Employee share plans in South Africa: regulatory overview

A Q&A guide to employee share plans law in South Africa.

The Q&A gives a high level overview of the key practical issues including, whether share plans are common and can be offered by foreign parent companies, the structure and rules relating to the different types of share option plan, share purchase plan and phantom share plan, taxation, corporate governance guidelines, consultation duties, exchange control regulations, taxation of internationally mobile employees, prospectus requirements, and necessary regulatory consents and filings.

To compare answers across multiple jurisdictions, visit the Employee Share Plans: Country Q&A tool.

This Q&A is part of the global guide to employee share plans law. For a full list of jurisdictional Q&As visit www.practicallaw.com/employeeshareplans-guide.

Contents

Employee participation

1. Is it common for employees to be offered participation in an employee share plan?

Share plans are commonly implemented in most medium to big companies in South Africa. They are used in both private and public companies. Their use is commercial and they assist with both employee incentives as well as meeting regulatory ownership requirements, such as those contained in the Broad-Based Black Economic Empowerment Act, 2013 (Act No. 46, 2013).

Where private companies undertake broad-based share plans, the share plan is usually set up in such a way that the benefits of the shares are passed on to the employees. However, the employees do not receive the actual shares. For example, a trust may be set up to hold the shares while the employee is made a beneficiary of the trust. Dividends pass through to the beneficiary or employee on an ongoing basis and the capital growth is usually received on the fulfilment of certain conditions.

 
2. Can employees be offered a share plan where the shares to be acquired are in a foreign parent company?

An employee can be offered shares in a foreign parent company, subject to exchange control approval.

There are limitations on South African tax residents holding shares in foreign companies that, in turn, hold shares in the Common Monetary Area (comprising South Africa, Lesotho, Swaziland and Namibia). These structures are known as "loop structures" and are not viewed favourably from an exchange control perspective.

There is, however, an exception under the exchange control regime for foreign share plans that allows private individuals to participate in offshore share incentive plans despite the general loop prohibition. This ruling limits the individual's foreign capital allowance (currently ZAR10million per person, per year, over the age of 18 years) if the employee must pay for the shares. If the shares are granted for free, they will not be subject to this limit.

The South African Reserve Bank also requires that a copy of the share plan be lodged with them (by way of a notification).

 

Share option plans

3. What types of share option plan are operated in your jurisdiction?

A broad range of plans can be implemented, covering a range of instruments including options, share awards, phantom share schemes, and so on.

For tax purposes, the legislative framework classifies employee share plans under sections 8B and 8C of the Income Tax Act, 1962 (Tax Act). Section 8B deals with broad-based share plans and section 8C deals with vanilla employee schemes.

Broad-based share plans

Section 8B of the Tax Act provides a tax incentive for broad-based share plans, subject to certain criteria being met. Specifically, the relevant shares must be:

  • Equity shares.

  • Available for acquisition by 80% of employees.

  • Acquired at par (nominal) value.

If the qualifying shares are held for at least five years, even if the employee leaves before the expiry of the five years, the gain on the disposal of the shares will be subject to capital gains tax (CGT) and is not regarded as income for the employee. However, if the shares are disposed of within the five-year period, the gain is included in the income of the employee (or ex-employee). There are no tax consequences on the award of the shares.

The general principles discussed in the above paragraph apply only to these particular plans (which have not been implemented in South Africa on any notable scale), therefore these plans are not discussed further in this chapter.

Restricted equity instrument share plans

An equity instrument includes shares, equities or rights where the value of the rights is determined with reference to shares (section 8C, Tax Act). If an equity instrument is classified as a restricted equity instrument, there are no tax consequences on the granting or awarding of the equity instrument. The tax consequences are delayed until "vesting" (as defined in the Tax Act) of the equity instrument. Typically, any share that has restrictions, such as a limitation on the ability to dispose of the share, will fall within the definition of a restricted equity instrument.

Where an unrestricted equity investment is granted (that is, the employee can freely deal with the investment from day one), the same tax event takes place on the date of award.

