Are B-BBEE Trusts still valid and what are the requirements?

Are B-BBEE Trusts still valid and what are the requirements?

B-BBEE trust

The Broad-Based Black Economic Empowerment (B-BBEE) Codes of Good Practice measure performance against five inclusion indicators. These requirements prioritise economic growth through minimum levels of local participation.

The ownership element, specifically when using trusts, remains highly contested. Why you may ask?

This is because trusts can often circumvent the objectives of B-BBEE. 

In a previous article we discussed broad-based collective ownership programmes such as non-profit companies, in this article we look at the criteria for B-BBEE trusts with focus on the trust participants.

What are the objectives of B-BBEE?

Briefly, the objective is to increase the effective participation of black people in the South African economy and promote a more equitable income distribution.  In this regard, trusts can provide financial benefits to more black people than individual ownership structures can. Trusts can especially benefit poor and unskilled black people who otherwise would not have an opportunity to participate in shareholding or acquire securities or interests in a company. It is trite law that trusts in general are “designed/essentially to protect the weak” (Land and Agricultural Bank of South Africa v Parker and Another 2005 2 SA 77 (SCA)). Trusts are, therefore, ideal vehicles to achieve the broad-based objectives of the B-BBEE Act.

In early 2021, the Minister of Trade, Industry and Competition (“the Minster”) acknowledged that the significant differences in opinion as to how collective ownership enterprises, including B-BBEE trusts, should be considered for black ownership purposes, were affecting the economy and that clarity was required.

The Minister then gazetted a practice note in May 2021 to clarify how the current legislative provisions should be interpreted. This practice note was sorely needed in the B-BBEE ownership sphere, and its promulgation will hopefully have the effect that a uniform interpretation will be adopted.

What are the basic criteria for trusts when it comes to participants? 

In recent years, the market has only deemed a B-BBEE trust as valid if the participants or beneficiaries of the trust were clearly identified individuals, over the age of 18 years, and receive their distributions in cash. Furthermore, it was asserted that ownership structures might not contribute to skills development or community welfare initiatives.

The Minister, however, refuted this and confirmed that specific beneficiaries do not need to be individually identified, that minors as participants may indeed be included in ownership calculations, and that distributions may be in cash or in kind. It was also confirmed that ownership may be facilitated through structures with educational, developmental and community upliftment objectives.

It was made clear that the trust deed must define the participants of the trust, but that they may be defined as a class of natural persons. The proportion of the entitlement of the participants to receive distributions should also be defined. The trustees administering the trust should have no discretion to change the definition of the participants, but they can select the beneficiaries from the defined class, who will then receive distributions in the proportions set out in the trust deed. 

Trustees must submit an annual financial report to participants at an annual general meeting. In this regard, the Minister confirmed that the participants should be invited to said meeting, but that their attendance was not required for the structure to comply with the ownership provisions.  Lastly, on winding up or termination of the trust, all accumulated economic interest must accrue to the participants or to an entity with similar objectives.

In practice, this means that the trust should function as an independent shareholder, where the trustees hold trustee meetings, keep financial records, attend shareholder meetings and report to its participants. The importance of developing black people through empowerment training and development programmes cannot be ignored. SERR Synergy has unique training courses to assist with the development of beneficiaries to participate meaningfully in the affairs of the trust or other ownership structures.

In conclusion

Trusts as ownership vehicles are therefore still very much valid and acceptable for B-BBEE purposes. 

SERR Synergy assists businesses with a variety of ownership structures to facilitate black participation in accordance with the current B-BBEE legislation.

About the author: Liezl Krynauw holds an LLB from the University of Pretoria and started her career with Webber Wentzel attorneys. She joined the team at SERR Synergy in 2018 where she currently serves as a Senior Corporate Legal Advisor specialising in company law and collective ownership structures.

Please note that a similar article about B-BBEE Trust requirements was published by the author on our website and the Business Essentials platform in August 2018 - Link  

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