Em­ployee share schemes clar­i­fied

Business Day - Business Law and Tax Review - - BUSINESS LAW & TAX REVIEW - PRIYESH MODI

THE new Com­pa­nies Act has been on the re­ceiv­ing end of much crit­i­cism. Whether jus­ti­fied or not, the leg­is­la­tion ad­dresses cer­tain anom­alies un­der the pre­vi­ous Com­pa­nies Act in­so­far as em­ployee share schemes are con­cerned.

One of the prob­lems un­der the old Com­pa­nies Act arose from off­shore em­ployee share schemes con­ducted by for­eign com­pa­nies wish­ing to ex­tend par­tic­i­pa­tion in the schemes to its South African em­ploy­ees. The crit­i­cal is­sue was whether such of­fers to el­i­gi­ble em­ploy­ees were “of­fers to the pub­lic” and, if so, a prospec­tus would have to be is­sued.

The new Com­pa­nies Act re­solves that is­sue. Sec­tion 96(1)(f) de­ter­mines that an of­fer is not an of­fer to the pub­lic if it per­tains to an em­ployee share scheme that sat­is­fies the re­quire­ments of sec­tion 97, which pro­vides for the ap­point­ment of a com­pli­ance of­fi­cer and re­quires the num­ber of spec­i­fied shares al­lot­ted dur­ing that fi­nan­cial year in terms of the em­ployee share scheme to be dis­closed in the an­nual fi­nan­cial state­ments.

Sec­tion 95(1)(a) specif­i­cally re­gards “a com­pany” as in­clud­ing a for­eign com­pany, which is de­fined as an en­tity in­cor­po­rated out­side SA, ir­re­spec­tive of whether it is a profit or non-profit en­tity. It has been sug­gested that this, to­gether with the use of the more gen­eral word­ing “per­tains to” in s 96(1)(f), should make it pos­si­ble for for­eign com­pa­nies to of­fer their South African em­ploy­ees shares in an off­shore listed hold­ing com­pany in terms of an em­ployee share scheme with­out rais­ing prospec­tus con­cerns.

The new act en­ables a com­pany to is­sue shares even though it has not re­ceived full con­sid­er­a­tion for them. The idea is to per­mit the com­pany to is­sue the shares and to re­quire the shares to be trans­ferred to a third party, to be held in trust and later trans­ferred to the sub­scrib­ing party in ac­cor­dance with a trust agree­ment. Un­less the trust agree­ment pro­vides other­wise, cer­tain rights as­so­ci­ated with the shares held in trust are re­stricted, for ex­am­ple, the trans­fer of the shares to the sub­scrib­ing party, the ex­er­cise of vot­ing rights, and ap­praisal rights and dis­tri­bu­tions by the com­pany.

This pro­vi­sion should help fa­cil­i­tate black eco­nomic em­pow­er­ment (BEE) trans­ac­tions with­out com­pro­mis­ing a com­pany’s em­pow­er­ment rat­ing to the ex­tent that the trust agree­ment pro­vides that the sub­scriber may en­joy the eco­nomic and vot­ing rights as­so­ci­ated with the shares held in trust. This pro­vi­sion should also help sim­plify the fi­nanc­ing ar­range­ments for em­ployee share schemes.

Sec­tion 38 of the old leg­is­la­tion pro­hib­ited com­pa­nies from fi­nanc­ing the ac­qui­si­tion of its own shares un­less cer­tain re­quire­ments were met.

A sim­i­lar ap­proach has been adopted in sec­tion44 of the new Act, although its for­mu­la­tion dif­fers from the old act’s sec­tion 38.

Sec­tion 44 pro­vides that un­less the mem­o­ran­dum of in­cor­po­ra­tion of a com­pany pro­vides other­wise, the board may au­tho­rise the com­pany to pro­vide fi­nan­cial as­sis­tance in con­nec­tion with the sub­scrip­tion of any op­tion, or any se­cu­ri­ties, is­sued or to be is­sued by the com­pany or a re­lated or in­ter­re­lated com­pany.

Ir­re­spec­tive of any mem­o­ran­dum of in­cor­po­ra­tion pro­vi­sion, fi­nan­cial as­sis­tance is pro­hib­ited un­less the re- quire­ments of sec­tions 44(3) and (4) are met:

The fi­nan­cial as­sis­tance pro­vi­sion must ap­ply to an em­ployee share scheme that sat­is­fies the re­quire­ments of sec­tion 97, or a spe­cial res­o­lu­tion, adopted within the pre­vi­ous two years, which ap­proved such as­sis­tance ei­ther for a spe­cific re­cip­i­ent or for a cat­e­gory of po­ten­tial re­cip­i­ents, and the spe­cific re­cip­i­ent falls within that cat­e­gory;

The board must be sat­is­fied that im­me­di­ately af­ter pro­vid­ing the fi­nan­cial as­sis­tance, the com­pany would sat­isfy the sol­vency and liq­uid­ity test;

The board must be sat­is­fied that the terms un­der which the fi­nan­cial as­sis­tance is pro­posed to be given are fair and rea­son­able to the com­pany; and

The board must en­sure that any con­di­tions re­strict­ing grant­ing of fi­nan­cial as­sis­tance set out in the mem­o­ran­dum of in­cor­po­ra­tion have been sat­is­fied.

Un­like the old act, there is no blan­ket ex­emp­tion for bona fide em­ploy­ees’ loans and em­ployee share schemes.

A com­pany will there­fore have to com­ply with the gen­eral re­quire­ments of a spe­cial res­o­lu­tion, the sol­vency and liq­uid­ity test, as well as the “fair and rea­son­able” de­ter­mi­na­tion.

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