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Fundamental Rules to Watch When Dealing Through and with Trusts

Using trusts correctly in business transactions.

Isaac Fenyane

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Trusts are being used progressively more in concluding a variety of business transactions.  Trusts are often preferred as a means of “legacy protection”.  However, there are certain fundamental rules relating to trusts which, if not observed, could render the protection sought in the use of a trust useless and may even result in serious personal liabilities for trustees.  The following are the fundamental rules which trustees and parties that transact with trusts should be wary of.

Ensure the trust is properly established

The law requires that there should be separation between the control and ownership of the trust assets on the one hand and, on the other hand, the enjoyment of all benefits of the trust assets.  As such,  one of the basic yet crucial elements in the establishment of trusts is that one person (the founder / donor) transfers from himself property (the trust assets) and place such property in sole and exclusive control and ownership of the trustees (in their capacity as such) to be administered by them for the benefit of other persons (the beneficiaries).

Most often, trusts (especially family trusts) are structured in such a way that all trustees are the also beneficiaries.  In such instances, the trust concerned would not meet the basic legal element as noted above.  Therefore, the validity of such a trust may be open to challenges by third parties and, most certainly will not withstand close scrutiny by the courts.

In order to guard against breach of the rule noted above, which is a common oversight in many family trusts, the Supreme Court of Appeal has in previous cases recommended that trust deeds should always provide for the appointment of at least one independent trustee.

Ensure trustees who act have letters of authority

Section 6(1) of the Trust Property Control Act, 1988 requires that trustees appointed after 1 March 1989 act as trustees only if authorised by the Master of the High Court (i.e. after the Master issued that trustee with a letter of authority).  It follows that if a trustee acts without the letter of authority, such acts would be invalid.

Guard against the rule of subminimum number of trustees

Most often, trust deeds set out a rule of minimum number of trustees required to be in office at any given time.  This rule requires caution for trustees and third parties alike because if the trustees are fewer than required, then unless the trust deed provides otherwise, the trust will be deemed to be legally incapacitated and thus any transactions or agreements it purports to conclude will be invalid.  In this regard, the trustees may only act for purposes of appointing an additional trustee but they will be in breach of their duties if they continue to act in any other way while they are fewer than required.

Ensure correct decision-making process was followed

It is important to ensure that decisions of a trust are taken in accordance with due process required by law and the trust deed.  A trustee may not make decisions as an individual and without regard to the input of other trustees.  This is a serious breach of the rules of the trust law and if such decisions are later challenged in court, the trust might not be bound by such decisions and the errant trustee may be held personally liable to the beneficiaries and /or the third parties for losses suffered as a result of such individual decision.

In this regard, the following rules should always be borne in mind when trustees make decisions:

  • Meetings must be properly called and qourated

All trustees must be given due notice of all trust meetings.  If one of the trustees is deliberately excluded from a meeting, the decision taken at that meeting will be open to challenge.  It is a different case if a trustee who was given notice of a meeting fails to attend a meeting.  In this regard, the requirements regarding the minimum number of trustees that should be present before a meeting can take place (the quorum requirement), as set out in the trust deed, must always be observed.

  • Round robin resolutions

If decisions are taken by way of written resolutions without a need for attendance of meetings (the so-called round robin resolutions), care should be taken to ensure that the passing of such resolutions is permitted in the trust deed and that such resolutions are taken strictly in accordance with the provisions of that trust deed.

  • Decision by majority or all trustees

Trust deeds often provide a threshold for approval of various decisions.  Some decisions may require approval by a simple majority whereas some may require the unanimous approval of all trustees.  Accordingly, trustees (and third parties dealing with trusts) should always consider the nature of the decision and the level of approval required by the relevant trust deed in order for the decision to be valid.

  • Trustees act jointly

The law requires that whenever trustees act on behalf of a trust, they should do so jointly (except if a trust deed expressly provides otherwise).  This means that although the decisions of the trust must be approved by the majority of the trustees, when implementing those decisions the trustees must act as a collective.

Put simply, resolutions for the implementation of decisions of the trust must be signed by all trustees (including those who voted against the decision).  A resolution signed by only the majority of the trustees would not be consistent with the principle of acting “jointly”.  Of course the trustees may nominate one of them as an agent of the trust in implementing a particular decision, but again such nomination must be made jointly.

