Understanding the Employee Share Ownership Plan
The ownership element on the B-BBEE scorecard is a priority element as laid out in the revised B-BBEE Codes of Good Practice 2013. As a result, failing to comply with the ownership element will result in a discounting principle being applied. Therefore, this element is of paramount importance when it comes to the implementation of a B-BBEE strategy which a business would like to embark upon.
This need has resulted in a variety of B-BBEE ownership solutions being implemented by businesses, one of which is known as the Employee Share Ownership Schemes/Plans (ESOP).
The ESOP structure is gaining popularity in both big businesses, including JSE listed companies, as well as smaller companies. We suspect the rise in popularity is due to the simplicity in implementing the structure, as well as the benefits which both businesses and employees will receive from the implementation of these structures.
Where business owners are concerned, an ESOP provides a great incentive for employees to strive towards, whilst both increasing employee productivity and loyalty. For employees, it provides them with both financial gain, as well as growth in their personal careers, given that they will have an opportunity to speak their mind when it comes to the running of the business.
More often than not, an ESOP is facilitated through a trust, as set out in the Trust Property Control Act 57 of 1988, with the beneficiaries to the trust being black employees as defined in the Broad-Based Black Economic Empowerment Act 53 of 2003. The benefits of implementing an ownership solution of this nature are that the beneficiaries are known to the business and can be trusted, and ownership is not left in the hands of people unknown to the business. The beneficiaries can further provide meaningful insight and comment insofar as the operation of the business is concerned, and the fronting issue relating to the unknown and silent beneficiaries is circumvented.
The Act makes specific provision for ownership facilitated through a trust, as well as an ESOP. Thus, when implementing an ESOP using a trust, both the rules pertaining to trusts as well as ESOPs will have to be adhered to. The ESOP structure is not a foreign concept to the B-BBEE Commission or verification agencies, and the structure has stood the test of verification agencies on countless occasions. This should provide businesses with the comfort that it will receive the relevant points for ownership when it comes time for verification.
Verification agencies will be required to determine, and confirm, that an ESOP provides the beneficiaries with economic interest and voting rights. This means that the beneficiaries must receive a portion of the business’s dividend as and when it is declared, and participate, to some extent, in the shareholders' meetings and voting procedure in proportion to the beneficiaries’ shareholding. Given that a trust is operated and managed by its trustees, the trustees will be the ultimate voice of the beneficiaries when it comes to voting and participation.
As is the case with any share transaction, the shares transferred to the trust will have to be valued by a valuator. This valuation will determine the loan amount that the trust will take out to purchase the shares from the business. Generally, the loan is paid back to the business, or other shareholders, through a portion of the dividends received by the trust. This loan, by law, will have to be paid off in no longer than 10 years.
While we don’t wish to oversimplify the process of setting up and implementing an ESOP, we believe that a basic understanding of the above will be a good foundation from which to proceed. We would also recommend, as some final points, that you avoid complexity wherever possible, be guided by your intentions at all times, and do not be afraid to ask any questions which you may have – the better understanding you have of your ESOP, the more likely it is to be an effective business and corporate structuring tool.
If you require any assistance with the ownership element – we are here to help. Please contact us with any of your B-BBEE related queries.
Nicholas Lazarides (LLB WITS)