Share option plan

In a share option plan, the employee is given the option to acquire shares at a certain specified date at a specified price. This price is usually the trading price at the date of the granting of the option. The employee can then accept the offer within a certain time frame, subject to certain criteria (which the employee usually does within a relatively short period following the granting of the option). The shares are not delivered or paid for on the date of exercising the option but usually at a future date, and subject to the employee satisfying certain conditions. Once the restrictions on the shares cease to have effect, either due to time having elapsed or performance-based criteria being met, the employee accepts delivery against payment of the agreed purchase price. Where the shares are not "in the money", the employee usually has the option to sell the shares back to the company at the market value on the granting date. Typically, the shares are worth more on the delivery date than the agreed purchase price and, therefore, the employee enjoys the benefit of the growth in the share price over the period between granting the option and taking delivery.

A typical restriction that is placed on the share options granted is that the employee must still be an employee of the company on the delivery date. Typically, the share options vest in tranches to incentivise the employee over a longer period, while allowing the employee to benefit in the interim. These plans only give rise to income tax for the employee when the option, or the share that is the subject of the tax, becomes "unrestricted".

Grant

4. What rules apply to the grant of employee share options?

Discretionary/all-employee. Most share option plans are discretionary and employers can grant options to any employee on any terms. Assuming that the share option plan does not constitute contractual terms and conditions of employment, the terms can differ between employees (even for options granted on the same date).

Non-employee participation. Non-employee participation is allowed. The same tax implications described in Question 3 usually apply.

An "employee share scheme" is defined as a "scheme established by a company, whether by means of a trust or otherwise, for the purpose of offering participation therein solely to employees, officers and other persons closely involved in the business of the company or a subsidiary of the company, either by means of the issue of shares in the company, or by the grant of options for shares in the company" (section 95(1)(c), Companies Act, 2008 ) (Companies Act).

A scheme that falls within the definition above can receive financial assistance from the company without requiring shareholder approval (section 44, Companies Act). An offer of shares or options in such a scheme does not constitute an "offer to the public", which means that no prospectus is required.

The Johannesburg Stock Exchange (JSE) Listings Requirements (Schedule 14) sets out certain requirements for share option schemes adopted by JSE listed companies and subsidiaries of JSE listed companies (which provide for the issue of securities in the listed holding company). In particular, the share option scheme must be approved in a general meeting by the listed company's shareholders.

For JSE listed companies, Schedule 14 requires share option schemes to be used to incentivise staff (employees and other persons involved in the business of the group). The JSE must be consulted where the share option scheme is intended to apply to employees of associates.

Maximum value of shares. There is no maximum value of shares that can be granted from a tax perspective. However, the commercial rationale behind the share option plan will usually be determinative of participation levels. For example, where the share plan is being implemented to achieve the Broad-Based Black Economic Empowerment Act, the total shareholding usually aims to assist with achieving the latest black ownership requirement.

Shareholders must approve, by way of a special resolution, any issue of shares or rights exercisable for shares in a transaction or series of integrated transactions if the voting power of the relevant class of shares equals or exceeds 30% of the voting power of all shares held by shareholders of that class before the transaction or series of transactions (Companies Act).

In respect of JSE listed companies, share option schemes must contain provisions relating to (Schedule 14, JSE Listing Requirements):

  • The number of equity securities that can be used for the scheme (which must be stated and the number cannot be exceeded without shareholder approval as required above). Use of the wording "from time to time" or a percentage is prohibited.

  • A fixed maximum number of equity securities that can be acquired by any one participant.

Market value. There is no requirement that the exercise price must be the market value at the date of grant from a tax perspective. There will usually not be a taxing event on the date of granting. However, the difference between the purchase price and the market value on the vesting date will attract tax, at the employee's individual marginal rate (up to 41%). Therefore, the lower the purchase price, the larger the taxable amount.

For JSE listed companies, share option schemes must contain provisions relating to the basis for determining the price (if any and regardless of the form it takes) payable by participants, and the period after or during which payment must be made (Schedule 14, JSE Listing Requirements). This must be a fixed mechanism for all participants. Re-pricing of options is prohibited.

