ESOPs and the Competition Commission’s Public Interest Considerations

By Tiisetso Masimula

Large multinational transactions that require Competition Commission approval can benefit greatly from the inclusion of Employee Share Ownership Plans (“ESOPs”), which can serve to address the public interest considerations of the Competition Commission and to provide other benefits to the parties to the transaction. Multinationals considering implementing ESOPs in this context need to clearly understand the commercial and economic impact on the transaction and structure the ESOP carefully.

Introduction

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 South Africa, employee ownership can play a crucial role in addressing the Competition Commission’s public interest considerations, which promote employment, competition, and the empowerment of historically disadvantaged groups.

Mergers and acquisitions involving multinational companies in various industries may require the approval of the Competition Commission. Companies can use employee ownership to address these public interest considerations by providing employees a financial stake in the company, creating a sense of ownership and engagement among them, and promoting a fairer distribution of wealth.

It is crucial to understand the role employee ownership can play in addressing public interest considerations, including its benefits, its challenges, as well as the key 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.

Overview of the Competition Commission’s Public Interest Requirements

The Competition Commission’s goal is to ensure businesses operate in a fair and competitive environment by promoting and maintaining competition in the South African market. In addition to considering competition effects, the Commission evaluates whether mergers and acquisitions are in the public interest. These public interest considerations are defined in the South African Competition Act and include the impact a transaction may have on employment, the particular industrial sector or region business, small businesses or firms owned by historically disadvantaged persons, competition, the ability of participants to compete on their merits, and the interests of consumers.

The public interest requirements are crucial to the Commission’s decision-making process in evaluating mergers and acquisitions. They aim to ensure that the benefits of a merger or acquisition outweigh any potential negative impact on the broader public. By evaluating factors such as employment, competition, and historically disadvantaged groups, the Commission can promote a more equitable and sustainable business environment in South Africa.

For instance, the Commission 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 closure of a factory in an economically disadvantaged region. Similarly, the Commission may require merging companies to divest certain assets or take measures to preserve competition if a merger is likely to result in a dominant market position that could harm competition.

In promoting the empowerment of historically disadvantaged groups, the Commission ensures that the transaction does not perpetuate or exacerbate existing inequalities. Overall, the public interest requirements are a critical tool for the South African Competition Commission in ensuring that mergers and acquisitions result in positive outcomes for the broader public.

The Commission has used these requirements to impose conditions on transactions in recent years, such as the merger between Pioneer Foods and PepsiCo and the merger between Sibanye-Stillwater and Lonmin. These examples illustrate how the public interest requirements can be applied in practice to ensure positive outcomes for the broader public.

The Benefits of Employee Share Ownership

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

Greater Employee Engagement

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 that they have a vested stake in the merged company’s success 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.

Broader Distribution of Wealth

Employee ownership can help to 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.

Helping Meet the Strategic Objectives of Mergers or Acquisitions

In addition, employee ownership can enhance the attainment of synergies and help in meeting the strategic objectives of a buyer in a merger or acquisition. Synergies refer to the financial benefits that arise from combining two companies, such as cost savings or increased revenue.

Employee ownership can play a crucial role in realizing these synergies. When employees have a stake in the success of the merged company, they are more likely to be committed to the integration process and work towards the achievement of the strategic objectives of the buyer. This can help to reduce resistance to change and increase employee buy-in, which can be important for the success of the merger or acquisition.

Increasing Post-Integration Stability

Employee ownership can also play a crucial role in increasing post-integration stability and promoting positive employee relations in the merged company. Mergers and acquisitions can often lead to job losses, changes in organizational culture, and other disruptions that can negatively impact employee morale and productivity. Employee ownership can help to mitigate these risks and ensure a smoother transition for employees.

Improve BEE Ownership

Employee ownership can also be used to improve Black Economic Empowerment (BEE) ownership in South Africa. BEE ownership refers to the ownership of South African companies by previously disadvantaged individuals or groups, including Black South Africans, women, and people with disabilities. BEE ownership is an important aspect of economic transformation in South Africa, and it is a key consideration for the South African Competition Commission when assessing mergers and acquisitions.

