B-BBEE requirements 'de jure' for law firms

B-BBEE requirements 'de jure' for law firms

B-BBEE requirements 'de jure' for law firms

Personal Liability Companies, or incorporated companies operated by professionals are also forced to consider having B-BBEE compliance due to today’s competitive economic climate.

In this blog we discuss the different types of law firms and the B-BBEE requirements that may have an impact on their business operations.

Antiqua Lega (Ancient Law)

The father of law, Plato, was a legal thinker who philosophized about law for the free benefit of the ancient society. His works were influenced by the likes of Pythagoras and Socrates and his works contemplated society and the law. Plato’s “law firm” could be seen as a great ancient Greek ruin and very far divided from the modern-day legal practice. Plato contemplated legal orders and for centuries legal philosophy laid the foundation for the law as we know it today. Ancient Roman emperor Claudius was the first emperor to legitimize the advocacy profession. The first advocates were intellectualists who made the law a hobby. Since the legitimizing of advocacy, these individuals could charge for their legal services and so the concept of the law firm was born.

Lex Modern (Modern Law)

Today, legal jurists or attorneys are referred to as legal practitioners as per the Legal Practice Act 28 of 2014 (LPA) which came into effect on 1 November 2018, the LPA regulates the modern-day law firms in South Africa after completion of their legal education and fulfilling the requirements of becoming an admitted attorney. In South Africa we differentiate between two types of legal practitioners, namely: Attorneys and Advocates. Attorneys either have their own law firms or are integrated with an existing firm.

With the enactment of the LPA, attorneys and advocates are now defined as “legal practitioners”. An individual who practices law as an attorney has to comply with the following criteria set out in section 24 (2) and Section 26 (1)(a)-(d):

  • Having satisfied all the requirements for the LLB degree obtained at any university registered in the Republic, after pursuing for that degree, a course of study of not less than four years or a course of study of not less than five years if the LLB degree is preceded by a bachelor’s degree other than the LLB degree, as determined in the rules of the university in question and approved by the Council; or subject to section 24(2)(b), satisfied all the requirements for a law degree obtained in a foreign country, which is equivalent to the LLB degree and recognised by the South African Qualifications Authority established by the National Qualifications Framework Act, 2008 (Act No. 67 of 2008);
  • Undergone all the practical vocational training requirements as a candidate legal practitioner prescribed by the Minister, including community service as contemplated in section 29, and a legal practice management course for candidate legal practitioners who intend to practise as attorneys or as advocates referred to in section 34(2)(b);
  • Passed a competency-based examination or assessment for candidate legal practitioners as may be determined in the rules.

Law Firms not operating as sole proprietaries or partnerships in South Africa are registered as Personal Liability Companies, in terms of the Companies Act, 71 of 2008. With reference to section 8 (2)(c), of the Companies Act professionals such as attorneys, engineers, doctors or auditors have the option to incorporate a company in such a way that the directors, (both past and present directors) are jointly and severally liable, together with the company for any liabilities of the company. The Personal Liability Company has perpetual existence which means that the perpetuity of the company succeeds that of the owners. 

Lex Modern and the impact of B-BBEE requirements

Legal minds as the likes of Plato in today’s day and age have to keep up with the times and Law Firms are not excluded from the growth South Africa has experienced in the last two decades. B-BBEE has saturated all spheres of the economy and a multitude of private companies partake in B-BBEE. Personal Liability Companies, or incorporated companies operated by professionals are also forced to consider having B-BBEE-compliance due to today’s competitive economic climate.

Preferential Procurement, one of the priority sub-elements of the B-BBEE -Scorecard, has the commercial result of Companies procuring services or products from suppliers who have a favorable B-BBEE -rating. The majority of law firms today depend financially on corporate retainers and inevitably have to partake in B-BBEE, and in particular, have to comply with the black ownership requirement

Section 34 (7) of the LPA prescribes that a commercial juristic entity may be established to conduct a legal practice provided that, in terms of its founding documents—shareholding, partnership or membership as the case may be, comprises exclusively of attorneys. The Broad-Based Black Economic Empowerment Act, 53 of 2003, as amended, makes provision for companies to utilize collective ownership structures, benefiting the broader community or workers. The restrictions of Section 34 (7) of the LPA which proscribes that only admitted attorneys may hold ownership in a law firm, disqualify law firms from utilizing broad-based collective ownership structures for ownership. In order to comply with the provisions of the B-BBEE Act and the LPA, a law firm can only meet the B-BBEE requirement of ownership by having a “black” individual as natural person who is also an admitted attorney as a shareholder.

For purposes of the Broad-Based Black Economic Empowerment Act, one has to apply the definition of “Black People” - African, Coloured or Indian persons who are natural persons which are citizens of the Republic of South Africa by birth or descent; are citizens of the Republic of South Africa by naturalisation before the commencement date of the Constitution of the Republic of South Africa Act of 1993; or became citizens of the Republic of South Africa after the commencement date of the Constitution of the Republic of South Africa Act of 1993, but who, but for the Apartheid policy that had been in place prior to that date, would have been entitled to acquire citizenship by naturalisation prior to that date. Chinese people are also included by virtue of a High Court order and is deemed “African” for the purpose of the B-BBEE Act.

The revoked Attorneys Act 53 of 1979, Section 23(2) stipulated that;

“Every shareholder of the company shall be a director of the company, and only a shareholder of the company shall be a director thereof.” The subsequent LPA, which replaced the Attorneys Act in its entirety, does not address this specific requirement of directors to be shareholders and vice versa.

In respect of B-BBEE ownership, the following rights are attached to shareholding and are indicators of ownership in terms of B-BBEE:

  • Voting Rights; and
  • Economic Interest

Therefore, for a law firm to comply with ownership as a priority element of B-BBEE, equity in the form of shares with voting rights and economic interest attached thereto, have to be vested in the hands of “black” admitted attorneys as natural persons. Law firms are not left destitute due to changing times but can be assisted with the right tools in order to run successful law firms. Abraham Lincoln explained the law as nothing else, but the best reason of wise men applied for ages to the transactions and businesses of mankind.  

A variety of options exist for attorney’s firms to incorporate black shareholding such as a sale of shares, issue of shares or providing a share option. Last mentioned is a practical and popular equity instrument to ensure ownership compliance.

SERR Synergy assists law firms to perpetuate the best solutions for their firm adhering to the applicable legislation in order to achieve the priority element of ownership. We have refined the processes in which law firms can participate in this B-BBEE climate and to empower attorneys to focus on their clients and not their ownership, we take care of the latter. May the reader be left with this legal maxim: ad perpetuam rei memoriam – for the perpetual memorial of the matter.

About the Author: Deonette Jacobs obtained her LLB Law Degree in 2017 and joined SERR Synergy in 2018 where she currently holds the position of Corporate Legal Advisor. She prides herself in being a vital role in assisting law firms with their B-BBEE -requirements.

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