Employee share ownership programmes (ESOPs) and HDP (historically disadvantaged persons) transactions have gained prominence in the context of mergers and acquisitions, where the South African competition authorities have increasingly conditionally approved mergers subject to ESOPs or HDP transactions to address public interest concerns. These conditions aim to ensure that ownership by workers and HDPs is not adversely affected by mergers, and in some cases, they seek to enhance such ownership.
The implementation of ESOPs and HDP transactions, however, introduces complex legal, financial, and operational challenges for both acquiring and target firms. This article examines the evolving approach of the South African competition authorities regarding ESOP and HDP transaction-related conditions and the practical implications for firms implementing these conditions as part of the merger approval process.
Current trends
Given the structure of the competition and public assessment under the Competition Act, ESOPs and HDP transactions (and other public interest conditions) can potentially be used by merger parties to remedy and address potential anti-competitive effects of a merger – as recently seen in the Vodacom/Masiv merger.
In recent years, ESOPs and HDP transactions have emerged as a transformative tool in South Africa, playing a crucial role in economic empowerment and inclusive ownership. These programmes and transactions are often integrated into Broad-Based Black Economic Empowerment (B-BBEE) strategies, reflecting their significance in promoting equitable economic participation. The South African competition authorities' focus on ESOPs, HDP transactions and other public interest conditions in merger approvals, as seen in the recent Vodacom/Masiv merger, has contributed to a surge in their implementation, particularly as a remedy for ownership dilution concerns and to address potential anti-competitive effects.
One significant trend is the increasing adoption of ESOPs and/or HDP transactions as a strategic tool for B-BBEE compliance. This is particularly relevant to the ownership element of the B-BBEE scorecard. Firms are recognising the dual benefits of ESOPs: enhancing employee engagement and meeting regulatory mandates.
Another trend is the diversification of ESOP structures. Firms are exploring various models, such as restricted share schemes, share purchase plans, option schemes, and phantom schemes, to tailor ESOPs to their specific needs. This flexibility allows companies to align ESOPs with their strategic objectives, whether it's incentivising employees, enhancing B-BBEE compliance, or facilitating mergers and acquisitions. We have also noticed a trend with the Competition Commission affording itself the right to approve the B-BBEE shareholder in the context of HDP transactions.
Lastly, the regulatory environment surrounding ESOPs and HDP transactions is becoming more supportive. The publication of the Commission's Revised Public Interest Guidelines Relating to Merger Control has provided clearer frameworks for the implementation of ESOPs and HDP transactions. We have also seen the competition authorities slowly move away from imposing ownership conditions where it is not feasible to do so or where there are no concerns about ownership dilution.
Planning for the implementation of ESOPs/HDP transactions
While ESOPs and HDP transactions are generally seen as a positive development, their implementation can be complex and costly.
Merger conditions imposed by the competition authorities usually contain a time period within which merger parties are required to implement an ESOP or an HDP transaction. This period is typically between 12 and 24 months from when the deal has been closed. This often means that parties are required to begin implementing an ESOP or HDP transaction as soon as possible so that they do not breach the merger conditions.
To do so, merger parties should begin considering the structure of the ESOP or HDP transaction at an early stage. This entails, for example, considerations on whether an ESOP will be established as a trust or a company. Parties must also consider financing considerations, drafting the required documents, engagement with key stakeholders, due diligence processes, tax and other implications. These considerations may be complex, depending on the structure of the ESOP or HDP transaction and may have an effect on the timing of the implementation of an ESOP or HDP transaction.
To mitigate timing risks, parties need to develop and implement a clear roadmap with key milestones. They should involve transactional and legal advisors at an early stage of the implementation of an ESOP or HDP transaction. This will assist parties in identifying any issues that may delay implementation. Merger parties should also be upfront and make submissions to the competition authorities during the investigation or adjudication of their deal. They should set out realistic timelines for the implementation of the ESOP or HDP transaction, depending on the particular facts of their case. Where parties have been unable to start with the implementation of an ESOP or HDP transaction in a timely manner, they should seek to engage with the competition authorities as soon as possible to mitigate the risk of non-compliance with their ESOP or HDP condition.
If it becomes evident that the ESOP/HDP condition will need to be varied from a timing perspective, merger parties should engage proactively with the competition authorities. Early engagement may help avoid opposition from the competition authorities and other key stakeholders.
Given the rise in mergers being approved subject to ESOP and/or HDP transactions to address public interest concerns, parties need to plan proactively and exercise caution when agreeing to the timing of the implementation of these conditions. This will ensure that parties meet their regulatory mandates and achieve the desired outcome for ESOPs or HDP transactions.
This was first published by DealMakers here: DealMakers Second Quarter 2025 M&A Rankings