Employee ownership can help to improve BEE ownership in several ways. Employee ownership can provide a pathway for employees from previously disadvantaged groups to become owners of the merged company. By giving employees a stake in the success of the merged company, companies can help to promote greater economic empowerment and wealth creation among historically disadvantaged groups.

Employee ownership can provide a range of benefits in the context of mergers and acquisitions, including greater employee engagement and motivation, a more equitable distribution of wealth, and a more sustainable business environment. Moreover, employee ownership can be used to improve BEE ownership in South Africa, which is an important aspect of economic transformation and a key consideration for the South African Competition Commission when assessing mergers and acquisitions.

How Employee Ownership Can Help in Addressing Public Interest Requirements

Employee ownership can be a powerful tool for meeting the South African Competition Commission’s public interest requirements in the context of mergers and acquisitions. In particular, employee ownership can help to address concerns related to economic empowerment.

Employee ownership can help promote economic participation and wealth creation among employees, particularly among previously disadvantaged groups such as Black South Africans, women, and people with disabilities. By providing employees with a stake in the success of the merged company, employee ownership can facilitate greater economic empowerment and inclusivity. This is especially crucial in the South African context, where economic transformation and Broad-Based Black Economic Empowerment (BEE) ownership are key public interest requirements. Through employee ownership, these historically disadvantaged groups can have a greater voice and control in the merged company, contributing to greater equity and social justice.

More Multinationals Have Started Introducing ESOPs

We have seen a number of large multinationals introduce employee ownership to meet public interest requirements successfully, including:

1. Pioneer Foods and PepsiCo: In 2019, PepsiCo acquired South African food and beverage company Pioneer Foods as part of its expansion into Africa. As a condition of the merger, the South African Competition Commission required that a portion of the merged entity be owned by a broad-based black economic empowerment (B-BBEE) 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. By meeting the public interest requirements of promoting economic transformation and B-BBEE ownership, the employee ownership structure helped facilitate the approval of the merger by the South African Competition Commission.
2. SABMiller: In its 2016 acquisition by AB InBev, SABMiller established an ESOP for its South African employees. This ESOP provided a 10% shareholding in the local business to more than 4,000 permanent employees, primarily Black South Africans. This initiative helped to meet the BEE ownership requirement and promote greater economic empowerment among employees.
3. Coca-Cola Beverages Africa merger: In 2016, SABMiller plc, The Coca-Cola Company, and Gutsche Family Investments merged their African bottling operations to create Coca-Cola Beverages Africa (CCBA). As part of the merger, the South African Competition Commission required that a portion of the merged entity be owned by a BEE consortium and that CCBA implement an ESOP. The ESOP enabled CCBA employees to acquire an ownership stake in the merged entity, thereby promoting greater economic empowerment and inclusivity among historically disadvantaged groups. By meeting the public interest requirements of promoting economic transformation and B-BBEE ownership, the employee ownership structure helped facilitate the approval of the merger by the South African Competition Commission.

Challenges of Employee Ownership

While employee ownership can provide numerous benefits, there are also several challenges and limitations that companies must consider when implementing such a structure.

