The importance of B-BBEE compliance for law firms with insights into the modern-day application of share options

The importance of B-BBEE compliance for law firms with insights into the modern-day application of share options

The importance of B-BBEE compliance for law firms with insights into the modern-day application of share options

B-BBEE compliance by law firms has inevitably become important as Preferential Procurement is one of the priority elements of the B-BBEE scorecard.

In the previous article in this series titledB-BBEE Requirements ‘de jure’ for law firms”, it was highlighted that law firms were experiencing increasing pressure from their clients to become B-BBEE compliant. Any government-related entity will require a level 4 or higher B-BBEE compliance level and black ownership is presently the order of the day. Most major banks are also insisting on law firms being B-BBEE compliant in order to remain on their panels, while black ownership requirements are becoming increasingly prevalent in this environment. Therefore, compliance by law firms has inevitably become important as Preferential Procurement is one of the priority elements of the B-BBEE scorecard.

Sean Bosse explains the saturation of B-BBEE in the market as we know it today in his article for Ghost Digest on 26 April 2006:

“Your practice will need to comply with B-BBEE even if your firm does not intend to tender or work for government functionaries. The reason for this is found in an analysis of the Act and Codes in which the true driver of B-BBEE is that it has a cascade effect starting at government level and filtering down to the level of general business-to-business suppliers and providers of services.“

The B-BBEE Codes of Good Practice provide for a level 2 Enhanced Recognition Level for a 51% and higher black-owned company, under the R50 million per annum turnover threshold.

There has been a welcome development in the legal sphere where law firms offer black admitted attorneys in their service the opportunity to acquire shares in their practices. A black person (as per the B-BBEE Codes) who is an admitted attorney may hold shares/equity in a law firm for purposes of ownership through a Sale of Shares, an Issue of Shares or a Share Option. The latter acquisition deserves more in-depth analysis, as will be provided herein.

History of a share option

The Share Option dates back centuries and originates from the Roman-Dutch law of contract, a pactum de contrahendo. The pactum is a binding legal instrument with the intention of concluding a future agreement in terms of which contracting parties assume legal obligations. One of the first recorded examples of an option contract can be found in Politics, written by the Greek philosopher and legal visionary, Aristotle. Greek history tells us in this book about another philosopher, Thales of Miletus, and his commercial- legal invention of the option. Thales was an astronomer and invented a method to predict profitable olive harvests. However, he did not have the financial means to profit from his algorithm. He therefore creatively devised a commercial transaction where he paid for the rights to those olives, from which he would only benefit at a future date when the harvest was due.                                                                                        

In modern times, a share option is a well-known commercial transaction and an equity instrument in terms of the Companies Act, 71 of 2008, which gives the holder thereof the right to acquire shares/assets at a future date at a predetermined price. When financial means are not immediately available, a share option may provide interim relief to the holder of the equity instrument in acquiring such financial means to exercise the option at a future date stipulated in the instrument/contract. 

The option (right) to purchase the shares is usually done at nominal value. When the option becomes due, however, it has to be exercised at a valuation value or at a predetermined price (strike value).

Share options and B-BBEE

Paragraph 3.13 of Statement 100 of the B-BBEE Codes recognises ownership in the form of a Share Option as a valid form of ownership. Paragraph 3.13 stipulates:

“Exercisable Voting Rights and Economic Interest will be recognized where a participant holds an instrument granting the holder the right to acquire an Equity Instrument or part thereof at a future date,” if the requirements provided for in the Codes are met.

The requirements for recognition are as follows:

  • Exercisable Voting Rights are attached to the instrument;
  • Economic Interest is attached to the instrument.

Therefore, a Share Option is a viable option for a black participant to acquire shares and equity at a future date by entering into a commercial transaction for the future acquisition of ownership of shares. This gives full effect to the intention of the legislature by enabling black individuals to own shares or the right to acquire those shares at a future date. The rights attached to the shares as subject matter of the share option, being the voting rights and economic interest, must be irrevocably ceded to the option holder for the duration of the option period.

Paragraph 3.13.4 of Statement 100 of the Codes also determines how a share option is valued for purposes of Net Value in terms of the ownership element recognition. Share options therefore comply with all three indicators for B-BBEE Ownership, namely Voting Rights, Economic Interest and Net Value.

In these changing economic times, law firms can be assisted with the right tools in order to run successful law firms. Charles Darwin wrote: “It is not the strongest of the species that survive, nor the most intelligent, but the ones most responsive to change.”

SERR Synergy assists law firms to implement 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 by minimising the risk and maximising the opportunities in a unique South African business environment.

About the Author: Deonette Jacobs obtained her LLB degree in 2017 and is an admitted Advocate of the High Court of South Africa. She joined SERR Synergy in 2018 where she currently holds the position of Corporate Legal Advisor. She prides herself on playing a vital role in assisting law firms with their B-BBEE requirements.

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