Employee share schemes clarified
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.