UK: Corporate Focus Spring 2016

Bribery Act sinks its teeth into Sweett

A recent case puts businesses on notice that the Bribery Act 2010 has bite. Punished for failing to prevent the corrupt acts of its subsidiary, and defenceless because of a complete absence of procedures to prevent acts of bribery being committed on its behalf, Sweett Group PLC has the unwelcome distinction of being the first company to be convicted under the Bribery Act's corporate offence.

Sweett Group PLC (Sweett) is a construction company listed on AIM. Its subsidiary in the UAE paid a bribe to a senior Emirati official at an insurance company in order to secure a consultancy contract relating to the construction of a hotel. The bribe amounted to GBP 680,000 and was made in monthly payments under a sub-consultancy agreement.

A company can be guilty of an offence under section 7 of the Bribery Act if "a person associated with the company" bribes another person, with the intention of obtaining or retaining business or an advantage in the conduct of business for the company (corporate offence).

Following an SFO investigation, Sweett pleaded guilty to the corporate offence and was ordered to pay GBP 2.25 million, made up of a GBP 1.4 million fine, a GBP 851,152.23 confiscation order and GBP 95,031.97 in respect of the SFO's costs.

The key takeaways for your business are as follows.

  1. Associated persons: Sweett's subsidiary, a separate legal entity, paid the bribe to win the contract for itself, and yet Sweett was the company which was penalised. The court found that where a subsidiary is not operating autonomously from its parent company, the parent company may be liable for acts of bribery committed by the subsidiary, which is held to be an "associated person". Ensure that you have sufficient oversight of your overseas subsidiaries as these could, in some circumstances, fall within the scope of "associated persons", making your business liable for their corrupt acts.
  2. Adequate Procedures: Section 7(2) of the Bribery Act provides a defence if a company can show that it had adequate procedures in place to prevent bribery being committed on its behalf. Sweett admitted that it had no such controls in place. Worse still, earlier audits and reports had identified concerns regarding the subsidiary's activities, which Sweett did not address. Assess where the corruption risks lie in your business and discuss with your advisers how best to mitigate them. If you fail to do so, the penalties can be hard to swallow.

No Prince Charming for Adamantine – Court prevents compulsory acquisition

Bowleven was at risk of losing its 50% participating interest in a Production Sharing Contract to Adamantine, but the Commercial Court found that arguments advanced by Adamantine would have "odd and uncommercial consequences". The case presents a useful reminder to businesses of how the courts will construe your contracts and their focus on the commercial intention of the parties.

Adamantine and Bowleven entered into a sale and purchase Agreement (SPA) to assign to Bowleven half of Adamantine's interest in a Production Sharing Contract (PSC) in respect of a Kenyan block. Under the PSC the exploration phase was divided into three periods. The SPA contained a 'drill or drop' provision, requiring the parties to meet and choose whether or not to proceed to each subsequent period. If one party elected to proceed to the next stage and the other did not, the withdrawing party was obliged to assign its interest to the other.

Under the PSC, Adamantine was required to fulfil minimum work obligations before the initial exploration period expired. At the time of the vote it was clear to both parties that these obligations would not be met. At the meeting only Adamantine voted to proceed to the next phase (conditional on further time being allowed to complete the minimum work obligations) and subsequently requested that Bowleven assign its interest to it in accordance with the SPA. Bowleven refused, maintaining that the drill or drop vote was invalid as the failure to meet the minimum work obligations would prevent the parties from proceeding to the next period.

Applying established principles for interpreting commercial contracts (see box), the Court held that, as the minimum obligations were not fulfilled, the right to progress to the next exploration stage did not exist and a vote to do so was meaningless. Bowleven was not therefore obliged to relinquish its participating interest. There was no fairytale ending for Adamantine.

The key takeaways for your business are as follows.

  • Courts will review contracts against the commercial background in which they were drafted.
  • The court's views as to what you and your counterparty intended when your contracts were signed might radically differ from your own. Clarity is key.
    • The Court is concerned with identifying the intention of the parties by reference to what a reasonable person, having all the background knowledge which would have been available to the parties, have understood them to have meant.
    • It does so by focusing on the meaning of the words, which is assessed in light of: the natural and ordinary meaning of the words;
      • any other relevant provisions;
      • the overall purpose of the clause and the agreement;
      • the facts and circumstances known or assumed by the parties at the time that the document was executed; and
      • commercial common sense, but disregarding subjective evidence of any party's intentions.

