What are the B-BBEE requirements for an ESOP?
Employee ownership is specifically recognised under Statement 100 of the B-BBEE Codes of Good Practice as a vehicle for recognising B-BBEE ownership, and there are points available for a qualifying Employee Share Ownership Plan (ESOP). Ownership carries 25 points on the generic B-BBEE scorecard, and an ESOP can contribute meaningfully towards them, which is why employee ownership increasingly forms a core part of a company’s broader B-BBEE strategy.
In South Africa, ESOPs are most often structured as trusts, with employees as the beneficiaries. For an ESOP to qualify for B-BBEE ownership recognition, it must be structured to meet a defined set of criteria covering trustees, beneficiaries, governance and winding-up. These requirements are set out below.
ESOP requirements per Statement 100 of the B-BBEE Codes
| Category | Requirement |
|---|---|
| Trustees | Employee participants must take part in appointing at least 50% of the trustees. |
| Beneficiaries |
The trust deed must define the employee participants — either a written record of the names of the employee participants or the use of a defined class of natural person. The trust deed must define the proportion of employee participants’ claim to ESOP benefit — either a written record of fixed benefit percentages or the use of a claim/benefit formula. Trustees must have no discretion on the beneficiary or benefit definition. |
| Governance |
The trustees must present the financial reports to employee participants yearly at an AGM. Participants must be able to participate in managing the scheme at a level similar to the management role of a shareholder. This is typically achieved through participation at meetings of the employee participants and the ability to elect trustees. The trust deed or other relevant statutory documents must be available, on request, to any employee participant in an official language with which that person is familiar. |
| Winding-up | All accumulated Economic Interest is payable to the participants at the earlier of a date or event specified in the scheme constitution, or termination/winding-up of the scheme. |
| Additional criteria | To achieve maximum points on the ownership scorecard, the ESOP must have a track record of operating as an ESOP or, in the absence of such a track record, demonstrable evidence of full operational capacity. The B-BBEE Codes state that operational capacity can be evidenced by suitably qualified and experienced staff in sufficient numbers, experienced professional advisors, operating premises, and all other necessary requirements for operating a business. In practice, verification agencies typically appreciate that an ESOP would not satisfy these capacity requirements, and rather look for strong scheme governance and administration. |
Getting these requirements right at the design stage avoids costly restructuring later. As with any ESOP, the goal is to identify the structure that makes the most sense for your business and your participants, while remaining fully compliant.
Net Value: the other critical driver
Aside from the B-BBEE Codes’ ESOP recognition criteria, a critical driver of the B-BBEE ownership outcome is Net Value, which addresses wealth creation for Black participants over time. An ESOP needs to be structured to meet both the upfront and the evolving Net Value targets over the life of the scheme. If sub-minimum Net Value targets are not achieved, a one B-BBEE level penalty is imposed.
Transcend Capital has advised on over 200 ESOP and B-BBEE transactions since 2005 — we’ll help you get the structure right the first time.
Talk to our ESOP & B-BBEE transaction advisors →
Shaun Smit
Director, Transcend Capital
This article is part of our complete guide to ESOPs in South Africa.
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