The Mabey & Johnson Case – Implications for Shareholders
Daniel Walker, Voisin
Mabey & Johnson Limited, the first company to be convicted in the UK for acts of bribery overseas, was sentenced at Southwark Crown Court in September 2009 in relation to admitted offences of overseas corruption and breaching UN sanctions.
The prosecution for corruption arose from the company's voluntary disclosure to the Serious Fraud Office (the "SFO") of evidence that the company had sought to influence decision-makers in public contracts in Jamaica and Ghana between 1993-2001 and the prosecution for breach of UN sanctions (in relation to the Iraq "Oil-for-food" programme), arose from an investigation that commenced in January 2007.
However, Mabey & Johnson Limited continues to set anti-corruption enforcement precedent as the SFO has recently taken action in the High Court under Part 5 of the Proceeds of Crime Act 2002 ("POCA") which has resulted in an Order for a parent company, Mabey Engineering (Holdings) Ltd, to pay £131,201 in recognition of sums it received through share dividends derived from contracts won through unlawful conduct by Mabey & Johnson Limited, in which it was a principal shareholder.
Notwithstanding that this parent company did not know about Mabey & Johnson's inappropriate behaviour, the SFO was able to recover "property obtained through unlawful conduct" in a case which has potentially far-reaching implications for investors.
Indeed, this was the first time that the SFO has compelled a parent company, rather than the company itself or individuals responsible for its management, to forfeit profits under Part V of POCA and indicates that the SFO plans to leverage this power broadly to recover shareholder dividends resulting from corrupt activities.
In a speech following the action against the Shareholder of Mabey & Johnson Limited, the Director of the SFO, Richard Alderman, has warned investors that the case marks the beginning of a more proactive approach by the SFO and he highlighted two key messages which arise from the settlement:
1. "First, shareholders who receive the proceeds of crime can expect civil action against them to recover the money. The SFO will pursue this approach vigorously. In this particular case, however, the shareholder was totally unaware of any inappropriate behaviour. The company and the various stakeholders across the group have worked very constructively with the SFO to resolve the situation and we are very happy to acknowledge this; and
2. The second broader point is that shareholders and investors in companies are obliged to satisfy themselves with the business practices of the companies they invest in. This is very important and we cannot emphasise it enough. It is particularly so for institutional investors who have the knowledge and expertise to do it. The SFO intends to use the civil recovery process to pursue investors who have benefited from illegal activity. Where issues arise, we will be much less sympathetic to institutional investors whose due diligence has been lax in this regard."
These proceedings have therefore excited considerable concern, as it has been suggested that by targeting shareholders in this way, the SFO are pushing the boundaries of the law and raises important questions about the extent to which shareholders will be held liable for the criminal conduct of their subsidiaries.
It also raises the issue of whether institutional investors such as pension funds and private equity firms will be held to a different standard from other investors as shareholders with financial experience and resources may be expected to monitor their portfolio companies sufficiently more closely in order to mitigate corruption risks.
In light of the Mabey & Johnson case, private and equity firms will therefore need to take steps in order to ensure that they and their portfolio companies are not violating the United Kingdom Bribery Act and should ensure that they have adequate procedures in place to prevent bribery, as prevention remains the best form of defence. Such policies must consider the specific risk factors of the company, for example, the industry, its business model, the countries in which it does business and the volume of business conducted through third parties. They should also ensure that due diligence is conducted prior to an investment to ensure that any problems uncovered are adequately dealt with.
The Mabey & Johnson case also has relevance for the Channel Islands as a Jersey Company with shares in a UK Company that sustains a Bribery Act violation and prosecution, may well have to return profits, even where it did not have knowledge of the unlawful conduct.
In view of the threat to dividends, the additional criminal liability and adverse implications for valuation, reputation and marketability, the Mabey & Johnson case emphasises the importance for investors to ensure that adequate due diligence is conducted and that anti-corruption risk analysis should be undertaken before shares in a company are acquired.
Daniel Walker, Solicitor
Voisin, Jersey, Channel Islands