Can't do right for doing wrong? – Supreme Court tells directors to use powers for their "proper purpose", not what they think is in the company's interest

It was recently decided that the board of a company had restricted the exercise by certain shareholders of rights attaching to their shares for an improper purpose. Businesses should take note that it didn't help that the directors had acted in what they perceived to be the company's interest – to fend off a corporate raid.

The directors of JKX Oil & Gas plc believed that two of its shareholders were attempting to exploit their minority shareholding to obtain effective control of the company at a cheap price in a "corporate raid". The two shareholders were encouraging other shareholders to vote against an equity fundraising being proposed at an upcoming shareholder meeting, which the board supported.

The board issued a disclosure notice on the two shareholders requesting information about the number of shares they held and any agreements or arrangements between people interested in the shares. The two shareholders denied that there was any such agreement or arrangement.

The board considered that it had reasonable grounds to believe that the responses were false or materially incorrect. Relying on the Company's Articles of Association, the board issued a "restriction notice" in relation to the shares in question, suspending the right to vote at general meetings.

The two shareholders challenged the restriction claiming it was being exercised for an "improper purpose" in order to influence the outcome of the shareholder meeting. Under the "proper purpose" rule in the Companies Act 2006, a director must only exercise powers for the purposes for which they are conferred.

The board argued that, once the shareholders had failed to provide the information, the power to make a restriction order could properly be exercised for the purpose of defeating their attempt to influence or control the company's affairs.

The Court considered that the power in the Articles to suspend rights attached to shares had three purposes, including as a sanction for refusal to provide the information.

The Court found that the board had not suspended the rights for one of the three proper purposes, and so it was held to have exercised its power to issue a restriction notice for an improper purpose. The restriction notice was "not itself a legitimate weapon of defence against a corporate raider."

The key takeaways for your business are as follows.

  • Don't forget, your board's duty to act in the interest of the company is separate from – and additional to – its obligation to use powers for their proper purpose.
  • Work out what the purpose of a power is before using it. A power which comes with strategic benefits should not be used for that strategic purpose.

Eclairs Group Ltd v JKX Oil & Gas plc: [2015] UKSC 71

Another nail in the tax avoidance coffin

In a recent Supreme Court decision UBS AG & Anor v HMRC [2016] UKSC 13 the Supreme Court unanimously ruled in favour of HMRC and held that the bonus tax arrangements implemented by UBS and Deutsche Bank didn't work.

The schemes involved some complexity but, in essence, instead of the employees receiving discretionary cash bonuses (which would have been subject to income tax when the bonuses were paid) the banks used the amount of the bonuses to subscribe for redeemable shares in offshore companies. The shares were awarded to the employees in place of the bonuses. Conditions were attached to the shares making them subject to forfeiture if a contingency occurred. The idea was that when the shares were ultimately disposed of there would be a capital gains tax liability (or not as the case may be for non-domiciled employees) and at no stage would there be an income tax liability.

The importance of the contingencies was that it made the shares "restricted securities" which was a critical factor in enabling an income tax charge to be avoided. In the UBS scheme the contingency was a specified rise in the FTSE 100 within a three week period and in the Deutsche Bank scheme it was the employee being dismissed for misconduct or leaving voluntarily within a six week period.

In both cases the Supreme Court found that the contingencies were arbitrary and had no commercial or business purpose. On that basis the Supreme Court decided that the contingencies could be ignored with the result that the shares ceased to be restricted securities. This meant that the shares were taxable when they were received.

HMRC is focusing a lot of effort in relation to tax avoidance schemes and is certainly enjoying a "great run of form" in the courts. In the current climate the courts appear increasingly willing to look for ways to strike down tax avoidance schemes. Anyone considering entering into a tax avoidance scheme should therefore approach things with considerable caution. Where steps are inserted into an arrangement with little or no commercial purpose the courts are willing to ignore them and if these steps underpin the success of the scheme this of course is fatal.

Corporate Focus Spring 2016

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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