1. Cost: Implementing an employee ownership plan can be costly for companies. For example, creating an ESOP requires the company to set aside a portion of its profits to fund the plan. Additionally, there may be legal and administrative fees associated with implementing the plan.
2. Complexity: Employee ownership structures can be complex and difficult to understand for employees. This can lead to confusion and dissatisfaction among employees, particularly if they do not fully understand the benefits and limitations of the plan.
3. Dilution of control: By transferring ownership to employees, companies may lose some level of control over their operations. This can be particularly challenging in situations where the company is attempting to achieve specific strategic goals or objectives.
4. Difficulty in valuing employee shares: One of the key challenges of implementing an employee ownership plan is determining the value of employee shares. This can be particularly difficult in situations where the company is not publicly traded, as there may be limited data available to help determine the value of the shares. This can lead to conflicts between employees and shareholders, particularly if there is disagreement over the value of the shares.
5. Need for financing: Implementing an employee ownership plan often requires financing, which can be a significant barrier for some companies. Financing may be necessary to purchase shares from existing shareholders or to issue new shares to employees. This can be particularly challenging for smaller companies or those with limited access to capital. In some cases, companies may need to seek external financing, which can come with its own set of challenges and limitations.
6. Potential conflicts between employee and shareholder interests: Another challenge of employee ownership is the potential for conflicts between employee and shareholder interests. While employee ownership can align the interests of employees with those of shareholders, it can also create tensions between the two groups. For example, employees may prioritize job security or wage increases over maximizing shareholder returns, which can lead to conflict with other shareholders.
7. Incompatibility with public interest goals: In some cases, employee ownership plans may not be compatible with public interest goals, such as promoting economic transformation or B-BBEE ownership. For example, if the company is required to have a certain level of ownership by historically disadvantaged groups, an employee ownership plan may not meet this requirement if the employee base does not include a significant portion of historically disadvantaged employees.
8. Limited impact: Employee ownership plans may have limited impact in situations where employees do not have a significant ownership stake in the company. This is particularly true in situations where the company is owned by outside investors or where the employee ownership plan is limited in scope.
9. Resistance to change: Implementing an employee ownership plan requires a significant cultural shift within the company. This can be challenging, particularly if employees are resistant to change or do not fully understand the benefits of the plan.
10. Implementation challenges: Finally, there are a number of implementation challenges associated with employee ownership plans. For example, the plan may require significant changes to the company’s legal and governance structures, which can be time-consuming and costly. Additionally, the plan may require significant communication and education efforts to ensure that employees fully understand the benefits and limitations of the plan.

Overall, while employee ownership can provide numerous benefits, companies must carefully consider the challenges and limitations associated with such a structure before implementing it. By carefully weighing the costs and benefits, companies can determine whether employee ownership is an appropriate strategy for achieving their strategic and public interest goals.

Key Considerations for ESOP Structuring

When structuring an ESOP for a South African company, there are several key considerations that need to be taken into account to ensure a successful implementation.

Firstly, it’s important to understand the existing Black Economic Empowerment (BEE) ownership structures of the target company when acquiring a South African company in a merger or acquisition. BEE ownership is a government-mandated policy aimed at promoting economic transformation and addressing past imbalances. The policy requires companies to have a certain percentage of ownership held by black individuals or entities. Therefore, it’s essential to evaluate the potential impact of an ESOP on the existing BEE ownership structure to ensure compliance with the policy.

Secondly, when considering an ESOP for a South African company, it’s essential to evaluate the dilutional impact of including employee ownership and its effect on the business case for a transaction. This involves analysing the potential impact of the ESOP on the financial performance of the company and its value proposition. The ESOP should be structured in a way that is financially viable and does not negatively impact the overall business case for the transaction.

Thirdly, it’s important to consider the tax and accounting impact of introducing employee ownership when acquiring a South African company. The tax implications of an ESOP can vary depending on the structure of the plan and the specific tax laws of South Africa. Therefore, it’s critical to consult with tax professionals and accountants to ensure compliance with local tax laws and regulations.

Fourthly, the introduction of employee ownership can have a significant impact on employee relations in South Africa. It’s essential to communicate the benefits and objectives of the ESOP to employees effectively. Proper communication can improve employee morale, retention, and engagement, leading to improved business outcomes.

Finally, it’s necessary to understand the impact of introducing employee ownership on recognised BEE ownership. The BEE ownership structure may need to be adjusted to ensure compliance with local regulations, and the ESOP structure may need to be modified to integrate with existing BEE ownership structures.

In summary, when structuring an ESOP for a South African company, it’s essential to consider the existing BEE ownership structures, the dilutional impact on the business case, tax and accounting implications, employee relations impact, and the impact on recognized BEE ownership. Proper consideration of these key factors can help ensure a successful implementation of an ESOP in a South African context.

Conclusion

ESOPs provide an attractive option for simultaneously addressing the Competition Commission’s public interest requirements and BEE ownership in a way that can achieve various other benefits at the same time.

Should you be considering how to address the BEE ownership requirements for a potential investment in a South African company, it is imperative to critically investigate and analyse the structural options and related implications.

With over 15 years of experience in turnkey ESOP implementation, Transcend Capital can support you on your journey in finding an optimal and sustainable ESOP solution.

About Tiisetso Masimula

Tiisetso is a Director at Transcend Capital. He designs and implements BEE ownership solutions, works on multinational deals, provides BEE ownership advisory, and leads valuations.