 
5. What are the tax and social security implications of the grant of the option?

If the share option plan falls within the provisions of section 8C of the Tax Act, there are no tax consequences on the date the option is granted.

Where the share option plan falls outside of this section, the difference between the price paid for the shares and the market value will be taxed as income for the employee at their marginal rate. See Question 7 on the withholding of the tax payable.

Vesting

6. Can the company specify that the options are only exercisable if certain performance or time-based vesting conditions are met?

With most share option plans, a typical a minimum requirement is that the individual must be an employee on the vesting date. The exercise of the options is usually subject to meeting certain performance criteria.

 
7. What are the tax and social security implications when the performance or time-based vesting conditions are met?

For restricted equity instruments, the tax liability becomes due and payable on the date the restrictions cease to have effect and the shares vest in the employee (section 8C, Tax Act). Therefore, the difference between the purchase price paid for the shares and the market value is included in the employee's taxable income and taxed at his marginal rate (up to 41%).

Employer withholding and reporting obligations

Under the Tax Act, the employer must withhold employees' tax on the gain made as a result of the vesting of an equity instrument as contemplated in section 8C of the Tax Act. Vesting in this case occurs on the date the restrictions cease to have effect.

An employer is any person that pays, or is liable to pay, any person an amount by way of remuneration. An employee includes the director of a company. To decide an employer's obligation to deduct or withhold amounts for any gains realised on the vesting of the equity instrument, the relevant employer is the employer who granted the option. However, if this is not the same company as the one responsible for withholding of the employees' tax, then for practical reasons the company responsible for withholding the tax will withhold instead.

The employer company must ascertain from the Commissioner of the South African Revenue Service (SARS) the amount of employees' tax which must be deducted from the amount of the gain made on the date the equity instrument vests. A tax directive application must be submitted to SARS to confirm the tax that must be withheld.

The withheld employees' tax must be remitted to SARS together with an employees' tax return. This must be done on or before the seventh day of the month following the month in which the equity instrument vests. The employer company must disclose the amount of the gain and the tax withheld (as is the case with all other remuneration) on an employee's annual tax certificate (IRP5), a copy of which must be given to the employee and to SARS.

Social taxes

The following social taxes are paid to SARS by the employer company on behalf of the employee on the remuneration at the time of the taxable event:

  • The skills development levy at 1% of the gain, which must be remitted together with the income tax withholdings to the tax authorities by the seventh day of the month following the month in which the gain is realised.

  • The unemployment insurance fund contributions of 1% of remuneration up to ZAR178,464 per annum, which must also be remitted together with the income tax withholdings to the tax authorities by the seventh day of the month following the month in which the gain is realised.

Exercise

8. What are the tax and social security implications of the exercise of the option?

Where the share option plan falls within the provisions of section 8C of the Income Tax Act, 1962, there are no tax consequences on the exercise of the option where there are further restrictions on the shares. The tax consequences are delayed until the vesting of the shares.

Sale

9. What are the tax and social security implications when shares acquired on exercise of the option are sold?

If the employee elects to receive cash, rather than shares, the amount of cash received is taxed on the vesting date. There is no further disposal of shares in these circumstances.

If the employee receives shares on the vesting date, he will be subject to income tax. When the employee then disposes of these shares, general tax principles apply, depending on the intention of the employee holding those shares. Typically the shares are taxed under the capital gains tax regime. The capital gain is the difference between the market value of the shares on the vesting date and the sale price received for the shares. 40% of the gain is included in the taxpayer's income and taxed at their marginal rate (effectively up to 16.4%).

However, if the employee is a share trader, the employee may be taxed on revenue account, which is the difference between the market value on the vesting date acquired and the sale price received.

The taxpayer must account for his own capital gain in his annual tax return and settle the applicable tax.

 

Share acquisition or purchase plans

10. What types of share acquisition or share purchase plan are operated in your jurisdiction?

Share acquisition plans are typically long-term incentive plans that deliver shares to the participant at the beginning of the share plan period. The shares are subject to conditions which, if not met, result in the participant forfeiting the shares back to the company (or share trust). These forfeiting criteria usually include at least the requirement that the participant is still employed for a specified time period, but may also include other specific performance criteria. While the shares are held by the participant, the participant receives dividends and is entitled to capital growth for the shares delivered.

