This blog was co-authored by Hishaam Khan, Candidate Attorney

The Minister of Trade, Industry and Competition has recently clarified the confusion on whether Broad-Based Black Economic Empowerment (B-BBEE) trusts should be recognised as B-BBEE owners in B-BBEE structures for the purposes of the B-BBEE Codes of Good Practice.  In the Practice Note published during May 2021, the Minister has clarified that a defined class of black beneficiaries in such a B-BBEE trust satisfies the ownership provisions under the Codes, and that specific beneficiaries need not be individually identified.

The Codes detail the following qualification criteria for the recognition of trusts:

  • The trust deed must define the beneficiaries and the proportion of their entitlement to receive distributions;
  • A written record of the names of the beneficiaries or a defined class of natural person satisfies the requirement for identification;
  • A written record of fixed percentages of entitlement or a formula for calculating entitlement satisfies the need for defining proportion of benefit;
  • The trustees must have no discretion on the abovementioned terms; and
  • On winding-up or termination of the trust, all accumulated economic interest must be transferred to the beneficiaries or to an entity representing the interest of the participants or class of beneficiaries.

The Commissioner of the B-BBEE Commission had previously indicated that a number of transactions involving such ownership structures were non-compliant and did not constitute genuine and effective black ownership for purposes of the Codes.  The Commissioner went on to state that the beneficiaries of B-BBEE structures should be clearly identifiable and able to exercise voting rights, must receive the same economic benefits as other shareholders and ultimately become the unencumbered owners of the shares in which they are invested.  This view seemed to be contrary to the manner in which trusts operate under South African trust laws and not in accordance with Code Series 000 to 800 of the Codes.

The Commissioner’s statements had caused much confusion which has now been clarified.  As a consequence of the Minister’s Practice Note, Employee Share Ownership Programmes (ESOPs) or worker ownership schemes which provide a benefit for a large proportion or all of current and future black workers of the firm, or broad-based schemes which provide a benefit for certain designated groups can satisfy the ownership provisions under the Codes.

The Rules for Broad-Based Ownership Schemes (BBOS), ESOPs and for Trusts contained in the Codes determine that the constitution of the scheme must define the participants and the proportion of their claim to receive distributions.

The option to use a “defined class of natural person” as participants when structuring a BBOS, ESOP or Trust, rather than a written record of the names of each participant, is expressly provided for in the Codes.  The Practice Note provides that the objectives of the B-BBEE Act, regarding broad-based and meaningful ownership in the economy by black people, communities and workers, are often best served through this mechanism of identifying a natural class of persons to benefit from the scheme as opposed to a list of individuals with vested rights against the income and capital of the scheme.

The fiduciaries of these schemes select individuals from the defined class of beneficiaries that would benefit out of distributions of the scheme.  Once the fiduciaries exercise their discretion, each beneficiary selected to partake in a particular distribution acquires a vested right to such portion of the particular distribution allocated to them at that time.

Distributions may be in cash or in kind where, instead of making cash distributions to beneficiaries, these schemes often pay for skills development, education or training on behalf of beneficiaries or facilitate access to funding or fund social or community interventions or developments for the benefit of the participants who are a “defined class of natural persons”.

The result of the Minister’s clarification is a relief to many who have implemented these broad-based structures.  Provided that there is a defined class of black beneficiaries, you do not have to specifically identify each individual beneficiary.