In an astonishing scrap, top law firm Smith Tabata Ramsay Webber Buchanan Boyes (STRB) has been effectively accused of empowerment “fronting” by one of its own black shareholders.

This case, originally scheduled for hearing at the Johannesburg High Court, is now headed towards arbitration, but the allegations could have resounding implications for the legal fraternity, which many believe has dragged its heels when it comes to transformation.

Here, STRB is being sued by former director (and Wits University law lecturer) Haroon Laher, who quit the practice in February. Laher has tried to sell back his 10% shareholding to STRB, but was surprisingly told it was worthless.

Briefly, STRB was formed in 2003 by the merger of Johannesburg-based Ramsay Webber, Cape Town firm Buchanan Boyes, and East London’s Smith & Tabata. At that stage, Laher and other directors each got 10% of STRB’s shares, Buchanan Boyes got 25% and Smith & Tabata the other 25%.

Clearly, one of STRB’s motives for giving the 10% to Laher seems to have been to boost its black ownership status, as it then sought an “empowerment rating” from Empowerdex. STRB was given a BB- rating in 2005 because 45% of its shares were in black hands (including those of Laher) meaning it overshot the targets.

(In a proposal to Absa for business, STRB punted itself as a ‘broad-based empowered legal firm’, boasting of its Empowerdex status and said “we are totally committed to the transformation of our firm into a truly SA business”.)

However, problems emerged when Laher quit in February and tried to sell his 10% back to the firm. STRB managing partner Brian Webber told him his shareholding was worth zero.

Speaking to the FM, Laher said this was “absurd” and the “privatisation of apartheid”. He asked how it is that “companies like to advertise their empowerment status to win new business but have no problem claiming later that these shares are worth nothing”.

In a sworn affidavit for the court case, Laher said he quit STRB for various reasons, including an overhaul of the structure which, he says, would have reduced him to a “second-level shareholder”.

Laher said that when he told Webber he wanted to quit, Webber “became agitated and stated that I would not be paid for my share. I referred to the shareholders agreement, and he denied any such agreement existed”.

Laher points to the shareholding deal struck in 2003, which said that when any of the parties quit STRB, the shares would be valued by the auditors and that lawyer would then be paid for the shares (once debts had been deducted, of course).

Webber, in his own affidavit, rubbished Laher’s claim, saying he is “shocked” by Laher’s “attempt to extract payment of monies that were, and are not, due to him,” he says.

Says Webber: “I persist in my attitude that Haroon is not entitled to receive payment for his shares,” he says.

“Each partner received his shares in [STRB] free of consideration on the understanding that he would relinquish those shares on his departure without receiving any payment,” he says.

Webber also claims that Laher’s shares were “qualifying shares, issued at a par value and were to be surrendered on [Laher] resigning from [STRB] at par value”. He adds that Laher “never paid the subscription fee of R10 for his shares, and accordingly, is to surrender them at no value”.

In any event, he says, the partners “shall be entitled, but [are] not obliged” to buy the shares of a partner who leaves.

This is a particularly odd contention. If the shareholding in a lawfirm is worthless, this raises pointed questions about why the company got an ‘empowerment rating’ from Empowerdex in the first place, and just how valid it is. And companies that relied on this empowerment rating to award STRB legal business would be justifiably irked if the ‘black ownership’ component carries no economic rights.

Perhaps more worrying, if this position is adopted by other lawfirms, further disputes are inevitable. After all, why is it that throughout the corporate sector, ‘enterprise value’ has a distinct meaning, and if you hold 10% of that, it has a value. Yet somehow this common understanding of enterprise value somehow doesn’t apply to lawfirms? And what is the point of transferring ownership to black individuals if this has no economic value?

Now, while STRB is relatively small, it has some impressive clients, including Indian multinational TATA and Standard Bank. It also boasts the likes of former prosecutions boss Bulelani Ngcuka on its letterhead as a director.

However, what makes this dispute all the more alarming for the sector is that it comes as the Law Society of SA released its ‘empowerment charter’ which goes on in length about ‘ownership’ of lawfirms by black individuals.

Elsewhere in the legal fraternity, shares do carry weight. The best example of this was the princely R400m that Nedbank paid for Edward Nathan Friedland (now Edward Nathan Sonnenbergs) in 1999, before selling it back for R50m in 2004. Directors, including Michael Katz, profited from the deal.

Other companies have also done empowerment deals of some sort, including Cliffe Decker, Werskmans, and Routledge Modise Moss Morris, and have paid for a rating from Empowerdex. However, the black owners in those companies will be watching the STRB case with great interest.

In this case, Laher counters: “I also doubt that [the STRB directors] are aware that some of them, according to Webber, have been alloted shares which are simply ‘qualifying shares’ with no value,” he said.

In his papers, Laher raises the prospect of ‘fronting’ which is defined by the codes of good practice as “any practices or initiatives which are in contravention of, or against the spirit of any [rule or practice] pertaining to black economic empowerment.

Laher says that if he didn’t hold real shares in STRB or its predecessor Ramsay Webber, then “this is a classic illustration of fronting”.

In a discussion with the FM, Webber emphatically denied this. “The shares themselves don’t have a value. You don’t pay for the shares when you come in, and you’re not paid when you leave, but you’re entitled to profit distributions [as have happened] and you have voting rights,” he says.

When asked if this was common practice in the legal industry, Webber said: “I do believe so.”

David Lancaster, a senior partner at Webber Wentzel Bowens, says it depends on the structure of the practice. “In some instances, it could be normal that shares are worth nothing,” he says.

This dispute went to the Johannesburg High Court last month, but the parties agreed to take it to arbitration rather. This is likely to happen in the new year., and will be tracked closely by those concerned about transformation in the industry.

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