See also Question 3 on the tax implications of sections 8B and 8C of the Tax Act.

Acquisition or purchase

11. What rules apply to the initial acquisition or purchase of shares?

Discretionary/all-employee. See Question 4, which applies equally to share acquisition plans.

Non-employee participation. See Question 4, which applies equally to share acquisition plans.

Maximum value of shares. See Question 4, which applies equally to share acquisition plans.

Payment for shares and price. If the employee pays a significantly reduced purchase price, the difference between the purchase price actually paid and the market value on the date the conditions lift will be included in the employee's income. Therefore, the lower the purchase price, the higher the taxable amount.

For JSE listed companies, share acquisition schemes must contain provisions relating to the basis for determining the price (if any and regardless of the form it takes) payable by participants and the period after or during which payment must be made (Schedule 14, JSE Listing Requirements). This must be a fixed mechanism for all participants.

 
12. What are the tax and social security implications of the acquisition or purchase of shares?

The taxable event is not triggered on the acquisition of shares where they are restricted equity instruments under section 8C of the Tax Act (see Question 3).

Vesting

13. Can the company award the shares subject to performance or time-based vesting conditions?

In a share acquisition plan, the transfer of the shares takes place up front. However, there are clauses in the agreement that require the employee to forfeit the shares, potentially for no value, in specified circumstances. For example, the shares may be forfeited where:

  • The employee leaves the employment of the employer within a certain period.

  • Performance criteria are not met.

 
14. What are the tax and social security implications when any performance or time-based vesting conditions are met?

If the share acquisition plan falls within the definition of restricted equity instruments for the purposes of section 8C of the Tax Act, the employee is taxed on the difference between the amount paid for the shares and the market value on the date the restrictions cease to have effect.

The market practice for this type of share scheme is typically both performance-based and time-based. Usually, the shares vest in tranches periodically at specified performance dates.

Employer withholding and reporting obligations

Under the Tax Act, the employer must withhold employees' tax on the gain made as a result of the vesting of an equity instrument as contemplated in section 8C of the Tax Act. Vesting for these purposes will be on the date the restrictions cease to have effect.

An employer is any person that pays or is liable to pay any person an amount by way of remuneration. An employee includes the director of a company. To determine an employer's obligation to deduct or withhold amounts for any gains realised on the vesting of the equity instrument, the relevant employer is the employer who granted the shares. However, if this is not the same company as the one responsible for the withholding of employees tax, for practical reasons the company responsible for withholding the employees' tax will withhold instead.

The employer company must ascertain from the Commissioner of the South African Revenue Service (SARS) the amount of employees' tax that must be deducted from the amount of the gain made on vesting. A tax directive application must be submitted to SARS for confirmation of this amount.

The withheld employees' tax must be remitted to SARS, together with an employees' tax return on or before the seventh day of the month following the month in which the equity instrument vests. The employer company must disclose the amount of the gain and the tax withheld (as is the case with all other remuneration) on an employee's annual tax certificate (IRP5), a copy of which must be given to the employee and to SARS.

Social taxes

The following social taxes are payable by the employer company on the taxable value at the time of the taxable event:

  • The skills development levy at a rate of 1% of the gain, which must be remitted together with the income tax withholdings to the tax authorities by the seventh day of the month following the month in which the gain is realised.

  • The unemployment insurance fund contributions at 1% of remuneration up to ZAR178,464 per annum, which must also be remitted together with the income tax withholdings to the tax authorities by the seventh day of the month following the month in which the gain is realised.

Sale

15. What are the tax and social security implications when the shares are sold?

If the employee receives shares and then disposes of the shares, general tax principles apply depending on the intention of the employee holding those shares. Usually, the shares are taxed under the capital gains tax regime. The capital gain is the difference between the market value of the shares on the vesting date and the sale price received for the shares. 40% of the gain is included in the taxpayer's income and taxed at their marginal rate (effectively up to 16.4%).

