Competition Act and Employee Share Ownership Structures - Cox Yeats Attorneys

In 2019, the Competition Act was amended by introducing a further factor which the Competition Commission (the Commission) and Competition Tribunal must consider when approving a merger. Section 12(3)(e) was introduced by stipulating that the Competition Authorities must consider the effect that the merger will have on the promotion of a greater spread of ownership, in particular, to increase the levels of ownership of historically disadvantages persons and workers in firms in the market.  

From 2019, employee share ownership plans (or ESOPs) were introduced as a response to this legal requirement and very often, the Competition Authorities approved of a merger provided an ESOP was introduced.  

Under the BEE Codes, special rules apply for employee share ownership plans, and if the plan was constituted as a Trust, then the rules applicable to Trusts had application. The Commission did not stipulate any additional rules or requirements for ESOPs and ESOPs were generally established in accordance with the rules set out in the Codes.  

In April 2026, the Commission published an impact study on the key design principles which should be incorporated into ESOPs. The purpose of this design study was to add further rules or requirements for ESOPs over and above those set out in the Codes.  

The recent impact study by the Commission analyses 15 ESOPs across various sectors which were formed after 2019 and then provides recommendations on what the Commission would like to see in ESOPs, going forward. The document provides guidance as to the structuring of ESOPs which need to be formed so as to comply with the conditions of the Commission.  

The Commission proposed three main sets of recommendations. The first set of recommendations focusses on the funding of ESOPs, specifically, the criteria to be applied on debt. The second set of recommendations outlines the design principles that should be mandatory in ESOP’s and the third set of recommendations specifies the design principles that are mandatory, but should be determined in consultation with workers/trade unions.  

Financing of ESOPs  

The major impediment to the establishment of ESOPs is arranging for the finance for the acquisition of equity. Rather optimistically, the Commission recommends that firms should implement a zero interest rate on the debt funding given to ESOPs because the portion of the dividend allocated to the debt payment may not cover the full interest payment for the year. This results in the ESOP being unsustainable as the beneficiaries will be in perpetual debt.  

In response to this challenge, it has been practice, in the past, to allocate to the ESOP, a different class of share which is entitled to, at least, a minimum dividend, enough to ensure that the ESOP can pay the debt. The ESOP receives a trickle dividend, enough to repay the debt and sometimes, enough to ensure that there at least is some dividend flow to the beneficiaries.  

Under the Codes, it has also been necessary to reduce the debt applied to the acquisition of the equity interest. The Codes use a formula to ensure that the debt is fully redeemed within 10 years, otherwise full points are not allocated.  

Whilst it is understandable that the Commission has recommended that zero interest be charged on the debt funding, in practice, this is often impossible.  

The second recommendation on financing is that the ESOP be granted a discount on the shares acquired to take account of the fact that the ESOP holds a minority shareholding. This has often been applied, in practice, so as to meet the debt equity rule referred to above. 

The Commission’s study revealed that most ESOPs held less than 10% of the shares of the target company. As a minority shareholder, the ESOP had a lack of control over the operational and corporate policy of the firm and therefore, the ESOP should be offered a discount on the share price to compensate for the lack of control.  

The discount should also be justified on the fact that the ESOP, very often, has lock in periods in respect of the ownership or holding of the shares and the benefits gained from the B-BBEE points. 

Design Principles for ESOPs  

It was accepted that a trust structure would be appropriate. This is on the basis that a trust is formed for the benefit of the employees.  

The employees will not hold shares in their own capacity. They will hold shares via the trust. This is a big step forward as many ESOPs were criticised in the past, in that they did not allow the employees to hold shares directly.  

The Commission recommended that the structure of the ESOP should be determined in consultation with workers prior to the conceptualisation of the ESOP. This requires an anticipation of the condition being imposed prior to the filing of the merger notice.  

The ESOP should also be established at no cost to the workers. The workers should not be required to pay to participate in the ESOP. The merger parties should cover the cost of establishing the ESOP. The parties should engage with the qualifying workers to explain the establishment in terms of the ESOP and independent financial and legal experts should be made available to the qualifying workers so that they can obtain their own advice.  

Under funding, it is conceded that the dividend policy should provide for the payment of a trickle dividend. In this respect, it therefore seems to be recognised that funding cannot always be interest free.  

On governance, it was recommended that the ESOP employee representatives should be entitled to nominate a director to the board. On the ESOP itself, the elected trustees should consist of an equal distribution of firm and beneficiary nominated trustees or include the appointment of more beneficiary nominated trustees.  

All costs associated with the operation of the board of trustees should be borne by the merged entity. 

In regard to the participants, the Commission felt that all workers, with a defined number of years’ experience, should participate. Alternatively, workers at a certain grade on the Peromnes/Patterson Grading System, with the exclusion of top/senior management, should participate.  

It was recognised that bad leavers could cease to participate. This would include resignations and dismissals.  

The participation benefits would have to be defined.  

All ESOPs should have mandatory training for beneficiaries to ensure that workers understand the function of the ESOP. Training should be at no cost to the workers.  

Once trustees were appointed, then they should receive legal and financial training. Where there were disputes between the merging parties, in relation to the reasonableness of fees, then this should be determined by arbitration.  

There should be mechanisms for monitoring the performance of the ESOP. A compliance report should be submitted after the establishment of the ESOP. Thereafter, various updated reports should be submitted by the firms to the Commission. 

None of these principles are unduly onerous and many existing schemes have incorporated them.

Design Principles to be determined in Consultation with Workers  

In regard to the duration of the trust, the three options would be an evergreen trust, a trust which would have a defined buy back and then a hybrid between evergreen and buy back trusts.  

In regard to the trickle dividend, the option would be equal distribution, a dividend in the discretion of trustees, utilising the dividend with a higher portion to debt versus a lower beneficiary pay out or a lower portion to debt and a higher beneficiary pay out.  

In regard to classes of shares, they should be ordinary shares but they may be of different classes. 

There also needed to be discussion about whether the ESOP would be placed at holding company level or at subsidiary level. This becomes important in regard to the information which must be disclosed to beneficiaries.  

There needed to be discussion about the definition of good leaver and bad leaver. A good leaver should receive payment regardless of the reason for exiting the firm.  

If the ESOP still has debt, then the ESOP should consider alternative mechanisms to reduce the debt. The trust deed could make allowance for the ESOP to consider:  

1. purchasing more of the firm’s shares and then selling off part of the shareholding when the share price appreciates;  

2. the purchase of shares of other companies and the income of those shares allocated to the

debt; 

3. undertake investments such as EFTs and fixed income investments.  

It was also recommended that where the merging parties anticipate an ESOP remedy, they must consult with the workers prior to the notification of the merger to the Commission. If the merging parties do not anticipate an ESOP prior to the merger notification, they should consult with the workers during the merger investigation phase prior to agreeing a structure. This is to avoid a situation where an ESOP and its structure is conceptualised and factored into the deal by the parties without the involvement of the workers.  

Conclusion  

ESOPs have been part and parcel of corporate restructuring since the BEE Codes were introduced 25 years ago. Most ESOP structures have included the recommendations which have now been published by the Commission.  

These recommendations are, however, useful because they provide certainty as to complying with conditions imposed by the Commission. The type of conditions imposed are not dissimilar to what one may expect to see in practice. 

Competition Act and Employee Share Ownership Structures - Cox Yeats Attorneys