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Legislation targets failure to act

Greater risk awareness must be a priority

Companies in the UK are bracing themselves for a rise in
litigation risk, with two out of five businesses in the UK and US anticipating
an increase in the number of legal disputes in the next 12 months.

That is according to law firm Fulbright & Jaworski’s 2009 Litigation
Trends Survey, which finds that a quarter of companies believe a key source of
action may stem from regulatory non-compliance. The financial services and
insurance sectors topped the list of industries expecting an increase in
litigation among 50% and 56% of respondents, respectively.

“The increased time spent on regulatory matters over the past three years
undoubtedly reflects the increased complexity of regulatory issues,” Lista
Cannon, a managing partner in the firm’s London office says. “That sits
alongside the growing confidence of regulators to use their full range of
investigation and enforcement powers.”

More prosecutions
Over the past few years, the UK has beefed up its legislation against directors
and companies, partly because of the poor prosecution record in fighting complex
cases, especially fraud. The introduction of the Fraud Act, which came into
effect in 2007, has updated, widened and simplified the law so that fraud is now
a single offence, while the new bribery bill will introduce a corporate offence
of negligent failure to prevent bribery on behalf of a business.

The Serious Fraud Office, as well as the Office of Fair Trading, has also
been keen to encourage companies to self-report incidences of bribery,
price-fixing and other unfair or corrupt practices.

This approach has already had some success. In October 2009, specialist
bridge-builder Mabey & Johnson was ordered to pay fines of £3.5m and a
further £3.11m in repayments and prosecution costs after its previous management
was convicted of corruption and breaching United Nations sanctions. The fine
follows the company’s guilty plea at Westminster Magistrates Court last July on
charges of paying bribes in Jamaica, Ghana and Iraq. The prosecution was the
first of its kind against a UK company operating overseas.

These are not the only changes the government has made. The Ministry of
Justice recently changed the rules on legal aid, so that companies and directors
can no longer reclaim their full legal costs in criminal trials – even if they
are acquitted of all charges against them.

Aziz Rahman, a partner in specialist fraud law firm Rahman Ravelli, says
directors need to be aware of the ream of new penalties that can be used against
them following a number of changes in UK law. “The government is stacking the
chips in its favour to raise its prosecution record and as a result, strict
legal compliance, firm adherence to industry best practice and greater risk
awareness must be a priority for all companies and directors, including
non-executives,” he says. “If companies fail to act, it could be a very costly
mistake.”

Foreign action
Yet UK companies and their boards are not only at risk from UK prosecuting
authorities – US and European courts are increasingly taking an interest in
prosecuting foreign-registered companies to protect consumer and shareholder
interests in their own jurisdictions. During the past decade, European companies
that have fallen foul of corporate governance or accounting rules have been hit
harder and more frequently in the US than in Europe. The $1.1bn legal payout
handed down to Dutch retailing giant Ahold in 2005 to compensate shareholders
for accounting irregularities in its US subsidiary demonstrates how punitive the
US legal system can be.

According to a report last November by insurance research outfit Advisen,
European D&O Insurance Market to Benefit from Governance and Legal Reforms,
claims against European companies doing business in the US have risen sharply –
from 10 in 2005 to 37 in 2008, while 23 were reported in the first half of 2009
alone. Of the 113 securities suits filed against European companies in US courts
since 2005, 54 have been securities class-action lawsuits with an average
settlement of (euro)55m.

However, the report also found that Europe is gaining ground. Since 2005
there have been 32 large securities suits filed in European courts against
European companies with an average settlement per case of (euro)117m. Of these,
18 were filed in the first half of 2009 alone and 29 were collective action
suits.

There could be more if the European Commission gets its way. In November
2008, the EC set out proposals for a system of collective redress for consumer
complaints in a green paper. Presently, only 14 of the 27 EU member states have
procedures in place to handle collective redress. Much of the detail of the
proposals is still undecided, with a key stumbling block being whether claimants
should opt in or out of such actions.

As Julian Goulding, a partner at law firm Cheyney Goulding, says:
“Legislation, rules, regulations and principles are all in place to make
prosecuting directors and their companies easier. It is certainly time that
companies took that into consideration.”

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