Esop’s fables and other transformation fantasies

The Competition Commission seems to have a new hobby: forcing companies to give shares to their employees every time they want to merge or acquire another business. This is not only a blatant abuse of its powers, but also a misguided and harmful policy that injures businesses and workers in the long run.

The commission claims this policy is aimed at promoting the public interest by increasing the level of ownership by historically disadvantaged people and workers in the economy. But this is a smokescreen for its real agenda: to extract rent from companies that want to grow and compete in the market.

Let me explain. After wails of protest in the wake of its Burger King decision, (including from black investors who, rightly, perceived a risk to their being able to exit and realise their existing investments), the commission has quietly reverted to insisting that investors — local and foreign, large and small — give away 5% (and sometimes more) of their shares when they acquire a business.

Any merger transaction in which the parties cannot demonstrate the overall shareholding by “historically disadvantaged people” or “workers” will increase is met with a demand from the commission that the buyer give away shares, to be housed in a trust (called an employee share ownership programme, or Esop), which holds the shares on behalf of the target firm’s workers, who are its beneficiaries.

This is no longer a feature of only mega deals, such as Heineken/Distell, nor is it confined to mergers in which the commission identifies that there will be a substantial effect on the “public interest” because of a large reduction in the overall level of black shareholding in a target firm. In the first five months of 2023, at least three intermediate mergers approved by the commission have featured these conditions, and there have been two large mergers approved by the tribunal on this basis. It’s impossible to assess how many other transactions have avoided similar conditions by offering alternatives. (Commitments to engage in more “localisation” or to spend large sums on small business or skills development are common.)

The commission has developed a set of “indicative design principles” for the establishment and functioning of Esops, which it attempts to embed as part of the conditions for approval. The commission expects the buyer to pay for 100% of the shares in the target firm but receive only 95%; the trust should not pay. However, it occasionally concedes that the trust should pay, in which case the merging parties are expected to stump up the finance (interest free).

The commission is not concerned that the Esop will have a long payback period, which could be disastrous from a tax perspective, nor that workers may want to sell their shares. The commission expects workers to benefit from dividend flows into the trust, while the merging parties must tolerate an endless leak of dividends and bear the costs of its establishment and financial statements.

None of these principles has been articulated in a formal document by the commission. There has been no opportunity for public comment.

The policy is inconsistent with the BBBEE Act, which recognises that companies should craft their own economic empowerment strategies.

Recently deceased legendary property investor Sam Zell built an empire on the maxim that a true partner is someone who shares the risk. The logic being applied by the commission is worthy of Esop’s Fables.

Inconvenient commercial realities, like the fact that shareholders may be called on to fund the business and face dilution if they don’t are ignored. So is the question of whether forcing more “ownership” of firms by employees is achieving much for workers.

Is the application of this policy by the commission deterring foreign investors? Is it making local companies less keen to attempt acquisitions? Is it more effective than BEE? Why 5%? No-one knows. Conditions for these decisions are frequently claimed as confidential, and it’s almost impossible to identify whether these commitments have been offered by merging parties or agreed to by them only after the commission has threatened to prohibit the transaction. But it makes for catchy headlines in the year before an election when trade, industry & competition minister Ebrahim Patel reports to parliament.

The reason the commission isn’t aligning its approach with the BBBEE Act is that this is not about empowerment at all. This is a tax: it’s simply about diverting profits out of the hands of shareholders. Unlike a tax, though, the commission’s policy hasn’t been through the legislative process prescribed for taxation laws, and the money doesn’t flow into the fiscus, where it can be applied in the budget under the watchful eye of the Treasury and finance minister.

As the former chair of the Competition Tribunal once termed it, this is the work of a highwayman at a pass. It is a fertile field for exactly the sort of corruption investors assume they will encounter in SA. Many will just pay the bribe. Many others will simply walk away.