Isaac Fenyane is an attorney practicing as a senior associate at Edward Nathan Sonnenbergs Inc (ENS). He specialises in corporate law, mergers and acquisitions, corporate finance and general commercial law. He has extensive experience in project managing transactions and commercial projects, negotiating and drafting various commercial agreements and advising clients on a wide range of corporate and commercial law issues. For more information visit www.ens.co.za

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Business Landscape

How South African Small Businesses Owners Can Overcome Economic Uncertainty

Here are three things you can do to overcome these economic challenges.

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South Africa’s entrepreneurs haven’t had it easy. The current political landscape coupled with global uncertainty has brought with it significant business instability.

This is evidenced in Xero’s 2017 State of SA Small Business Report which found that 68% of small businesses view economic instability as their number one challenge, while 38% are concerned about their cash flow.

Within the small business community, the report also highlights a growing frustration with the government’s lack of support to help keep them afloat. Despite being set up to do just that, 89% of small businesses don’t feel that The Department of Small Business provides the right support.

This lack of support extends across government: 48% of entrepreneurs would like to see more funding, 44% want less red tape, 43% call for more tax breaks, and 36% want better access to finance. While these requests are perfectly reasonable, they’ll only take effect if the government gives them the go-ahead.

Implementing more measures to support small businesses will take time. This means 2018 is going to be just as challenging as 2017 – if not more so.

Related: How Women Entrepreneurs Can Change the SA Business Landscape

Here are three things you can do to overcome these economic challenges.

1Be agile

Smaller businesses are typically more agile than their larger competitors. This is a huge advantage when navigating an unpredictable market. Macro-economic challenges are, for the most part, beyond your control. Rather than try and ‘fix’ the situation, move with the market and adapt to its changing nature.

The best way to maintain customer relevancy is to review your offer regularly and look for ways to improve it. You could consider lowering your prices – as long as it doesn’t upset the books. Or think about investing money back into the business to yield greater returns.

There’s no one-size-fits all approach, so just make sure you do what is right for your business. Part of this is ensuring you stay fresh in the eyes of your customers by continuing to respond to their evolving needs.

2Invest in new technologies

Investing in the most up-to-date technology will pay off in the long run. For South Africa’s small businesses, technology is only growing in importance: where 19% said it was essential last year, that number has increased to 49% in 2017.

Cloud accounting software, for example, can help you understand your company finances and track budgetary health in real-time. Knowing exactly where your funds are and how they’re being allocated, enables a much faster response time – this is critical during unstable economic times.

Technology can also help you build a more competitive business by reducing wasteful expenses, automating time-consuming data entry tasks and streamlining processes for greater efficiency.

The more knowledge you have, the easier it is to put measures in place that will enhance your company’s operations.

Related: 7 Signs You Have A Positioning Problem [And Why Familiarity Kills Businesses]

3Deliver superior customer service

Purse strings might get tightened during tough economic times, but there will always be demand for certain products. Ensure you give your customers a superior user experience when they engage with you, and they’ll return.

It’s not always possible to compete on price. Bigger, more established companies generally have the capital reserves to undercut their rivals. But, small businesses can always compete on value. If you can offer a superior customer service, then you’ll receive customer loyalty in return – this is priceless in a volatile economy.

The past year has been incredibly challenging – and it’s unlikely to get easier as we move into 2018. But, the most successful entrepreneurs don’t let the economy thwart their ambitions – they equip their business to weather any storm. The sooner you innovate and adapt your business, the better your chances of success.

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Business Landscape

SAB-Commissioned Research Shows SA Poised To Reap Entrepreneurship Rewards

Every country has both significant opportunities and challenges.

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Every country has both significant opportunities and challenges.  It is becoming increasingly evident that corporates have a big role to play in addressing both.

Companies, particularly large ones like The South African Breweries (SAB) with all its scale and resources, not only do they have a responsibility but a duty to invest in a better world for all.

We know that entrepreneurship can have a huge impact on the growth and development of countries. That is one of the main reasons SAB is backing entrepreneurs 100%. The level of their impact was reaffirmed by recently released research by the Global Entrepreneurship and Development Institute (GEDI).

Not only is the environment for entrepreneurship in South Africa more conducive to small business development than many had previously believed, it also places the country ahead of some of our partners in the Brazil, Russia, India, China and South Africa (BRICS) economies and several others.

Related: SAB Launches Entrepreneurship Campaign To Create 10 000 Jobs In SA

This is pretty significant, given that the South African government’s National Development Plan (NDP) envisages that 90% of jobs will be created in small and expanding firms and that by 2030, the output from these firms would have grown substantially.

The GEDI research indicates it is commonly believed that South Africa does not nurture small businesses. This is mainly because self-employment makes up a comparatively small share of the total, relative to other African countries where it dominates employment.

