Understanding a trust’s ownership rights in close corporations
24 Nov 2021
Close corporations can no longer be registered in South Africa and will be phased out over time. However, until then, many people are unaware that trusts cannot actually own a member’s interest in a close corporation. This is because a trust is not a legal person and is an accumulation of assets and liabilities which comprise the trust estate. Its assets and liabilities vest in its trustees to be managed for the benefit of the trust beneficiaries. The trust estate, although not a person, constitutes a legal entity.
In a recent case, Vermeulen and another v Mellet NO and others [2021] 4 All SA 281 (FB) (“the Vermeulen case”), the Court had to determine whether or not an inter vivos trust (i.e. a living trust) can be the owner of a member’s interest in a close corporation.
Section 29 of the Close Corporation Act 69 of 1984 (“the Act”), originally provided that only natural persons may be members of a corporation and no juristic person or trustee of an inter vivos trust, in that capacity, shall directly or indirectly (whether through a nominee or otherwise) hold a member’s interest in a corporation.
The prohibition against trustees of an inter vivos trust being members of close corporations was later abolished by the insertion of sub-section 29(1A). The aforesaid sub section makes provision for a trustee of an inter vivos trust to become a member of a close corporation upon fulfilling certain conditions, which conditions are summarised in the Vermeulen case as follows –
(i) only natural persons must be beneficiaries of the trust;
(ii) the trust must appoint and authorise a trustee to be responsible for the member’s interest and such trustee shall personally have all the rights and obligations of a member and not the trust;
(iii) the corporation shall not be obliged to honour an obligation of or affecting the trust or any agreement between the trust and the trustee who is a member of the trust, which means that the corporation need not have regard to the provisions of the administration of the trust or the trust deed or any agreement between the trust and the responsible trustee; and
(iv) the total number of the members of the corporation including the beneficiaries of the trust shall not exceed 10 and if it does exceed 10, at any time, the benefit bestowed by the sub section shall not again be applicable to the trust regardless of the number subsequently being reduced to 10 or below.
In addition to the above prescribed conditions, a trust is also required to lodge each of the documents set forth in Companies and Intellectual Property Commission (previously, the Companies and Intellectual Property Registration Office) Practice Note 1 of 2006 (“the Practice Note”).
The majority decision in the Vermeulen case held that, among other things, a trust with multiple trustees may not, without more, be a member of a close corporation. Should a trust want to become a member of a close corporation, it must appoint a representative of the trust to be a member provided that the trust deed of the trust does not contain a contrary provision. The trustee will then become a member of the close corporation and not the trust.
Lastly, should a trust subsequently wish to sell its member’s interest, the sale agreement to alienate the member’s interest must be entered into by the authorised representative trustee (and not the trust) as a trust cannot sell something which it may not legally possess.
It is evident from the complexities surrounding inter vivos trusts that appropriate legal advice should be sought in respect of how such a trust may hold and dispose of assets to prevent legal issues further down the line.
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(This article is provided for informational purposes only and not for the purpose of providing legal advice. For more information on the topic, please contact the author/s or the relevant provider.)