Employee ownership structure can help pave way for M&A approval

Giving staff a stake in a firm can create a more inclusive economy and reduce income inequality – read the Business Day article here

By Tiisetso Masimula

Large multinational transactions that need approval from SA’s Competition Commission can benefit greatly from the inclusion of employee share ownership plans (Esops), which can help address the commission’s public interest considerations and provide other benefits to the parties involved. 

Multinationals considering implementing Esops in this context need to clearly understand the commercial and economic effects of the Esop on the broader transaction and the various parties.

Employee ownership is a popular model for businesses globally, with companies recognising the benefits of providing employees a stake in the company’s success. In SA, employee ownership can play a crucial role in addressing the empowerment of historically disadvantaged groups — an important mandate for the commission.

Mergers & acquisitions (M&A) involving multinational companies in various industries often require the approval of the Competition Commission. Companies can use employee ownership to address the commission’s public interest considerations by providing employees a financial stake in the company, creating a sense of ownership and engagement, and promoting a fairer distribution of wealth.

It is crucial to understand the role employee ownership can play in addressing this, including its benefits, challenges and considerations for structuring and implementing an Esop. We have seen recent examples of companies that have used employee ownership to address the commission’s public interest considerations successfully.

These include PepsiCo, which in 2019 acquired SA food and beverage company Pioneer Foods as part of its expansion into Africa. As a condition of the merger the Competition Commission required that a portion of the merged entity be owned by a broad-based BEE consortium and that Pioneer Foods implement an Esop. 

The Esop enabled Pioneer Foods employees to acquire an ownership stake in the merged entity, thereby promoting greater economic empowerment and inclusivity among historically disadvantaged groups. The employee ownership structure helped facilitate the approval of the merger by the commission.

This year Woolworths needed to introduce a 5% share ownership scheme before the approval of its acquisition of Absolute Pets. The Competition Tribunal approved the transaction with these conditions on April 2. Similarly, the Vitol Group was required to introduce an Esops that begins at 5% and increases to 9% (over a seven-year period) for the acquisition of Engen Petroleum.

The commission’s goal is to ensure businesses operate in a fair and competitive environment by promoting and maintaining competition in the market. In addition to considering competition effects, the commission evaluates whether M&A are in the public interest. 

These public interest considerations are defined in the Competition Act and include the effect a transaction may have on ownership by historically disadvantaged people, on employment, on the particular industrial sector or regional business, and on small businesses or firms owned by historically disadvantaged people.

These requirements are crucial to the commission’s decision-making process in evaluating M&A. For instance, it may impose conditions on a transaction to ensure employment is maintained or created if a merger or acquisition is likely to result in job losses or the closure of a factory in an economically disadvantaged region. 

The commission will in some instances require companies that are wanting to merge to consider offering a portion of their shares to historically disadvantaged people. This usually applies when the merger is likely to lead to a decrease in ownership by historically disadvantaged people.

Employee ownership can provide a range of benefits to both companies and their employees. These benefits can be particularly important in the context of M&A, where there is the potential for negative consequences for employment and the empowerment of historically disadvantaged groups.

• Employee ownership can promote greater employee engagement and motivation. When employees have a stake in the company’s success they are more likely to be committed to their work and take a longer-term view of the company’s performance. This can lead to increased productivity and help with retaining key talent. Where employees believe they have a vested stake in the merged company’s success they are less likely to leave the company after the transaction, reducing the risk of a brain drain and ensuring that key talent is retained, which can be important for the long-term success of the merged company.
• It can also help promote a more equitable distribution of wealth. In traditional ownership structures wealth is often concentrated in the hands of a small group of shareholders or executives. By giving employees a stake in the company’s success, employee ownership can help to create a more inclusive economy and reduce income inequality.

In promoting the empowerment of historically disadvantaged groups the commission ensures that the transaction does not perpetuate or worsen existing inequalities. Overall, the public interest requirements are a critical tool for the commission in ensuring that M&As result in positive outcomes for the broader public.

Esops provide an attractive option for simultaneously addressing the commission’s public interest requirements and BEE ownership in a way that can achieve various other benefits at the same time. Should organisations — both multinational and national — be considering how to address the BEE ownership requirements for a potential investment in a SA company, it is imperative to investigate and analyse the structural options and related implications.

About the Author

About Tiisetso Masimula

Tiisetso is a Director at Transcend Capital. As part of the B-BBEE transaction advisory team, he focuses on the design and implementation of B-BBEE ownership solutions. He has worked on various major multinational deals – providing B-BBEE Ownership advisory, and leading valuations. Prior to joining Transcend Capital, he spent four years in EY’s Transaction Advisory Services team. At EY, he provided buy-side and sell-side transaction, due diligence and valuations advice to multinational corporates and private equity clients.