Key takeaways from the Commission’s impact study
The Competition Commission (Commission) recently published its impact study titled “Employee Share Ownership Plans (ESOPs): An Analysis of Key Design Principles to Create Value for Beneficiaries and Firms” (Study). The Study is a notable development for dealmakers navigating South Africa’s merger control landscape. Conducted pursuant to section 21A of the Competition Act, 1998 (as amended) (the Act), the Study evaluates the effectiveness of employee stock ownership plans (ESOPs) as an ownership remedy imposed by the Commission as a merger condition to several transactions where it considered that the merger did not sufficiently promote a greater spread of ownership by historically disadvantaged persons (HDPs) and workers, as contemplated in section 12A(3)(e) of the Act. The Study signals the Commission’s increasing focus on the quality and effectiveness of ESOPs as a public interest remedy, and merging parties should take careful note of its findings.
The Study’s findings and recommendations offer parties a clearer framework for understanding the Commission’s standards of effective and sustainable ESOPs, and for designing any contemplated or mandated ESOP accordingly.
The Study sampled 15 ESOPs across various sectors, which were implemented between 2019 and 2023. The Study takes an honest and granular look at whether mandated ESOPs are delivering value to the HDPs and workers they are meant to benefit.
Following the 2019 amendments to the Act, the Commission has increasingly sought to address ownership and control as a public interest consideration in merger transactions. Where the Commission finds that a merger does not promote a greater spread of ownership, it may impose ownership remedies, including the establishment of an ESOP by one of the merging parties or the merged entity. Under the Commission’s non-binding Revised Public Interest Guidelines, an ESOP should hold between 5% and 10% of the equity in a merging party or the merged entity, and should represent a broad base of workers.
The debt problem: A critical design flaw
The Study’s most important findings concern the financing of ESOPs and the implications for their beneficiaries (employees). Most ESOPs in the Study were funded through debt, predominantly in the form of Notional Vendor Finance (NVF) provided by the merger parties to the ESOP vehicle (usually a Trust). In practice, interest has been levied on the NVF debt, leaving ESOPs reliant on discretionary dividend declarations to service the debt.
The Study highlights that charging interest on ESOP debt has a materially adverse effect on beneficiaries. In the absence of dividend declarations by an organisation, the outstanding debt owed by ESOPs compounds over time. Even where dividends are declared, they may be insufficient to meet the annual interest obligation in full, leaving the underlying capital amount effectively undiminished. The cumulative effect of these interest charges is to entrench and increase the debt burden, potentially rendering the ESOP structure unviable in the long term.
Based on the Study’s funding models (which assume a starting debt of R500 000 and specified dividend inputs) where interest is charged on the debt, the outstanding debt increases over time. In the Study’s base scenario, the debt increased by 24% over a 10-year period, with dividends mainly used to pay interest rather than reduce the capital amount. In contrast, where no interest is charged, the debt decreased by 66% over the same period. The Commission is, therefore, concerned that beneficiaries may not receive meaningful financial value from ESOPs, and may instead remain trapped in perpetual debt. It is important to note, however, that beneficiaries or employees do not incur personal debt under NVF schemes. Rather, the debt is owed by the ESOP vehicle to the lender, with the practical consequences that beneficiaries may rarely receive any financial flow-through benefits, as any dividends declared by the parties may only accrue to servicing debt.
The Study further illustrates that dividend distributions are far from assured. Of the 12 ESOPs that were operational by 2024, only half received a dividend payment that year. By 2025, seven out of 15 ESOPs received dividends. In 2025, dividend payouts to beneficiaries ranged between R360 and R4,734, a modest return for what is intended to be a transformative ownership intervention.
Design principles: the devil in the detail
Beyond financing, the Study reveals considerable gaps in the Commission’s current ESOP template and makes various recommendations to address them. These are grouped into three categories:
1. First, funding: the Study recommends that interest should not be charged on NVF debt, as it is unwarranted and renders ESOPs financially unsustainable. In addition, discounts on the share price – including minority discounts, marketability discounts, lock-in discounts, and B-BBEE points discounts – should be offered to ESOPs, consistent with typical commercial share sales, in order to reduce the debt burden significantly.
2. Second, ESOP design: the Study proposes a revised and expanded mandatory design template. This includes specified implementation timelines, the ESOP structure (trust or company) and shareholding percentage, a requirement that workers should not be required to pay to participate, specified funding models and trickle dividend distribution, governance structures that ensure worker board representation through beneficiary-nominated trustees, qualifying criteria for beneficiaries and “bad leaver” provisions (resignations and dismissals), specified benefits (dividends and/or capital gains), compulsory training for beneficiaries and trustees at no cost to workers, dispute resolution mechanisms for fee-related disputes, and robust monitoring conditions.
3. Third, worker consultation: the Study identifies design principles that should be determined in consultation with workers, worker forums, or trade unions (with professional advice made available at no cost to workers where required). These include the duration of the scheme, trickle dividend ratios, the class of shares allocated, placement of the ESOP at holding or subsidiary level, and alternative debt reduction mechanisms where the ESOP still carries outstanding debt.
What the commission recommends and what dealmakers should do now
The Study signals an important shift in the Commission’s approach to ESOPs imposed as merger conditions. ESOP structures offered by merging parties to address ownership (or other public interest concerns) can no longer be a box-ticking exercise. A poorly designed scheme risks worker dissatisfaction, regulatory scrutiny, and reputational harm. Although the Study’s recommendations are not binding, the Commission is likely to place increasing emphasis on features such as interest-free NVF financing, appropriate share price discounts, meaningful governance, and worker consultation in ESOPs proposed as part of merger conditions. In particular, the expanded mandatory design template will likely inform the Commission’s assessment of any contemplated ESOP from the outset.
Merging parties may be expected to consult with workers, worker forums, or trade unions prior to notifying the merger, using the pre-notification merger guidelines as a framework. These evolving expectations will inevitably have some practical challenges in their implementation. For example, the Study does not address how an ESOP should be funded where merging parties are unwilling or unable to provide interest-free NVF. In such circumstances, the alternative may be for the ESOP to acquire shares via a third-party financial institution, which would certainly require an interest component.
Merging parties and their advisors should be mindful of these evolving expectations when structuring transactions that are likely to attract public interest scrutiny under the Act.
Shawn van der Meulen is a Partner, Gina Lodolo a Senior Associate and Nicole Araujo an Associate | Webber Wentzel
This article first appeared in DealMakers, SA’s quarterly M&A publication.
DealMakers is SA’s M&A publication.
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