Family Trusts have come under increasing scrutiny by the Broad-Based Black Economic Empowerment (“B-BBEE”) Commission (“the B-BBEE Commission”) who seem to take a dim view on Trusts when it comes to claiming black ownership recognition under the B-BBEE Act and B-BBEE Codes of Good Practice (“the Codes”). For those who are not familiar the B-BBEE Commission is a statutory body governed by the B-BBEE Act and Regulations and the primary function of the B-BBEE Commission is to curb fronting, including misrepresentation and other practices that undermine the objectives of the B-BBEE Act. In carrying out its functions, the B-BBEE Commission must maintain a register of major B-BBEE transactions (these are transactions that exceed R25 million and result in black ownership recognition under the Codes); receive and analyze reports on compliance from entities as listed in the B-BBEE Act, receive complaints relating to B-BBEE; make findings on fronting practices and conduct investigations either on its own initiative or in response to a complaint.
In recent dealings with the B-BBEE Commission it has become apparent that the B-BBEE Commission has taken an overly broad / draconian interpretation of the Codes and the criteria that need to be met in order for Trusts to qualify for black ownership recognition. Below is a summation of some of the more material assertions the B-BBEE Commission has made in respect of Trusts and black ownership recognition:
- The principle that seems to underpin the B-BBEE Commissions assessment of Trusts is that black participants (i.e. beneficiaries of Trusts) must be viewed as indirect shareholders in the measured entity and therefore must satisfy the ownership recognition criteria in Statement 100 of the Codes in order for the Trust to qualify for black ownership recognition, that being exercisable voting rights and an economic interest.
- Therefore as indirect shareholders in the measured entity, the beneficiaries of a Trust must firstly have the capacity to exercise voting rights. The Commission has interpreted this to mean that minor beneficiaries (i.e. those under the age of 18) who do not have legal capacity and therefore cannot exercise voting rights cannot receive black ownership recognition. Concerningly the Commission have in fact gone even further and advised that Trusts that include minors in the ranks of their beneficiaries cannot receive black ownership recognition at all and must amend their Trust Deeds to exclude minors in order to qualify for black ownership recognition This interpretation is in our view quite clearly flawed on the basis that the definition of “black people” in the B-BBEE Act does not exclude minors and in fact one of the primary objectives of the B-BBEE Act is to promote black youth participation.
- The Trust Deed must clearly define the beneficiaries. Despite the fact that the Codes specifically state that a defined class of natural persons satisfies this requirement the Commission has advised that if a defined class of natural persons potentially includes minors or persons who are not yet in existence ( i.e. descendants that have not yet been borne) then the Trust cannot receive black ownership recognition at all as according to the B-BBEE Commission only adult black persons alive at the date of assessment can receive black ownership recognition.
- The Trust Deed must define the portion of the beneficiaries entitlement to receive dividends which can be expressed as a formula and the Trustees must not have a discretion to vary the proportion of entitlement to receive benefits.
- Beneficiaries must have full discretion with regards to the economic benefits / distributions they receive and beneficiaries should have the same rights that shareholders have to dividends declared by a company. The Commission has interpreted this to mean that a Trust set up for the purposes of education for example would not satisfy the requirement and would therefore not qualify for black ownership recognition on the basis that beneficiaries are forced to use the benefits they receive for education purposes and therefore the beneficiaries do not have full discretion with regard to how they may utilize the economic benefits they receive.
- As indirect black participants in the measured entity the beneficiaries must agree to any amendments to the Trust Deed;
- On winding up of the Trust all economic benefit must be transferred to the beneficiaries or an entity representing the beneficiaries.
While the B-BBEE Commissions interpretation of the Codes as it relates to Trusts is in our view not legally defensible, the B-BBEE Commission are unfortunately not particularly open to discussion or considering alternative interpretations of the B-BBEE Act and Codes and in the event that one does not comply with the B-BBEE Commissions “recommendations” the B-BBEE Commission has advised that they will launch an official investigation for fronting. It is important to note however that the B-BBEE Commission findings pursuant to such investigation must be made an order of Court in order for the findings to have any force or effect. Notwithstanding the fact that the B-BBEE Commission has no inherent powers to enforce any of its findings most do not have the appetite to challenge the findings of the Commission in Court and tend to comply with the Commission’s recommendations despite the obvious legal flaws.
In light of the above, if one is claiming black ownership recognition for Trusts, Broad-Based Black Ownership Schemes or Employee Share Ownership Schemes it is essential that the Trust Deeds meet the requirements of the B-BBEE Act and Codes or else one could run the risk of facing an investigation for fronting. In this regard for an initial assessment of your Trust Deed and advice regarding compliance with the B-BBEE Act and Codes please don’t hesitate to contact me at email@example.com .