It is, however, interesting that the report found that high levels of total entrepreneurial activity correlate globally with lower GDP, prosperity and development, and vice versa. Once you scratch beneath the surface, this begins to make better sense.

In less developed economies, it is harder to grow a small business beyond a basic survivalist enterprise. That is often where the story ends: These businesses never grow, therefore, they never employ more than a handful of people each.

By contrast, South Africa has a number of high-growth and high-tech start-ups that have carved out a place among the top companies on the planet and one of the continent’s only two “unicorns”, private, venture-backed companies valued at $1 billion or more, in the form of Promasidor Holdings.

By looking at the entrepreneurship ecosystem rather than at individual entrepreneurs, the GEDI research found South Africa to be the leader on the Continent when it comes to entrepreneurial activity. Furthermore, the potential is enormous. So, once South African start-ups have weathered the initial turbulence that comes from establishing a small business, they have the ability to grow significantly and even potentially compete globally.

In a nutshell, South Africa performs better where it counts: in entrepreneurial aspirations, innovation, high growth, internationalisation and risk capital – the main pillars that lead to economic growth.

The good news is: We have the capability to cultivate world-class, high-growth, highly innovative businesses from scratch and push on to achieve global competitiveness. The unfortunate news is that we have bottlenecks in the system that make it very difficult for entrepreneurs – especially those from disadvantaged backgrounds – to get a start in the first place.

If entrepreneurship is a two-stage rocket, we are good at getting the ones that make it past stage one into orbit but too many fail to launch at all.

That is largely a function of our dual economy:  Poor education and skills, lack of social capital, limited access to risk finance, markets and knowledge networks. This leaves many aspirant entrepreneurs stranded at the idea phase, while a culture that prizes formal employment and shuns risk makes entrepreneurship a seemingly unattractive option.

All this is changing though.

South African flag

SA’s Broad-Based Black Economic Development (B-BBEE) legislation is designed to promote inclusion, encouraging big corporates to consider emerging suppliers for integration into their supply chains and stimulating investment in enterprise development, education and skills training, among others.

There is a huge pool of funding available, which, as we learn more about the bottlenecks in our entrepreneurship ecosystem, is being deployed more effectively.

Related: The Journey Of Entrepreneurship: How The Tough Get Going

At SAB, we have one of the longest-running entrepreneurship programmes in the country – SAB KickStart – which focuses on youth-owned businesses.

It complements the SAB Foundation, an independent trust that primarily also promotes entrepreneurship and social innovation. There are also recent additions, SAB Thrive, a black private equity fund set up by SAB to transform the company’s supplier base through acquisition, business development and fostering entrepreneurship, and SAB Accelerator, an incubator with the aim of growing SAB’s supply chain to be inclusive of black-owned, especially black women-owned businesses. And then there are the agriculture projects, where we are investing R610-million over five years to establish thriving barley, hops, maize and malt industries in South Africa to strengthen rural employment and job creation.

These initiatives, and our commitment to create 10 000 authentic, real and sustainable jobs through entrepreneurship within five years, demonstrate our desire to make a difference in society and our faith in the ability of entrepreneurship to drive growth and employment.

In fact, we commissioned the GEDI research because our daily interaction with emerging entrepreneurs led us to question the prevalent assumptions about the deficiencies in the system.

In the 23 years since the launch of SAB Kickstart, we have developed a deeper understanding of what it takes to propel small businesses past the launch phase. As such, we have refined our support systems to boost them to scale.

We have also built a multi-pronged programme to provide support, finance where required, mentorship and skills, access to markets and supply chains across the entire trajectory of a small business – from idea phase to developing the skills to manage a business, to achieving the scale, quality consistency and sustainability that a large corporate like SAB requires of its suppliers.

We have the capacity – and we have ramped up the budget – to significantly expand these programmes and with the introduction of SAB Thrive and Accelerator to complete the circle, but it is also about a change in approach.

Whereas we have concentrated, up to now, on the entrepreneur, in future we will focus on the job-creation potential of candidate businesses.   We have also changed the way we think about procurement to make inclusion a serious consideration when we choose our suppliers.

The GEDI research shows South Africa is an entrepreneurial leader in Sub-Saharan Africa and has made considerable progress in overcoming structural factors to produce some of the most innovative and successful enterprises on the Continent.

South Africa provides the institutional support necessary for high-growth businesses to emerge and thrive, while government policies work to close historical gaps. With the addition of targeted, co-ordinated policies to address remaining bottlenecks, the country is poised to achieve greater growth through entrepreneurship.

