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Legal Sector – Ownership Element

The fundamental challenge of BEE ownership in the legal sector is that in terms of the Legal Practice Act, firms of attorneys can only be owned by attorneys themselves. This means that BEE ownership can only be achieved by having black attorneys own part of the firm, a process that takes the typical LLB graduate about 10-15 years before they become equity partners. Note the the current Legal Sector Charter is under challenge by several prominent law firms.

1. Introduction and Applicability

  • 1.1 Sector Code Overview: The Legal Sector Code provides a framework for measuring B-BBEE compliance specifically within the legal profession in South Africa. It aims to address the unique characteristics of this sector, including its role in upholding the Constitution and the need for greater representation of Black people and women in the profession.
  • 1.2 Scope of Application: The Legal Sector Code applies to:
    • Attorneys
    • Advocates
    • Firms of attorneys
    • Associations of advocates
    • Legal entities providing legal services (as defined in the Code)
    • Excludes in-house legal departments within companies that are not primarily engaged in providing legal services to the public.
  • 1.3 Legal Basis: Section 9(1) of the Broad-Based Black Economic Empowerment Act (No. 53 of 2003, as amended) and the Legal Sector Code (Government Gazette No. 40910, 09 June 2017). Importantly, the Legal Practice Act (LPA), No. 28 of 2014, also governs the structure and ownership of legal practices.
  • 1.4 Effective Date: 09 June 2017.
  • 1.5 Precedence: This Sector Code supersedes the Generic Codes for entities within its scope. However, the LPA’s provisions regarding ownership of legal practices are paramount.

2. Ownership Scorecard and Thresholds

IndicatorWeightingTarget
Exercisable Voting Rights (Black People) 6 points 30% + 1 vote
Exercisable Voting Rights (Black Women) 3 points 50% of 30% + 1 vote
Economic Interest (Black People) 6 points 30%
Economic Interest (Black Women)3 points 50% of 30%
Economic Interest (Black New Entrants) 2 points 10%
Net Value 8 pointsSee Below
Total 28 points Net Value Target: Based on a phased-in approach, linked to “years of recognition.”
  • 2.1 Ownership Scorecard:
  • 2.2 Priority Element Status: Ownership is a priority element.
  • 2.3 Subminimum Requirements: 40% of the Net Value points (i.e., 40% of 8 points = 3.2 points).
  • 2.4 Entity Size Thresholds:
    • EME Threshold: Annual Total Revenue of R5 million or less. (Lower than the Generic Codes).
    • QSE Threshold: Annual Total Revenue between R5 million and R35 million. (Different from the Generic Codes).
    • Generic Threshold: Annual Total Revenue above R35 million. (Lower than the Generic Codes).
  • 2.5 Automatic Recognition for EMEs/QSEs:
    • The usual automatic levels apply (Level Four for EMEs, Level One/Two for 100%/51%+ Black-owned EMEs and QSEs).
    • Crucially: Are there any conditions or restrictions on this automatic recognition? No. The Legal Sector Code does not have a similar provision to the Construction Sector Code’s Clause 3.1.3 (restricting automatic recognition for BEPs). However, the Legal Practice Act inherently restricts ownership to legal practitioners.