However, if the employee is a share trader, the employee may be taxed on revenue account, which is the difference between market value on the date acquired and the sale price received.

 

Phantom or cash-settled share plans

16. What types of phantom or cash-settled share plan are operated in your jurisdiction?

Phantom share appreciation rights (SARs) or notional share schemes/plans are the mechanisms that companies use to incentivise their participants in order to align the participant's objectives with that of a shareholder. A phantom SAR gives a participant an entitlement to a benefit calculated with reference to the variation in the market value of the company's shares. When the phantom SAR vests, the SAR is settled in cash. This type of share incentive plan is different from a share option plan (see Question 4), as share option plans give the participant an entitlement to shares against payment of an option price, whereas a phantom SAR entitles the employee to a cash settlement equivalent to the growth in the share price. In other words, cash, and not the shares, are provided to the participants.

For example, if the employer company's shares are valued at ZAR300 on the date of entering into the plan and the shares are worth ZAR900 on the delivery date, the participant is entitled to the appreciation, which is ZAR600. Typically, this amount is then settled in cash.

As no shares are issued or offered, these plans do not fall within the definition of an "employee share scheme" or "offer to the public" under the Companies Act. However, if there is a possibility of shares being issued rather than cash, the Companies Act will apply.

See also Question 3 on the tax implications of sections 8B and 8C of the Tax Act.

Grant

17. What rules apply to the grant of phantom or cash-settled awards?

Discretionary/all-employee. See Question 4, which applies equally to phantom share plans.

Non-employee participation. Non-employee participation is permitted. The same tax implications described in Question 3 usually apply.

There must be a cause for the payment. This may be difficult to determine where an award is made to a third party. If there is no cause, the award will be treated as a donation subject to donations tax, unless an exemption applies (for example, where the donor company is a public company).

Maximum value of awards. There is no maximum value of shares that can be awarded from a tax perspective. However, the commercial rationale behind the phantom share plan will need to be considered.

 
18. What are the tax and social security implications when the award is made?

Where the phantom share appreciation right falls within the provisions of section 8C of the Tax Act, there will be no taxable event on the date that the employee can participate in the phantom share plan. A cash amount is taxed in the employee's hands in the ordinary course.

Vesting

19. Can phantom or cash-settled awards be made to vest only where performance or time-based vesting conditions are met?

Phantom or cash-settled awards can be made to vest only where performance or time-based vesting conditions are met.

 
20. What are the tax and social security implications when performance or time-based vesting conditions are met?

Where the phantom share appreciation right (SAR) satisfies the requirements of section 8C of the Tax Act, the taxable event occurs on the vesting of the right on the employee. The gain made by the employee is included in the employee's taxable income and taxed at their marginal rate (up to 41%).

The following social taxes are payable by the employer company on the taxable value at the time of the taxable event:

  • The skills development levy at a rate of 1% of the gain, which must be remitted together with the income tax withholdings to the tax authorities by the seventh day of the month following the month in which the gain is realised.

  • The unemployment insurance fund contributions at 1% of remuneration up to ZAR178,464 per annum, which must also be remitted together with the income tax withholdings to the tax authorities by the seventh day of the month following the month in which the gain is realised.

Employer withholding and reporting obligations

Under the Tax Act, the employer must to withhold employees' tax on the gain made as a result of the vesting of an equity instrument as contemplated in section 8C of the Tax Act. Vesting in this case will be on the date the equity instrument vests in the employee.

An employer is any person that pays or is liable to pay any person an amount by way of remuneration. An employee includes the director of a company. To determine an employer's obligation to deduct or withhold amounts in respect of any gains realised on the exercise of SARs, the relevant employer is the employer that granted the performance shares. However, if it is not the same company as the company who is responsible for the withholding of employees tax, the company responsible for withholding will withhold instead.

The employer company must ascertain from the Commissioner of the South African Revenue Service (SARS) the amount of employees' tax that must be deducted from the amount of the gain made on the exercise of the SARs. A tax directive application must be submitted to SARS.

