This article clarifies how Trusts are used for ownership purposes under B-BBEE in South Africa.
What is a Trust?
A Trust is a legal arrangement where someone (called a Trustee) holds assets (like shares in a company) for the benefit of others (called Beneficiaries). B-BBEE allows ownership through Trusts for employee groups, communities, or similar collectives.
Trusts and B-BBEE Requirements
For B-BBEE points, Black people's ownership rights must be genuine. The B-BBEE Codes set rules to ensure Trusts don't undermine this goal. These rules apply to all Trusts used for ownership, including Broad-Based Ownership Schemes (BBOS), Employee Share Ownership Programmes (ESOPs) structured as Trusts and BBOS Educational Trusts.
Key Points for B-BBEE Ownership Trusts:
Clear beneficiaries and their share: The Trust Deed must clearly define who benefits and how much. Beneficiaries must know their share upfront, and proof of payments is required during B-BBEE assessments. Trustees can't change these details. There is no discretion allowed by the trustees.
Distribution of Trust proceeds: Trusts established must follow specific rules for distributing benefits to beneficiaries. The Trust Deed should clearly explain this process.
Financial reporting: Trustees oversee Trust finances and must inform beneficiaries annually through meetings.
Black participant involvement: Beneficiaries, represented by Trustees, should have a say in decision-making similar to shareholders in a company. This includes voting rights and active board participation.
Trust winding-up: Upon termination, all accumulated benefits must go to the beneficiaries or an entity representing them. Employee shareholding shouldn't be tied to employment contracts, as it's about ownership, not daily operations.
Trust Deed and B-BBEE Recognition
The Trust Deed must be available to beneficiaries in their preferred language. For B-BBEE points, the Trust must comply with the general Trust rules and any specific rules for BBOS or ESOPs (if applicable).
Family Trusts for B-BBEE
Family Trusts can also be used for B-BBEE ownership, but the Trust Deed must clearly define beneficiaries and their share. While Trustees manage the Trust, all benefits must eventually go to the beneficiaries.
Educational Trusts for B - BBEE
Educational Trusts can also be used for B-BBEE ownership, but the Trust Deed must clearly define the class of beneficiaries and the distribution that the beneficiaries will receive.
Important Considerations
Trust purpose: B-BBEE ownership Trusts are distinct from Trusts used for estate planning or tax benefits. The focus is on active participation, not passive investment.
Minors as beneficiaries: While Black children, as defined in the codes ,qualify as Black people under B-BBEE, including them as beneficiaries doesn't achieve true empowerment. They can't exercise voting rights and are seen as financial recipients, not indirect shareholders. B-BBEE aims to shift ownership patterns through active participation, which minors cannot do.
Conclusion
Trusts used correctly can be a powerful tool for B-BBEE transformation. They can increase Black ownership, management, and control of businesses in South Africa, aligning with the B-BBEE Act's goals. However, using Trusts to circumvent the Act (like not giving beneficiaries voting rights) is considered fronting and misrepresents a company's B-BBEE status.
Should you require more clarity or a specific structure for your company please contact us.
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