3. Specific Ownership Requirements and Interpretations

  • 3.1 Unique Ownership Targets: The Legal Sector Code has higher targets for voting rights and economic interest (30% + 1 vote and 30%) compared to the Generic Codes (25% + 1 vote and 25%). It also places a strong emphasis on ownership by Black women, with a target of 50% of the overall Black ownership target. There is a specific target for Black New Entrants.
  • 3.2 Flow-Through and Modified Flow-Through: Standard Flow-Through and Modified Flow-Through Principles apply.
  • 3.3 Exclusion Principle: Standard Exclusion Principle applies.
  • 3.4 Treatment of Specific Entities: The Code provides specific recognition criteria for:
    • Broad-Based Ownership Schemes (BBOS): Must meet specific criteria.
    • Trusts: Must meet specific criteria.
  • 3.5 Multinationals: No specific provisions beyond the Generic Codes. Equity Equivalents would likely apply as usual.
  • 3.6 Ownership by Qualified Professionals/Specific Roles:
    • The Legal Practice Act (LPA) fundamentally restricts the ownership of law firms (attorneys’ firms) to admitted legal practitioners. This means that, in practice, ownership must be held by qualified lawyers. This is not explicitly stated in the Legal Sector Code’s ownership scorecard, but it’s a pre-existing legal requirement that underpins all ownership structures in the legal profession.
    • Crucially: Are there any requirements for ownership to be held by individuals in specific roles (e.g., executive management, as in the Construction Sector Code for BEPs)? Are there penalties for not meeting these requirements? No, the Legal Sector Code itself does not have a further restriction like Clause 3.1.3. However, the LPA’s restriction to legal practitioners is paramount.
  • 3.7 Sale of Assets: No specific deviations from the Generic Codes.
  • 3.8 Private Equity Funds: Ownership by B-BBEE compliant Private Equity Funds is highly unlikely to be a viable option for law firms due to the LPA’s restrictions on ownership by non-lawyers.
  • 3.9 Other Unique Provisions:
    • Emphasis on Black Women: The strong emphasis on ownership by Black women is a notable feature.
    • Lower Thresholds: The lower thresholds for EMEs and QSEs reflect the structure of the legal profession, with many smaller firms and sole practitioners.
    • Legal Practice Act Restrictions: The overarching constraint of the LPA on ownership is a defining characteristic.

4. Areas of Uncertainty and Interpretation

  • 4.1 Ambiguities: As with the Generic Codes, valuation methodologies and the application of the Flow-Through Principle can be areas of interpretation. The specific rules for BBOS and Trusts may also require careful interpretation.
  • 4.2 Industry Practice: Industry practice is developing, and engagement with the Legal Practice Council is important.
  • 4.3 Potential Disputes: Valuation disputes, challenges to the legitimacy of ownership structures, and interpretation of the specific rules for various entities.

5. Deal Process, Parties, and Costs

  • 5.1 Typical Deal Structures: Direct ownership by Black legal professionals, and trusts (where the beneficiaries are ultimately Black legal practitioners). ESOPs and BBOSs are less common due to the LPA restrictions.
  • 5.2 Key Parties Involved: Law firms, advocates’ chambers, Black legal professionals, legal advisors, financial advisors, B-BBEE verification agencies.
  • 5.3 Deal Process Overview: Similar to the Generic Codes: due diligence, valuation, negotiation, legal documentation, and implementation. However, all structures must comply with the LPA.
  • 5.4 Cost Considerations: Similar to the Generic Codes: legal fees, valuation fees, advisory fees, B-BBEE verification fees, and the cost of the ownership transaction itself.

6. Gotchas and Best Practices

  • 6.1 Common Mistakes: Failing to meet the Net Value subminimum, inadequate documentation, fronting, not understanding the specific rules for BBOS and Trusts. Crucially: Attempting to structure ownership in a way that violates the Legal Practice Act’s restrictions on ownership by non-lawyers.
  • 6.2 Fronting Risks: High risk, given the professional nature of the sector and its role in upholding the law.
  • 6.3 Best Practices: Thorough planning, expert legal advice (specifically regarding the LPA), genuine commitment to transformation, careful structuring of ownership deals within the constraints of the LPA, ongoing monitoring of compliance.

7. Alternatives to Ownership

The other elements of the Legal Sector Scorecard include:

  • Management Control
  • Skills Development
  • Enterprise and Supplier Development
  • Socio-Economic Development
  • Pro Bono (unique)

8. Conclusion

The Legal Sector Code builds upon the Generic Codes but introduces several important distinctions, including higher targets for Black ownership (especially Black women), lower thresholds for EMEs and QSEs, and a strong emphasis on transformation within the legal profession. Crucially, the Legal Practice Act’s restrictions on ownership to admitted legal practitioners fundamentally shape the possible B-BBEE ownership structures in this sector. While the Legal Sector Code does not have a clause analogous to the Construction Sector Code’s Clause 3.1.3, the LPA’s existing rules effectively limit ownershp to qualified professionals.

Please contact us for a confidential discussion around your unique BEE ownership needs.

Chapter: Sector codes:
Chapter: Sector codes:
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