In recent years (inter vivos) trusts have become a popular
vehicle to use for purposes of employee share schemes to facilitate
empowerment transactions within the private sector.
Also, in many instances trusts are still valuable business
continuity planning tools. In many instances companies endeavour to
comply with the requirements of Broad Based Black Economic
Empowerment or "BBBEE", but the benefactors are not in
the financial position to "buy in" in lumpsum.
Interestingly, the Companies Act (71 of 2008) (the Act) has
introduced section 40(5), which permits a company to issue shares
to a subscribing party before the company has received the
subscription consideration. This would have been void under section
92 of the Companies Act of 1973.
Using the trust structure together with appropriate financial
arrangements makes it possible for these persons to now buy in.
This may also facilitate a long term strategy of grooming young and
dynamic employees into tomorrow's directors in the
Accordingly, this is a positive improvement in terms of
empowerment transactions, particularly in facilitating many
opportunities for businesses to comply and grow their businesses in
a strategic manner.
Section 40(5) of the Companies Act 71 of 2008
According to Buckland, the following requirements must be met in
terms of section 40(5):1
"There must be consideration for the subscription shares
in the form of either an instrument such that the value of the
consideration cannot be realised by the company until a date after
the time the shares are to be issued, or an agreement for future
services, future benefits or future payment by the subscribing
party (hence a subscription agreement);
The company must receive the subscription agreement;
The company must, against receipt:
Issue the shares immediately; and
"cause the issued shares to be transferred to a third
party, to be held in trust and later transferred to the subscribing
party in accordance with a trust agreement"; and
The issued shares must be transferred from the third party to
the sub scribing party at a later stage in accordance with the
Generally, at the time when a company issue shares, the rights
associated with the shares will come into existence and will then
be capable of being owned. The subscribing party (person who the
shares are issued to) thus becomes the original owner of the shares
by virtue of the shares being issued to it in terms of the
subscription agreement. A share so issued is then transferred in
the manner provided for in section 51 of the Act once it has been
recorded in its securities register.
It is however the name of the third party (aka the trust) that
is usually entered into the securities register of the company in
cases of employee share schemes.2
Therefore a transfer of shares, for purposes of the Act,
comprises nothing more than the company changing the details of the
shareholder in the certificated securities register from those of
the registered person (the transferor) to those of a new person
(the transferee) pursuant to an agreement to such transfer between
Importantly, there must also be compliance with any requirement
in the MOI restricting the "transferability" of the
The subscription agreement and trust deed therefore become
important documents that need to be properly aligned. In some
instances the trust deed does provide for the subscribing party and
not the trust to be the shareholder. This should however be done
with proper consideration to the risks involved.
The risks hereof posed to the company are where the subscribing
party or third party is:
Placed under business rescue (in the case of a company that is
the shareholder) or goes insolvent;
If the value of the subscription consideration is not paid or
realised in the future; Or
If future services, benefits or payments, contemplated by
section 40(5), are not delivered.
It is important to have a proper purpose and to ensure that the
legal structure is strategically aligned with this purpose when
embarking on implementing empowerment based structures in any
business. Importantly, although not covered in this article, the
implications of any tax consequences should also be properly
1. Buckland, Without Prejudice August 2013.
2. Subject to section 40(4) to (7) of the Companies Act 71
of 2008. See section (40)(5)(b)(ii) specifically.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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