The withheld employees' tax must be remitted to SARS, together with an employees' tax return, on or before the seventh day of the month following the month in which the equity instrument vests. The employer company must disclose the amount of the gain and the tax withheld (as is the case with all other remuneration) on an employee's annual tax certificate (IRP5), a copy of which must be given to the employee and to SARS.

Payment

21. What are the tax and social security implications when the phantom or cash-settled award is paid out?

The taxable event, for the purposes of section 8C of the Tax Act, is when the equity instrument vests in the employee.

 

Corporate governance guidelines, market or other guidelines

22. Are there any corporate governance guidelines, market rules or other guidelines that apply to any employee share plan?

There are a number of corporate governance guidelines that apply to companies operating share plans in South Africa.

The third King Report on Corporate Governance in South Africa (King III) was published with effect from March 2010. King III is not a statute, but rather a set of guidelines.

King III refers to all entities, irrespective of their size or the nature of their business. It recommends that all entities should make a positive statement about how the principles have been applied or explain why they have not been applied. It relies on self-regulation, and there is no body that is mandated to enforce King III. However, companies with securities listed on the JSE must comply with specific corporate governance requirements under the JSE Listings Requirements. Any failure to do so amounts to a breach of the Listings Requirements.

With share plans, King III states that a company should provide full disclosure on directors' remuneration on an individual basis, giving details of:

  • Base pay.

  • Bonuses.

  • Share-based payments.

  • Share options.

  • Restraint payments.

  • All other benefits.

King III also states that shareholders should pass a non-binding advisory vote on the company's yearly remuneration policy, and that the board should determine the remuneration of executive directors in accordance with the remuneration policy put to a shareholders' vote. However, the shareholders' vote is not binding on the board and is merely advisory. Although permitted by the Companies Act, 2008 (Act No. 71 of 2008), King III recommends that the chairman and other non-executive directors should not receive share options or other incentive awards geared to share price or corporate performance, as these incentives align their interests too closely with executives and may be seen to impair their objectivity.

 

Employment law

23. Is consultation or agreement with, or notification to, employee representative bodies required before an employee share plan can be launched?

Share schemes are usually targeted at senior management and executives who are not normally members of trade unions. If the employees are represented by trade unions, it is preferable to consult these trade unions before the launch of the share scheme, although no agreement is required if the share scheme is structured in such a way that it does not constitute contractual terms and conditions of employment. However, any collective agreement signed with a trade union should be considered to ascertain whether it contains any provisions requiring consultation or agreement.

Details of the scheme, its rules and applicability must be disclosed if consultation is required. Consultation must be in good faith and there are no mandatory time periods.

 
24. Do participants in employee share plans have rights to compensation for loss of options or awards on termination of employment?

Employees have a right to claim compensation for:

  • The equivalent to a maximum of 12 months' compensation for an unfair dismissal in the Commission for Conciliation, Mediation and Arbitration.

  • A maximum of 24 months' compensation for an automatically unfair dismissal in the Labour Court.

Compensation is calculated on the basis of the employee's remuneration on termination. Share options are normally separated from the employee's remuneration. However, employees may be entitled to a separate contractual or delict (tort) claim if the employer breaches the terms of the share scheme on termination of the employee's employment.

 

Exchange control

25. How do exchange control regulations affect employees sending money from your jurisdiction to another to purchase shares under an employee share plan?

Private individuals can participate in offshore share incentive plans subject to the limitation on the individual's foreign capital allowance (currently ZAR10 million per person over the age of 18 years) where the employee must pay for the shares (see Question 2).

 
26. Do exchange control regulations permit or require employees to repatriate proceeds derived from selling shares in another jurisdiction?

After a share plan has been lodged with the South African Reserve Bank (SARB) for notification, on the award of any shares to beneficiaries, the beneficiaries must apply for exchange control approval where any money is to leave the country. Each application for exchange control approval must be considered on its own specific facts. For exchange control approval, conditions can be imposed. A condition to sell and repatriate cash can potentially be imposed by the SARB or the Authorised Dealer (the major South African banks) concerned, although this is unusual. Such a condition will usually only be applied where the individual may exceed his foreign capital allowance.

