Legal Risk Management Advice
Hope Ltd (Hope) is a UK registered multinational with its headquarters situated in London. Hope is one of 15, UK listed synthetic composite material manufactures, whose products are utilised in satellite production. Their specialisation is in raw material extraction, specifically, ‘Unobtanium’, a rare Earth material, in politically unstable and developing countries.
Although most of its operations take place outside of the EU, Hope maintains a processing factory in County Dublin, Republic of Ireland. However its distribution logistics hub is located in Belfast, Northern Ireland. Hope are concerned about the potential disruption to this arrangement in January 2021 due to the UK withdrawal from the EU.
In order to offset any issues re their Irish network and to carry out their functions more efficiently, Hope, under advice from its lawyers, decided to undertake a partnership with Alaracorp (Alara), a UK and US listed marine cargo company that specialises in point to point critical infrastructure materials transport for reconstruction purposes in post conflict transition countries. Alara has a well – developed infrastructure network of suppliers for transport of materials and fuel. It also maintains exclusive access to key docking berths in ports and harbours around the world where they operate. As a result, Hope’s market share has increased from 26 to 37 percent.
As part of the partnership, Hope transferred heavy equipment, personnel and capital resources. The capital injections were financed via loans from investment banks secured by Hope’s shares as guarantee. Alara had previously been under review by the EU Commission for possible infringement of EU competition matters but political instability elsewhere in the union diverted their attention. Hope’s legal director has recently learned that the Commission is planning to turn their attention back to Hope due to concerns about market power of the new partnership.
As a result of Hope and Alara’s new partnership, three of its close competitors, Psycorp Ltd (Psycorp) and Brexcorp Ltd (Brex) and True Inc (True) with market shares of 12 percent and 8 percent and 10 percent respectively, are concerned that they can no longer sustain their business operations in the long term due to the lack of access to ‘Unobtanium’ sources and inability to compete with such an integrated distribution network. Members of Psycorp, Brex and True’s board approached Hope with a proposal that they potentially combine their resources in relation to ‘Unobtanium’ projects.
Hope rejected this advance. However, since making that determination and worried about any potential cooperative efforts by Psycorp, Brex and True, Hope in conjunction with Alara have taken steps to secure their supply chains. They have approached and secured the exclusive services of 4 of the 6 main port facility companies utilised by extractive firms to move their products globally. They have also secured the contracts to provide ‘Unobtanium’ to several satellite manufacturers, by offering the materials at a below market discount price.
Recent reports in the media, however, have alleged that Alara was only able to secure access to the key ports by paying substantial fees to a number of government officials in the foreign countries. There have also been reports from global human rights NGO’S that Alara have been complicit in the growing trend of use of mercenaries for commercial operations.
Although not substantiated, there have indications from local communities, that Alara have contracted with Freya Inc, a private military contractor, to provide security training for its employees working in unstable global locations.
Freya have historically been associated with aggressive commercial operational mandates. In 2019 Freya personnel had been involved in the suppression, intimidation and forced relocation of ‘Crescent Moon’, a local tribe in the Mystic Falls region of Transylvania.
The chairman of Hope, having recently attended a special briefing on risk management, has called a board meeting to discuss recent events and troubled that several large institutional shareholders of Hope had already expressed their concern about the share price and the company’s reputation both domestically in the UK and globally in its areas of operations.
At this meeting, the chief executive officer (CEO) and finance director expressed their opinion that there had been no unwarranted activity that they were aware of either by Hope or firms associated with Hope. Their opinion was that the NGO reports were almost certainly false. They were aware however, that certain operations by Alara and Freya in previous projects in some less regulated nations had not fully complied with all necessary standards and principles of good governance advocated by the UK but were fully compliant with local laws and customs of the countries in which they were operating.
They also revealed that, they had managed to secure the contracts with the satellite manufacturers by substantially undervaluing the costs of their materials, but that they would utilise mark to market accounting to offset the values so that it would not impact their profitability in the short term.
They also revealed that they anticipated that Psycorp, Brex and True would not have the financial ability to maintain themselves as competitors to Hope as a result of the Board’s actions and would exit part if not all of the satellite manufacturing market within a reasonable period of time. Once they did, Hope would be able to increase its market share and profits from anticipated future contracts.
In addition, they highlight that Hope has made considerable efforts in recent years to undertake Corporate Social Responsibility (CSR) and promote the image of the company as a ‘global corporate citizen’.
Having obtained an opinion document from the company’s legal advisers, which in their view was privileged, in respect of the various actions highlighted; the undercutting of prices and the wider CSR issues and reputational damage considerations, they did not expect any legal or reputational issues to arise.
