Since the recent amendment of the Broad Based Black Economic Empowerment Act 53 of 2003 and its regulations, i.e. the Codes of Good Practice, (jointly referred to as the “BBBEE Act” or the “Act”), whereby complying with the ownership requirement of the BBBEE scorecard, employee share schemes have become more popular than ever.

Despite this, the DTI and BBBEE Commission has raised concerns with regards to the authenticity of these structures. Moreover, whether these structures are truly contributing to empowerment and transformation or not.

The below constitute some guidelines to follow when constructing these vehicles for purpose of BBBEE compliance:

  1. The trust deed must clearly define the beneficiaries and the proportion of their right to receive distributions;
  2. The trustees must actively take part in managing the trust at a level similar to the management role of shareholders in a company having a shareholding;
  3. Based on the aforesaid in my view, the trustees should be appointed by the beneficiaries;
  4. A written record must be kept identifying the beneficiaries as well as prove that they fall within the designated groups as defined in the Act. The trustees must have no discretion in this regard;
  5. A written record must be kept of fixed percentages of claim or outlining formula for calculating claims. The trustees must have no discretion in this regard;
  6. The trustees must present the financial reports of the trust to the beneficiaries yearly at an annual general meeting of the Trust;
  7. The trust deed or other relevant statutory documents, of the trust must be made available, or on request, to any beneficiary in an official language in which that person is familiar;
  8. On winding up or termination of the trust, all accumulated interest must be transferred to the beneficiaries or to an entity representing the interests of the participants or class of beneficiaries.

These structures must, in their essence, support the purpose of the Act. If it does not or if its purpose is to circumvent the codes and Act – it could constitute fronting!