Opinion: 4 key steps to crafting an ESOP that strengthens your SA investment pitch
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.