11 things to consider before implementing ESOPs in South Africa
October 8, 2024
You're in good company
Employee Share Ownership Plans (ESOPs) promote employee engagement, attract and retain talent, and achieve BEE ownership recognition. Often structured as trusts, it is crucial they meet the ESOP requirements set out in the BEE Codes.
What you should consider:
- Long term sustainability
- Alignment of shareholder and employee interests
- Cost to the company and benefits to employees through business cycles
- BEE impact over the life of the ESOP
- Simplicity in communication and administration
- Effective and transparent governance
Our services:
- Assess ESOP feasibility for your business
- Design an optimal, sustainable ESOP
- Integrate tax, legal, HR, BEE, regulatory, technical accounting, and risk
- Drive implementation
- ESOP communication and trustee training
Strategic Black Investor
In South Africa’s competitive and dynamic business climate, having a strategic BEE partner is often crucial for success. Such partner can add value by stimulating growth, introducing new business, or retaining existing clients. Transcend Capital has an extensive network of qualified Black investors that are able to add value.
What you should consider:
- Cultural fit
- Track record and opportunity for business value-add
- Ownership demographics/profile
- Financing ability
- Transaction terms
Our services:
- Source partners who are a good match for your business
- Evaluate competence, value-add, risk and BEE scorecard impact
- Structure and implement the transaction
- Integrate tax, legal, BEE, regulatory, technical accounting, and risk
- Lead negotiations and drive the financial close
Broad-Based Ownership Schemes and Charitable Trusts
Broad-based ownership schemes are a great way of improving your BEE scorecard while enabling broad-based empowerment at grass roots level. These schemes are typically charitable, educational, or developmental trusts or NPCs that typically support company bursary schemes, emerging Black entrepreneurs, or employees and their dependents. In 2021 the DTIC issued a Practice Note clarifying the structural requirements of BBOS’s.
What you should consider:
- Clearly define the class of beneficiaries
- Ensure that funds flow to beneficiaries annually to achieve social impact
- Implement sufficient governance measures to prevent fronting
- Establish robust administration to ensure BEE audit compliance
Our services:
- Strategically design an optimal sustainable BBOS
- Assist with beneficiary selection
- Integrate tax, legal, HR, BEE, regulatory, technical accounting, and risk
- Structure and implement the transaction
Black Private Equity Funds
Black private equity funds are set up to invest in and grow businesses, providing capital and strategic input while transforming investee companies. If structured to meet BEE Codes requirements, private equity funds can enable BEE Ownership recognition.
What you should consider:
- Verify that the fund fully complies with the DTIC BEE Codes requirements
- Confirm that the fund is bona fide and not designed to circumvent BEE regulations
- Ensure that fund managers are at least 51% Black-owned
- Ensure the presence of active Black managers with relevant experience
- Align on investment horizon
Our services:
- Advise on the setup of Black private equity funds
- BEE Codes compliance assessment
- Risk assessment of funds that appear to good to be true - particularly relevant for multinational companies
- Integrate tax, legal, BEE, regulatory, technical accounting, and risk
Sale of Assets allows you to improve your BEE Ownership by selling a business asset such as commercial property (sale and leaseback), a business division or a subsidiary to a Black investor. BEE ownership points are linked to relative valuation of asset sold and the selling entity, and are locked in after 3 years.
What you should consider:
- Evaluate Sale of Asset feasibility and expected BEE ownership credit
- Ensure that the various requirements of Statement 102 of the BEE Codes are met
- Obtain an independent valuation of the targeted asset and the business, ensuring consistent application for future verifications
- Ensure legal terms secure a workable relationship and sustainable recognition
Our services:
- Assessing feasibility and evaluating options for your business
- Sourcing qualified Black purchasers
- Structuring an optimal, sustainable and BEE-compliant solution
- Integrate tax, legal, BEE, regulatory, technical accounting, and risk
- Lead negotiations and drive the financial close
Equity Equivalent Investment Programme
Multinationals unable to address BEE ownership through traditional routes can earn BEE ownership credits through the DTIC Equity Equivalent Investment Programme. This involves contributions to approved Enterprise Development or Socio-Economic Development initiatives, measured against 25% of business value or 4% of revenue.
What you should consider:
- Ensure your company meets the DTIC requirements, particularly regarding a policy of no minority shareholding internationally
- Assess the implementation road map, including engagement with DTIC
- Evaluate the cost of the ownership credits vs traditional options
- Identify required capacity for the ongoing management of the programme
Our services:
- Outline the requirements of the Equity Equivalent Investment Programme
- Evaluate the program from a cost and business value perspective compared to other BEE ownership options
- Support Equity Equivalent program design
- Determine a defendable valuation of the business
- Assist with DTIC interactions through our partners
