also mean that the representative trustee cannot act on instruction of the board of trustees, and in so doing, breach this requirement of the Act.