Opinion: 4 key steps to crafting an ESOP that strengthens your SA investment pitch
Summary: ESOPs to Strengthen a South African Investment Pitch (TL;DR)
Tie ESOPs to approval: Use employee ownership to address Competition Commission public-interest expectations, especially HDP ownership.
4 steps: (1) Map current B-BBEE ownership and plan how the ESOP integrates, (2) Model deal economics (capital structure, valuation, viability), (3) plan tax & accounting outcomes, (4) run clear employee communications to secure buy-in.
Outcome: A well-structured ESOP can remedy public-interest risks, support B-BBEE compliance, and make the investment case more compelling—without weakening the business case.
The South African Competition Commission’s revision of its public interest guidelines has increased the importance of local ownership in companies that attract foreign investment.
Mergers and acquisitions that significantly enhance ownership by “historically disadvantaged persons” (HDPs) are now more likely to secure the Competition Commission’s approval.
Enhancing HDP ownership through Employee Share Ownership Plans (ESOPs) can help remedy public interest concerns that might arise when the Competition Commission is reviewing a multinational transaction that requires its approval.
ESOPs give employees a financial stake in the company, promote ownership and participation in the firm’s performance, and help distribute wealth more fairly across the South African economy. They support the aims of the Competition Commission’s public interest mandate by advancing economic transformation.
However, multinationals looking to implement ESOPs need to determine the commercial and economic impact of such ownership plans and structure them correctly. Four steps are essential:
1. Understand the Broad-based Black Economic Empowerment (BEE) ownership structures of the South African company that is the subject of the proposed merger or acquisition. BEE is a national policy, mandated by the South African Government, that aims to promote economic transformation and redress past inequalities in the distribution of wealth and opportunities. It requires companies operating in South Africa to have specific levels of ownership held by HDPs or entities controlled by HDPs. It is therefore vital that a prospective investor in a South African company evaluate the effect of an ESOP on the firm’s BEE ownership structure. Such ownership structures may need to be adjusted to ensure compliance with local BEE regulations. Alternatively, the ESOP could be modified and integrated with the company’s existing BEE ownership structures.
2. Evaluate how the ESOP would affect the value and performance of the company considered for acquisition and determine the ownership plan’s impact on the business case for the transaction. Factors to consider include potential changes to the company’s envisaged capital structure, financial performance and its value proposition to the buyer of the company. Ensure that the ESOP is structured in a way that does not jeopardise the financial viability of the company nor weaken the business case for the transaction.
3. Consider the tax and accounting effects that could be triggered by the introduction of employee ownership in the South African company. The tax implications of an ESOP vary depending on the structure of the ownership plan. Prospective investors in a South African company should consult tax professionals and accountants with a thorough knowledge of the local business environment to ensure that a proposed ESOP leads to the best possible tax and accounting outcomes.
4. Ensure that the benefits and objectives of the proposed ESOP are communicated clearly to the company’s employees. Regular and carefully-considered engagement with the workforce is an important aspect of employee relations in South Africa. It encourages high morale, reduces labour disputes, boosts staff retention and supports strong long-term business performance.
ESOPs provide multinationals looking to invest in South African companies with an effective vehicle to remedy potential public interest concerns and thereby help secure Competition Commission approval.
However, successful ESOPs must be structured to accommodate the local commercial and economic impact of such ownership plans.
About Transcend Capital
Transcend Capital is a specialist Employee Ownership (ESOP) and BEE Ownership transaction advisor, serving South Africa’s leading listed and multinational companies. Founded in 2005, Transcend Capital has successfully advised on over 200 transactions. We utilise our unparalleled expertise and experience to structure and implement value-adding ESOPs and BEE transactions. Our culture and way of working enables us to be trusted advisors to blue-chip corporations and to attract and retain top talent. We deliver high-quality solutions and transactions that benefit our clients and the country.
Tiisetso Masimula
Director at Transcend Capital
Frequently Asked Questions
What ESOP details should we put into a Competition Commission public-interest commitment?
Specify target HDP coverage (e.g., % of workforce and % of ESOP participants who are HDP), minimum employee equity %, vesting/lock-in timelines, funding source (new issue vs vendor-facilitated), implementation milestones (e.g., T+90, T+180), and annual reporting (independent verification of ownership indicators and participant counts).
Pre-closing or post-closing—when should the ESOP go live in an M&A deal?
Common playbook: agree binding conditions at approval, then implement post-closing within a fixed window (e.g., 3–6 months). Pre-closing launches can de-risk execution but may complicate purchase price and condition precedents. Choose based on integration timing, funding readiness, and valuation certainty.
How do we achieve HDP ownership targets without excessive dilution?
Use a ring-fenced ESOP pool sized from a fully-diluted cap-table model, pair with treasury/new shares rather than secondary only, consider vendor loans/dividend-funded repayment, and include anti-dilution/top-up mechanics tied to future issuances so the ESOP’s percentage isn’t unintentionally eroded.
What should go into the ESOP section of the merger filing to speed approval?
Include a concise term sheet (beneficiary criteria, allocation rules), a dilution & affordability model, tax/accounting memo (headline treatment and assumptions), a governance map (trustees, oversight), and a communications plan summarising how employees will be onboarded and informed.
How do we integrate a new ESOP with existing B-BBEE ownership structures at the target?
Audit current trusts/partners, decide between rollover, parallel run, or consolidation, and model the combined Economic Interest, Voting Rights, and Net Value over time. Add change-of-control clauses and lock-ins to preserve recognition and avoid resetting measurement in the critical early years.