For many companies that wish to transform their ownership structure by including "black" individuals, as contemplated in the Broad-Based Black Economic Empowerment ("BEE") Act and Codes of Good Practice, the establishment of a employee share ownership programme or trust ("ESOP") is an attractive option. 

In addition to obtaining BEE points, an ESOP trust enables the company to provide valuable benefits for its staff, create incentives for staff longevity and create a sense of vested interest in the company's performance for staff.

A trust is an excellent vehicle for this type of ownership arrangement as it creates a single holder of the shares in the company's share register which does not need to be updated with every employee that leaves, retires or enters. 

However, often due to a lack of understanding about the legal nature of a trust and the requirements of the BEE Codes of Good Practice, these trusts may create unexpected problems or may not achieve the BEE points desired.

We would like to highlight just 2 of the problems:

• Creation of vested rights:  If the deed is drafted so that the trustees have no discretion on the total amount or the timing of distributions of income or capital (bearing in mind that the trustees cannot have any discretion in relation to the identity of the beneficiaries or their individual percentage of benefits), then the rights granted to the beneficiaries are vested rights.  As a result, the beneficiaries will hold "beneficial interests" in the underlying shares, which entitles them to various rights in relation to the company, including access to certain company documents and records, in terms of the Companies Act.  In addition, as the number of holders of "beneficial interests" in a company increases the company's "public interest score", as defined in the regulations to the Companies Act, the company may find itself having to apply with more stringent audit requirements and having to establish a social and ethics committee, among other things;
• Creation of a right to the underlying shares:  The trust deed may also be drafted in a manner which obliges the trust to distribute the actual shares held by the trust to the beneficiaries upon its termination, which is usually not intended.  It is very important for proper thought to be given to the various options for winding-up the trust and distribution of its assets upon termination. 

It is also essential that the trust, together with the other shareholders of the company, be party to a shareholders' agreement and for that shareholders' agreement to provide for issues like the appointment of directors, shareholder meetings and sale of shares.

In summary, therefore, the trust deed requires careful drafting to ensure compliance with the requirements of, and avoidance of the pitfalls contained in:

• the BEE Codes of Good Practice;
• the legal requirements for a valid trust; and
• the Companies Act, 2008.

Erika Petersen-Holmes, Partner

Contact: 031 575 7410 or petersen@wylie.co.za