Can Broad-Based Trust Ownership structures become compliant and remain investment vehicles of choice?

Can Broad-Based Trust Ownership structures become compliant and remain investment vehicles of choice?

Recently there has been a concern companies who have concluded B-BBEE transactions in the form of an acquisition by a Broad-Based Trust (“BBOS”). This stems from the B-BBEE Commissioner announcing in various ways that most of these transactions are non-compliant – due either to the Trust structure itself, or due to the mechanics of the BEE transaction, or both.

Of course, this is nothing new. Trusts as a form of B-BBEE Ownership have been under scrutiny since before 2015. We can all remember the attempt by the DTi in May 2015 to reduce the ability of BBOS to claim full points under the ownership pillar (Code 100) – which amendment was hastily recalled. At the time, there was a promise that the DTi would form a committee to investigate these structures and provide clarity in the market. This has not happened, and no further notification from the DTi has been forthcoming. Although over time the stance has softened, the substance of ownership transactions with broad-based structures has found resonance with the B-BBEE Commission – with different consequences.

Rather than seek to create a blanket limitation on all broad-based ownership schemes, the Commissioner has sought to sought to understand where she is uncomfortable with these schemes and provide guidance. She has concluded that Code 100 does not need to be amended at all – that it says all that it needs to say, and that the prevalent interpretation by companies, consultants and verification agencies has been incorrect to date. She has also provided guidance about how the interpretation of Code 100 should work.

It is worth understanding what the Commissioner is saying if you have a trust or broad-based entity, an employee ownership (“ESOP”) scheme, or even black ownership derived from a family trust anywhere within your ownership structure and see how it relates back to Code 100. The prevailing interpretation about black ownership flowing through trusts is that the rules apply to the relationship between the investee entity (ie the company) and the trust itself, and that provided the trust receives benefits accorded with its status as a BEE investor, the transaction is compliant and sound. However, the Commissioner has a different view. A compliant BEE transaction involving a trust includes not only arms-length shareholder rights at the level of the trust and the investee, but also at the level of the trust and its beneficiaries. The Commissioner requires that beneficiaries of BBOS, ESOP and black family trust structures be identified upfront – at the date of entering into a transaction – and that those beneficiaries enjoy similar rights and obligations vis-a-visthe trust that they would enjoy if their rights were held through a company and they themselves had actual shareholding – and that these rights flow from the inception of the BEE transaction till the end date. A summary of these is set out in the table below:

Code ownership components Substantive interpretation
Voting rights The beneficiaries of the trust must exercise substantive voting rights at meetings of the trust and provide a mandate for trustees to act on their behalf
Economic Interest Named beneficiaries must receive equal economic benefits compared to other shareholders for the duration of a transaction. This includes both the entitlement to equal pro rata dividends, as well as the same capital gain they would have enjoyed if they had been direct shareholders
Net Value When debt is paid down by the trust and when any lock-in period is over, beneficiaries must be the unencumbered “owner” of their pro rata share in the company in which the trust has invested, through their entitlement to a defined trust interest. The rights accruing to that interest must resemble the same rights as other shareholders in the investment.

As can be seen, the B-BBEE Commission requires a fundamentally different way of looking at how ownership flows through trusts.

Well, what does that all mean? And what impact does this have on a measured entity’s current ownership score and percentage?

It means that most of the trusts found in BEE ownership schemes, have to profoundly change the way that they operate, mainly in the relationship between trustees and beneficiaries, or face the consequences – the Commissioner is empowered to bring fronting charges against companies who do not comply – and by all accounts she is already doing so.

To be compliant with the Commission requires significant amendments to almost all of the trusts and employee ownership schemes that we have seen. The greatest amendments are to employee ownership, where it is impossible to simply remove bad leavers or resignees from further income or capital benefits without a formal exit arrangement – resembling that in the Company’s Act for exiting shareholders.

In 2019, we operate in a compliance environment where any risk or “cutting-edge” B-BBEE advice is not worth taking.  There is no shortcut to BEE ownership compliance. In a space where verification agencies are being suspended regularly, losing their license to operate, we can expect to see different approaches being taken in future verifications when it comes to the confirmation of ownership – more substantive scrutiny taking place. Aside from these Commission compliance requirements, we can expect verification analysis about the way that these trusts actually operate. The Codes require significant independence and high standards of corporate governance – we anticipate more verification agencies asking the tough questions.

“Captive ownership”, in the words of the Commissioner, is not here to stay. At some point, all Trusts, other BBOS and ESOPs will have to adapt.

The broad-based ownership lobby group is nowhere to be found, so charitable and educational trusts will have to adapt as well. Many of our clients ask these questions in relation to mining community trusts. It is clear that setting up a community trust to comply with the MPRDA will not automatically ensure that the same trust is compliant with the B-BBEE Code. Those companies who are required to report to the DMR and wish to obtain a B-BBEE verification certificate using the same ownership structures will have to ensure that those community trusts, ESOPs and family trusts meet the Commissioner’s requirements, as well as those of the MPRDA is order to be claimed under dual frameworks.

Where does the Commission’s view leave the plethora of charitable and educational trusts? Including those which are prevalent in the structures of large and successful BEE investment houses? It is clear that these are not able to conform to the Commissioner’s understanding of the Code. By their very nature they identify different beneficiaries in need at a specific moment in time, and the right to a return of a capital nature on ownership does not vest in those beneficiaries, but only in the trust structure itself. The question is – does it matter? Is there not some further end that makes these more than worthwhile?

An observation is that the commissioner’s view that charity and education are to be found in the pillars related to Skills Development and SED denies the desperate state of a nation wherein we live, where social development is dependent upon the private sector for support. Where the huge opportunity to harness stakes of significant ownership in profitable companies to contribute to the broader social transformation agenda, instead of limiting it to a few, has been making a difference for years, bringing the disenfranchised into the economic fold. A desk top study will reveal the positive financial and social impact of broad-based ownership.

The difficulty with using the other pillars in the Codes to contribute to the alleviation of poverty and bring economic transformation at this level is that the Codes themselves are inherently skewed in favour of those who already have economic opportunities. In the Generic Code, 95 points (including bonus points) ie 87% are targeted at measuring those who already participate in the economy – those who already have jobs, who already have skills, who already own a business. Only 14 points out of 109 (ie 13%) address in any way the challenge of bringing transformation to those who are still outside of the economic pie. In a country with an official 27,6% unemployment rate, is it worth not restricting the ability to benefit those for the sake of the concept of a capital gain?

This is, however, a debate for another day, and now, it is imperative that BBOS, ESOPs and family trusts be aligned to ensure future compliance. The best way to future-proof your ownership structure is firstly to ensure that the structure of the scheme meets the minimum requirements of the commissioner. Do what needs to be done, amend the founding documents to comply. The second is to ensure that the management of the actual scheme adheres to strict corporate governance requirements. Does the scheme have a bank account? Have regular dividends actually been paid into that account and distributed to named beneficiaries? Are regular meetings held on proper notice? Are the trustees sufficiently independent and knowledgeable? Is the scheme managed separately from its investee? Regular corporate reflection is necessary so that the independence of the trust is not compromised.

Should you require any advice about the substantive compliance of your Trust, BBOS or ESOP, or wish to effect the required amendments to the structure – contact Lisa Agbenafa at




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