We can achieve far more if we work together, if we make small business development an area where corporates share data and lessons learnt, link suppliers into one another’s supply chains and work more closely with government to ease the regulatory burden for small businesses.

If we can bridge the divide between the thousands of entrepreneurs struggling in the early stages of business development and the dynamic environment at the apex of the system, we can create high-growth enterprises in numbers that would change our employment outlook and harness the demographic dividend of a youthful nation.

As a responsible corporate citizen, we are committed to continuously building on the foundations we have laid over past two decades to drive sustainable entrepreneur development. Entrepreneurs are our future!

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Business Landscape

Can We Make The Rand Grand Again?

The USD/ZAR currency pair (US Dollar/South African rand) is closely correlated with the EUR/ZAR (Euro/South African rand) with an 83.9% correlation.

Jeff Broth

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The USD/ZAR currency pair (US Dollar/South African rand) is closely correlated with the EUR/ZAR (Euro/South African rand) with an 83.9% correlation. Simply put, the performance of the USD and the EUR with respect to the ZAR are one and the same. When the USD or the EUR appreciates, we are likely to see similar trends taking place with respect to the USD/ZAR and the EUR/ZAR currency pairs.

As of Thursday, 17 August 2017, the USD/ZAR exchange rate was 13.169. The 52-week trading range for this currency pair is 12.298 on the low end and 14.748 on the high-end. 10 years ago, at the height of the global financial crisis (August 21, 2007), $1 was trading at R13.17040. The USD appreciated sharply against emerging market currencies, notably the ZAR, in the years following the crisis. Between 2007 and January 2016, the USD gained on the ZAR. It reached a high of R16.44437 on 14 January 2016, before retreating sharply to R12.43849 on 24 March 2017.

Unbeknownst to many millennials in South Africa, the ZAR was not always trading at its current levels. Before Jacob Zuma assumed the presidency, and gross malfeasance engulfed the South African economic system, the Rand was a force to be reckoned with in global financial markets.

South Africa was considered the bright star of emerging market economies in Africa. Gold, platinum, coal, iron ore, tourism and other factors helped to create a positive image of the South African economy.

Economic Malfeasance Impacts Credit Ratings

Enter the Gupta scandal, Nkandla, multiple successive votes of no-confidence in the president, and ongoing fears about nationalization, the exodus of multinational corporations, and a crumbling infrastructure – the result is evident in the Rand. The South African economy continues to absorb swelling numbers of illegal immigrants, many of whom are living in squatter camps where rising levels of ethnocentrism are brewing. A flare-up is imminent.

International credit ratings agencies have downgraded South Africa’s rating over time, with the following ratings and outlooks from major agencies:

  • Moody’s assigned a Baa3 rating to South Africa with a negative outlook – June 9, 2017
  • S&P assigned a BB + rating to South Africa with a negative outlook – April 3, 2017
  • Fitch assigned a BB + rating with a stable outlook – April 7, 2017.

These credit ratings are extremely important to international investors says Weiss Finance professional, Sal Caputo, ‘They determine capital flows into South Africa. Investors, pension funds and sovereign wealth funds look towards credit ratings for their investment decisions in foreign countries. If we wind the clocks back to 1994, Fitch assigned a BB rating, Moody’s a Baa3 rating and S&P a BB rating to South Africa’s economy. While the ratings appear similar today, the sentiment (the outlook) is decidedly negative this time around.’

Pre-Global crisis, in 2006 the USD/ZAR was trading at 6.1392. Put into perspective, R100,000 would buy you $16,288.76, 11 years ago, and that same R100,000 is the equivalent of $7,588.17 today. These figures do not take into account the real money depreciation, or how much more you could have earned by investing that $16,288.76 over 11 years. The differences are dramatic. Inflation in South Africa is currently recorded at 5.1% year on year (June 2017).

This is good news in that it means the real purchasing power of the South African rand is not being adversely affected by rising prices. This is the lowest inflation rate for South Africa in 1.5 years. Conversely, the inflation rate in the United States for the 12 months ending July 2017 was measured at 1.7% – 3 times less than South Africa’s rate.

Clearly the value of the South African currency is being eroded away every year. The current interest rate at South African banks was measured at 6.75% on July 20, 2017. This means that investments in SA banks yield real money growth to capital. Provided inflation is kept in check, and the SA infrastructure is renovated, upgraded and maintained, good governance can help the SA economy to get back on track.

A Thought: In the 1960s, the South African rand was grand, as it traded at a mere R0.72 to the USD. Things have certainly reversed since then, but the Rainbow Nation has the ability to turn a new page and make the Rand proudly South African once again.

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