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The use of trusts within the ownership structure of a measured entity has become a popular mechanism over time within which to facilitate B-BBEE ownership. The B-BBEE Codes of Good Practice, as well as the various B-BBEE Sector Codes make specific provision for trusts to be utilised within ownership structures and determines that B-BBEE ownership recognition will be given to the measured entity, depending on the number and composition of the black participants within a trust. The effective black ownership flowing through a trust is measured at the beneficiary level.

We have found that quite a number of measured entities making use of a trust to facilitate B-BBEE ownership, goes through all the trouble, effort and expense to have the trust properly constituted and effectively implemented, but then, over time, do not take the appropriate measures in order to ensure that the trust is effectively managed. It is important to keep in mind that each trust is different and that each trust must be administered and managed in terms of the provisions of its trust deed. It is further important to know that a trust is administered by its board of trustees, which acts in a fiduciary capacity on behalf of and to the benefit of the trust beneficiaries and that these trustees may only act as such after they have received the required Letter of Authority from the Master of the High Court. Any action or decision taken by a trustee who is not in possession of the required Letter of Authority is null and void from the beginning and may not be ratified at a later stage.

The B-BBEE legislation makes provision and contains specific requirements for normal B-BBEE trusts, but also makes provision and contain specific requirements for certain types of B-BBEE ownership vehicles, like Broad-Based Ownership Schemes and Employee Share Ownership Programmes, to be housed within a trust. It is critical that a measured entity, making use of a trust, has in-depth knowledge of these requirements and ensures that the trust deed complies and that the trust is administered according to these requirements. Should the trust deed not comply with the relevant legislative requirements, or should the trust not be appropriately administered according to these requirements, the relevant B-BBEE Verification Agency will reject the trust at verification time.

This will lead to the measured entity not receiving points on the B-BBEE ownership scorecard and recognition for its effective black ownership and may lead to the measured entity being penalised by one B-BBEE level on its B-BBEE certificate. Depending on the nature of the transgression, it may also lead to an investigation into fronting by the B-BBEE Commission. Fronting is a serious criminal offense which carries a hefty prison sentence for the directors of the measured entity, as well as anyone else knowingly or unknowingly involved, and a severe financial penalty for the measured entity itself. Effective management of a B-BBEE trust, in accordance with the relevant legislative requirements, is therefore of utmost importance.

As part of the above effective management requirement, it is also important to ensure that there is an effective flow of dividends from the measured entity, through the ownership structure, pro rata to the shareholding held by each shareholder. We have found instances where B-BBEE ownership structures are created according to the relevant legislative requirements, but that dividends are then simply not declared year on year. This may be due to the measured entity not being in a financial position to declare any dividends, which is a perfectly legitimate reason, but may also be due to the fact that the measured entity investing funds back into the business.

One of the difficulties that we have found where dividends are not declared is that, in certain instances, the non B-BBEE shareholders will still take drawings out of the measured entity, or receive some sort of alternative financial benefit, other than legitimate market-related salaries, while the B-BBEE shareholder, especially in the case of a B-BBEE trust, does not receive the same or any financial benefit at all. Measured entities taking part in such a practice is taking a serious risk of running afoul of the law. It should be clearly understood by the measured entity that such action is illegal and will lead to an accusation of fronting. Measured entities should especially be careful when it comes to the payment of salaries, in this type of scenario, to its non-B-BBEE shareholders, as these salaries must be market-related.

In order to avoid the dividend risk, set out above, measured entities need to seriously consider declaring dividends year on year, if it is at all in even the most remote financial position to do so. Even if a small dividend is declared, the said risk will be mitigated to a great extent. The measured entity, in declaring a dividend, must do so in accordance with its documented dividend policy and must ensure that it is distributed pro rata to shareholding.

Where a B-BBEE trust is utilised in the measured entity’s ownership structure, the relevant trustees must take possession of the trust’s dividend and must ensure that it is distributed in accordance with the provisions of the trust deed to the trust beneficiaries.

Should you require any assistance or more information on any aspect discussed in this article, please contact the Compliance Hub offices. We specialise in the creation and implementation of effective B-BBEE ownership solutions.

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