Understanding Share Options as an Ownership Solution

The B-BBEE Codes of Good Practice (COGP) offer several mechanisms to recognize Black Ownership, each with specific criteria to ensure that the spirit of empowerment is upheld. One such solution is Share Options, as detailed in Paragraph 3.13 of the COGP. In this article, we’ll explore how Share Options can be an effective tool for fostering Black Economic Empowerment while adhering to the letter and intent of the COGPs.

When designing any Ownership solution for B-BBEE, it is critical to not only follow the clear guidelines set out in the COGP but also to consider how these structures translate into real-world empowerment for Black people. Ideally, every B-BBEE Ownership transaction should lead to tangible benefits for Black individuals and communities, contributing to long-term economic upliftment.

Criteria for Recognizing Share Options under COGP

In terms of the COGP, “Exercisable Voting Rights” and “Economic Interest” is given to a holder of an Equity Instrument that provides the right to hold shares or part thereof at a future date. However, there are clear requirements that must be met for this to be recognised:

• Voting rights attached to this instrument must be irrevocably transferred and exercisable by the holder during the option period, even before the Equity Instrument is acquired. This means the holder will be entitled to vote at any shareholders meeting in accordance with the percentage shares held.
• All Economic Interest is irrevocably transferred and payable to the holder of the Equity Instrument during the option period, even before the Equity Instrument is acquired. Thus, all dividends and distributions declared in respect of the Equity Instrument must be paid to the holder during the option period.
• The value of the Equity Instrument is determined by using a Standard Valuation Method for calculating the Net Value to ensure that the Equity Instrument is valued at a fair Market Value.

When these requirements are met:

• The full points available for Voting Rights and Economic Interest are awarded based on the percentage of shares the holder of the option holds.
• Net Value points are awarded as no acquisition debt is incurred by the holder of the option.

Exercising the Option or Exiting

Once the option period lapses, the holder of the Share Option has a crucial decision to make:

1. Exercising the Option

The option holder can choose to purchase the shares at the new market value, which will be determined through a new valuation using the same valuation method as when they entered the transaction.

2. Exiting

If the option holder chooses not to exercise the option, they may exit the arrangement. In this case, the holder is entitled to receive the value associated with the shares, as determined by the most recent valuation, without needing to purchase them. This payout ensures that the holder can still benefit from the equity value created during the option period.

Final Thoughts

Share Options present a viable and effective solution for achieving Black Ownership in line with the B-BBEE Codes of Good Practice. By ensuring that voting rights, economic interest, and fair valuation are fully transferred to the option holder, businesses can create real opportunities for Black empowerment while simultaneously optimizing their B-BBEE score.

To ensure full compliance and effectiveness, businesses considering Share Options as part of their B-BBEE strategy should consult with legal and tax experts to structure these agreements correctly and maximize their empowerment impact.

Should you want to discuss the above in more detail or need assistance with how this ownership solution can work for you, contact us at:

Elevate Advisory Partners
📧 adriani@elevateadvisory.co.za
🌐 www.elevateadvisory.co.za

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