Law firm accused of empowerment ‘fronting’

A Financial Mail report says Laher subsequently tried to sell back his shareholding, but was told it was worthless, so is suing the company. The case was originally scheduled for the Johannesburg High Court but is now headed towards arbitration and could have implications for transformation in the legal sector, says the FM. TRB was formed in 2003 by the merger of Ramsay Webber, Buchanan Boyes and Smith & Tabata. Laher and other directors each got 10% of STRB\'s shares. One of STRB\'s motives for giving the shares to Laher seems to have been to boost its black ownership status, as it then sought an ‘empowerment rating’ from Empowerdex, which granted it a BB rating in 2005 because 45% of its shares were in black hands. Laher points to the 2003 shareholding agreement, which says when any of the parties quit, the shares would be valued by auditors and the party would then be paid for the shares. But Webber, in his affidavit, says he is ‘shocked’ by Laher\'s ‘attempt to extract payment of monies that were, and are not, due to him’. He said partners are given shares on the understanding that they relinquish them should they leave the company. However, if the shareholding in the law firm is worthless, says the FM, this raises questions about the validity of the Empowerdex rating. The Law Society of SA emphasises ‘ownership’ of law firms by black individuals in its empowerment charter. Laher says if he didn\'t hold real shares in STRB or its predecessor Ramsay Webber, then ‘this is a classic illustration of fronting’. Full Financial Mail report (subscription needed) Comment by Empowerdex MD Chia-Chao Wu: Although we would not want to comment on the merit of the case mentioned in the article, we would like to provide the following hypothetical example for the readers to consider ownership assessment under similar scenarios. As a principle, when a black shareholder buys into a company or is issued shares, we check the voting rights as well as the black shareholder\'s entitlement to receive his/her share of economic interest flowing from the company. The rights to economic interest measure the right of a shareholder to receive dividend, as well as capital gains resulting from the sale of his or her shares. However, if in a hypothetical example, the shareholder acquires 10% in the company, but such company always pays out all of its income as dividend to all of its shareholders in proportion to their ownership and retains no capital value in the company, when such shareholder wants to sell his/her shares after the payment of the dividend, there will be little or no capital value attached to those shares. In this scenario, it does not mean that the shares had no economic value as long as the shareholder is entitled to receive his/her full share of the distribution whenever it is made. This can be confirmed further if an independent assessor or auditor values the shares on the day of exit. If the assessor found the share\'s value to be insignificant, and it is the same for the shares held in the hand of every single shareholder holding the same class of shares, then the contention that the shareholder owns 10% of the company is correct, even if the shares are \"worthless\" on the date of exit. As this is a practice commonly used in professional services firms and partnerships, one really needs to consider all of the details of the matter before making any blanket statements.