A trust is not a person!

Care needs to be taken when involving a family trust in any business transaction, including the acquiring of shares.

A trust is not a person!
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Family trusts are fairly common in South Africa. Most business people have registered trusts for the protection of assets. Many have also set up private companies. Often the shares in such companies are in fact owned by the family trust, or by a share trust which might have the family trust as a beneficiary. The issue of control or voting power under such an arrangement was recently dealt with in a South Gauteng High Court case, Blue Square Advisory Services (Pty) Ltd v Pogiso and Another (01082/2011).

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The judge examined various cases regarding trusts and said it is clear that a trust “is not an incorporated company, neither is it a body of persons unincorporated whose common funds are the collective property of all its members.” The conclusion, he added, “is inescapable – a trust is not a person within the meaning of that word in the 1962 act.”

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Not recorded
In the Blue Square case, the trust was entered in the share register of the company as the only shareholder. Problems arose when the veracity of a resolution to fire company directors was brought into question. And the judge pointed out the difficulties facing the shareholders due to the fact that the family trust had been registered as shareholder and the names of the individual trustees were not recorded in the share register.

A company is not permitted to go behind the share register, and cannot give effect to a notice of trust. This doesn’t mean that a trust cannot hold shares, it means that the company cannot allow anyone but the person whose name is on the share register to cast a vote. If this person is holding the shares as a nominee for another, the company cannot be concerned with that fact.

Cannot vote
Any breach of agreement between a nominee shareholder and the beneficial shareholder is a matter to be decided between them, and the company cannot be party to their dispute. As a trust is not a person, it cannot vote, because it has no legal personality. It is a conglomerate of rights and duties. The trustees are the people who own shares and are able to vote and attend to the trust business.

The company can only look to the share register to ascertain the person who is authorised to act as member. It cannot look behind the register and examine extrinsic evidence, as would be contained in the trust deed or the Master’s letters of authority. Therefore, the judge rightly dismissed a claim by the company that a resolution passed by the trust was valid.

It seems the difficulties experienced by trustees might be remedied with the coming into effect of the new Companies Act, but if you’re a trustee it’s as well to bear in mind that the trust cannot operate as a person distinct from the trustees. It’s best to name the trustees in any transaction in order to ensure that the transaction will be unassailable if litigation ensues. And it’s probably still best practice to name the trustees as the registered members in a company share register.

Peter O’Halloran is head of tax at BDO, Gaborone. Contact him on 00267 390 2779 or at [email protected]. Please state ‘Tax’ in the subject line of your email.