Pseudo-ownership Or Real Value? Unpacking The Competition Commission’s ESOP Impact Study

Section 12A(3)(e) of the Competition Act 89 of 1998 (as amended) (the "Competition Act"), requires competition authorities to consider whether a proposed transaction promotes a greater spread of ownership by historically disadvantaged persons and workers. Where a transaction falls short, competition authorities have sought to impose Employee Share Ownership Plans ("ESOPs") as conditions of approval, seeking to remedy any adverse impact on ownership. Against this backdrop, the Competition Commission (the "Commission") recently published an impact study (the "Study") examining whether these mandated ESOPs genuinely deliver meaningful ownership and financial benefit to workers, or whether they amount to a form of pseudo-ownership that fails to realise the intended value for workers and firms alike. The Study reviewed fifteen ESOPs mandated by merger remedies between FY2019/20 and FY2022/23 across various sectors including agriculture, mining, retail and fintech, drawing on submissions from the firms concerned, trustees of ESOPs, trade unions, the Broad-Based Black Economic Empowerment Commission, the Department of Trade, Industry and Competition and industry experts.

Key findings

Key takeaways from the Study include that all fifteen ESOPs assessed held shares, most carried voting rights and all were entitled to dividends when declared. However, only seven of the fifteen ESOPs had paid dividends by 2025, with individual payouts ranging from ZAR360 to ZAR4,734 per beneficiary. Non-payment in the remaining cases was attributed to poor firm performance, profit reinvestment and ESOP debt repayments. As regards governance participation, eight of the fifteen firms permitted the ESOP to appoint a representative to the board of the firm in question.

Upon evaluating the current design structure of the ESOPs, the Commission identified that the financing of ESOPs has become a significant obstacle to the effectiveness of ESOPs due to the use of debt as a funding mechanism. Eleven of the fifteen ESOPs sampled were funded through notional vendor finance, and six of those were charged additional interest. In cases where ESOPs were funded by debt, dividend income was often not enough to cover interest charges, leaving capital unreduced and resulting in what the Study describes as “perpetual debt,” which adversely affects payouts to beneficiaries. The Study also found that beneficiaries frequently lacked a meaningful understanding of their ESOP, that trustee training was inconsistent, and that workers were often consulted only after key design choices had already been made.

The Commission’s recommendations

The Study proposes three sets of recommendations:

• Funding of ESOPs: Firms should implement a zero interest rate on the debt funding; ESOPs should be offered a discount on initial share prices to account for (i) the lack of control over operational and corporate policies of the firm as a minority shareholder; (ii) the inability to quickly convert shares to cash and the administrative costs incurred in doing so within private firms; and (iii) lock-in periods and the benefits gained from B-BBEE points.
• Mandatory design principles: The design principles of an ESOP that should be prescribed in all ESOP remedies include the implementation date, the structure of the ESOP (i.e. trust or company), no-cost participation for workers, the funding model utilised, governance arrangements (including the right to nominate a board director), participation criteria, participation benefits, mandatory training for beneficiaries on the functioning of the ESOP as well as legal and financial training on the operations of ESOPs at no cost to workers, dispute-resolution mechanisms and monitoring obligations.
• Design principles subject to Worker / Worker Forum / Trade Union consultation: These design principles should be determined in consultation with workers, worker forums or trade unions and should include duration, trickle-dividend ratios, share class, placement of the ESOP at holding-company or subsidiary level, good and bad leaver definitions, and debt-reduction mechanisms. The Commission further recommends that where merging parties anticipate that an ESOP remedy will be required, they must consult with workers / worker forums / trade unions before notifying the merger to the Commission.

Our analysis

The Commission’s recommendations appear well-intended, seeking to ensure beneficiaries experience genuine ownership through shares, voting rights, board representation and financial benefit.

A recurring concern, however, is that although the Study is intended to benefit both beneficiaries and firms, certain recommendations may not fully account for the commercial realities in which firms operate. Merger transactions do not take place in the abstract. They proceed under time pressure, strict confidentiality obligations, regulatory uncertainty, and the competing demands of multiple stakeholders. The recommendations, in this respect, may benefit from further consideration of practical constraints. While they are sound in principle, their application to specific transactional contexts remains to be tested.

The pre-notification worker consultation requirement is a case in point. Merger discussions are typically confidential and, for listed entities, subject to securities-law constraints. Pre-notification consultation could risk premature disclosure, labour relations complications, and potential breach of non-disclosure agreements.

The board representation recommendation also warrants caution. For firms with established governance structures, adding a board nominee whose appointment is driven by an ESOP condition rather than solely by skills, experience or fiduciary capacity may raise governance questions that warrant careful consideration. Further, directors owe duties to the company as a whole, not to a single constituency, and the Study does not appear to address in detail how potential conflicts between a nominee’s representative role and their fiduciary obligations might be managed.

Although the Study is thorough in its treatment of design principles, it leaves several practical issues unaddressed. It does not engage with the costs associated with implementing its proposed recommendations. The zero interest, discounts, mandatory training, independent expert fees, monitoring and compliance reporting all carry significant financial implications for the firm implementing the ESOP. The Study does not appear to address directly what happens when an ESOP is imposed on a firm that is not profitable or is in a cyclical downturn — where dividends are not declared, the ESOP delivers no financial benefit to workers regardless of how well it is designed, and the ongoing administration costs become a net burden on an already strained firm. The Study acknowledges that dividends depend on firm performance but does not propose a mechanism for suspending or restructuring an ESOP when a firm is genuinely unable to fund it.

Despite the existence of the previously stated areas for development, the Commission’s Study is a welcome and substantive contribution to the development of ESOP remedies in South African merger control. It identifies the structural weaknesses, particularly around debt and interest, which have prevented many ESOPs from delivering real value to workers in the country. Therefore, firms planning to enter into merger transactions should be aware of these recommendations as they could inform merger conditions in the future.

Under section 21A of the Competition Act, the Minister is required to table the Study in the National Assembly. To date, no public communication has confirmed whether this has occurred. It therefore remains to be seen whether the recommendations contained in the Study will be taken forward and, in due course, acquire binding force.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.