The SARB generally allows South African residents to transfer capital out of the Common Monetary Area for investment purposes, subject to certain restrictions.

Under the individual's foreign capital allowance (that is, ZAR10 million per calendar year), an individual can invest in foreign assets subject to the Authorised Dealer approval.

 

Internationally mobile employees

27. What is the tax position when an employee who is tax resident in your jurisdiction at the time of grant of a share option or award leaves your jurisdiction before any taxable event affecting the option or award takes place?

Under the provisions dealing with share plans and employees tax, the gain must be apportioned to the extent that it was sourced in South Africa. For example, where an employee is granted ZAR100 worth of shares after three years and spent one and a half years earning the shares in South Africa, ZAR50 may be taxable in South Africa.

 
28. What is the tax position when an employee becomes tax resident in your jurisdiction while holding share options or awards granted abroad and a taxable event occurs?

The gain can be apportioned for the duration that the gain was sourced in South Africa (see Question 27).

 

Securities laws

29. What are the requirements under securities laws or regulations for the offer of shares under, and participation in, an employee share plan?

Under the Companies Act, 2008 (Companies Act), an offer to the public is widely defined but does not include, among other things, "an offer made in any of the circumstances contemplated in section 96". Section 96(1)(f) of the Companies Act states 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".

An employee share scheme will qualify for exemption if the following requirements are satisfied (section 97(1), Companies Act):

  • The company appointed a compliance officer for the scheme to be accountable to the directors of the company.

  • The company states in its annual financial statements the number of specified shares that it has allotted during that financial year under its employee share scheme.

  • The compliance officer complied with his obligations (see below).

A compliance officer that is appointed in respect of any employee share scheme (section 97(2), Companies Act):

  • Is responsible for the administration of that scheme.

  • Must provide a written statement to any employee who receives an offer of specified shares under the employee scheme, setting out:

    • full particulars of the nature of the transaction, including the risks associated with it;

    • information relating to the company, including its latest annual financial statements, the general nature of its business and its profit history over the last three years;

    • full particulars of any material changes that occur in respect of any information provided in terms of the above two requirements.

  • Must ensure that copies of the documents containing the information referred to in the last bullet are filed with the Companies and Intellectual Property Commission (CIPC) within 20 business days after the employee share scheme has been established (section 97(2)(c), Companies Act).

  • Must file a certificate with the CIPC within 60 business days after the end of each financial year, certifying that the compliance officer complied with his obligations during the past financial year (section 97(2)(d), Companies Act).

These are the only filings required under securities laws. There are no costs associated with these filings (and there is no approval process).

The filing in section 97(2)(c) of the Companies Act is required once only and the filings in section 97(2)(d) of the Companies Act are required annually.

There is no requirement that the compliance officer be located in South Africa. Provided that the compliance officer is able to perform its duties, there does not appear to be any reason why the compliance officer cannot be located overseas.

The above requirements do not apply to phantom share appreciation rights or notional share schemes/plans, as they do not fall within the definition of an "employee share scheme" under the Companies Act.

 
30. Are there any exemptions from securities laws or regulations for employee share plans? If so, what are the conditions for the exemption(s) to apply?

An offer of shares can constitute an "offer to the public", which requires certain steps to be taken under the Companies Act.

A primary offer (excluding an initial public offering) to the public of any listed securities must comply with the requirements of the exchange on which these securities are listed. If the shares are listed, provided that the requirements of the exchange are met, no further steps must be taken under the Companies Act. A prospectus or filing of the employee share scheme with the Companies and Intellectual Property Commission is not required.

If the shares are not listed, an offer to the public requires a prospectus. However, an offer is not an offer to the public if it relates to an employee share scheme that satisfies the requirements of section 97 of the Companies Act (see Question 29).

 

Other regulatory consents or filings

31. Are there any other regulatory consents and filing requirements and/or other administrative obligations for an offer of shares under, and participation in, an employee share plan?

See Question 29. Except as set out below, there are no other regulatory consents or filing requirements.

For foreign parent employee share schemes, lodgement with the South African Reserve Bank is also required (see Question 2). The exchange control notification will usually be made by the company's bankers in South Africa at no charge (and there are no costs associated with approval or lodgement).

 
32. Are there any data protection requirements or obligations for an offer of shares under, and participation in, an employee share plan?

There are currently no specific data protection requirements on employers in force. The Constitution, 1996 contains a general right to privacy, but in order to enforce this right, an employee must show that a violation of their privacy resulted in a loss. There are no specific rules relating to the cross-border transfer of personal information under the Constitution. Whether a person's privacy has been infringed is assessed from a rights' perspective.

The new data protection legislation, the Protection of Personal Information Act, 2013 (POPI) is coming into force in stages. Certain sections came into force on 11 April 2014, and these enable the appointment of an information regulator and the making of regulations. The compliance obligations are not yet effective.

POPI governs the way in which personal information is collected, used, stored, shared and deleted. Personal information is given a wide meaning and includes employee personal information.

Under POPI, personal information can only be transferred to a third party in a foreign country on limited grounds, which include the employee's consent to the transfer.

Consent is not required, however, in any of the following circumstances:

  • The transfer is necessary to conclude or perform a contract with the employee, or with a third party in the interests of the employee.

  • The personal information is adequately protected after the transfer.

  • It is not reasonably practical to obtain the employee's consent, but the transfer is for their benefit and they would be likely to have consented.

 

Formalities

33. What are the applicable legal formalities?

Translation requirements. A document that must be produced or provided to a holder of the company's securities or employee of the company must be in plain language (section 6(4), Companies Act, 2008). This means that the documents relating to the share scheme must be in a language that the employees would understand (usually, this will be the language in which the company primarily conducts its business).

E-mail or online agreements. Agreements concluded electronically are recognised as legally binding under the Electronic Communications and Transactions Act, 2002.

If the agreement is concluded by way of an automated transaction (for example, the employer's system is programmed to analyse an application and accept or reject it according to pre-programmed criteria), the following rules apply:

  • The system must allow a natural person representing the employer to review the agreement before it is concluded (irrespective of whether this occurs each time).

  • The employee must be provided with an opportunity to prevent or correct any material errors in concluding the agreement.

If the employer requires that the agreement to participate in the employee share plan must be signed by the employee, ordinary electronic signatures (including e-mail signatures) are sufficient, provided that the method used:

  • Identifies the person signing.

  • Indicates their acceptance of the terms.

  • Is an appropriately reliable method in the circumstances.

Witnesses/notarisation requirements. There is no general requirement that agreements need to be witnessed or notarised to be binding.

Employee consent. The employee's consent is required in connection with the actions needed to administer his options or other awards.

 

Developments and reform

34. Are there any current trends, developments and reform proposals that have or will affect the operation of employee share plans?

Trends and developments

Employee share plans are primarily governed by the Companies Act, 2008 and the Tax Act. The provisions of the Tax Act, including those relating to employee share plans, are constantly being amended. These amendments can close current share plans down, but usually allow different share plans to be implemented. Regular tax advice should be sought, to stay abreast of current developments.

Reform proposals

The Tax Act was amended with effect from 1 March 2016, with the aim of clarifying the interaction between the taxation of share incentive trust, the time of disposal rules and the attribution of any capital gains to trust beneficiaries. The South African National Budget Speech, which was presented before Parliament on 24 February 2016, proposed that legislation be introduced to address certain instances where the section 8C rules are being circumvented.

 

Online resources

Official legislation database

W www.justice.gov.org/legislation

Description. This is the official website of the Department of Justice and Constitutional Development in South Africa and contains a database of all South African legislation. The Income Tax Act, 1962 the Companies Act, 2008 and the Regulations promulgated under these Acts can be accessed from this website.



Contributor profiles

Dale Cridlan

Norton Rose Fulbright South Africa Inc

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Charles Ancer

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Mohammed Chavoos

Norton Rose Fulbright South Africa Inc

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Professional qualifications. South Africa, Lawyer

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