Two non-executive directors (NEDs) were not entirely convinced by the denials of the CEO and finance director or reassured by the opinion from the company’s legal advisers. They insisted on asking for an external Counsel’s opinion and wanted Counsel’s independent view of the legal and commercial risks in this situation.
The chairman asks you, as external counsel, to consider Hope’s situation and provide your views about the legal implications surrounding Hope’s activities and whether:
1- Hope is potentially liable under any legal systems, structures or regulations as a result of its operations and agreements;
2- Whether the UK withdrawal will hinder its Irish distribution network;
3- Hope is at risk of facing any governance issues that have been raised as a result of its or its associated firms activities and about the appropriate way forward for dealing with them;
4- Hope is in compliance with applicable UK corporate codes.
5- Further, they would like your view on potential risks and opportunities that the company may need to consider with regard to Corporate Social Responsibility in respects operations in an unstable /developing country. Where appropriate, if you consider it would be relevant, give examples of issues that other companies have faced
LEGAL RISK MANAGEMENT ADVICE
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Legal risk management advice
Introduction
Hope Ltd (Hope) conduct and that of its partners exposes it to some major legal risks because of violation of the competition law, the Good Friday agreement, the Anti-trust and Bribery laws and some corporate good governance. Besides, the organization also faces some major risks that require exploration of the enterprise risk management. This advice is based on an insightful analysis of some legal guidelines and how the organization can navigate them.
1 Whether Hope is Potentially Liable Because of its Activities and Agreements
Hope is a victim of anti-competitive practices for its partnership with Alara, in which the organization decided to undercut its competitors. Such practices are prohibited under Chapters I and II of the Competition Act 1998 (the Act), which bars anti-competitive behavior that affects trade in the UK. The exercise also outlawed under Articles 81 and 82 of the EC Treaty, which restricts distortion of competition that affects businesses in the EU. Therefore, irrespective of the location of Hope’s businesses, as long as the competition being affected is either in the UK or the EU, then the organization is liable under the two statutes.
The agreements that these statutes prevent include fixing the prices to be charged for goods or services, limiting production, carving up markets, and discriminating between customers. Hope engaged in fixing the prices for its goods, which makes it difficult for its competition, Psycorp, Brex and True, to thrive. The company’s actions to carve out the market through its collaboration with Alara to maintain exclusive access to key docking berts in ports and harbors around the world also makes it liable. In this case, it does not matter whether the agreement is formal or informal, written or verbal. An informal conversation in which two competitors agree to match each other’s prices is treated in the same way as a formal agreement.
Hope is also liable for abuse of dominant market position as captured in Chapter II of the Act and in Article 82 of the EC Treaty. The two statutes prohibit any business which holds a dominant position in a market from abusing the position. Hope is in a dominant position because of its unfettered access to Unobtanium sources, which the competition lacks access to. The company abused this position when it approached and secured the exclusive services of four of the six main port facility companies that were utilized by extractive firms to facilitate the global transfer of their products. Therefore, Hope’s engagement in these activities makes it liable for prosecution.[“EU/Competition/Article 82 of the EC Treaty (Ex Article 86).” EU/Competition/. Accessed December 12, 2021. https://ec.europa.eu/competition/legislation/treaties/ec/art82_en.html.]
2 Whether the UK Withdrawal will Hinder its Irish Distribution Network
Since Hope has its distribution logistics hub in Belfast, Northern Ireland, its trade activities are governed under The Belfast Agreement, which is also called the Good Friday Agreement. The agreement was based on a strong relationship centered on trust between Ireland and the British, in which the two countries would maintain a close relationship between the two countries with Northern Ireland acting as a point of contact between the two nations. However, BREXIT may have a significant impact on the shared context of the Good Friday Agreement. However, there seems to be a shared commitment by both countries to continue with the agreement. Ultimately, the withdrawal of the UK from the EU will not have an impact on the agreement if the two nations take appropriate measures to protect it.[North Ireland Office. “The Belfast Agreement.” GOV.UK. GOV.UK, April 10, 1998. /government/publications/the-belfast-agreement.] [“Ireland and Brexit | The Institute for Government.” Accessed December 12, 2021. /explainers/ireland-brexit.] [“Northern Ireland – a ‘Place between’ in UK-EU Relations?” Accessed December 12, 2021. https://pure.qub.ac.uk/files/220146787/EFAR_Northern_Ireland_as_a_Place_Between_in_UK_EU_Relations_revised_20200920_Final.pdf.] [Phinnemore, David, and Katy Hayward. “UK Withdrawal ('Brexit') and the Good Friday Agreement.” Queen's University Belfast. European Parliament Policy Department for Citizens' Rights and Constitutional Affairs, December 8, 2017. https://pure.qub.ac.uk/en/publications/uk-withdrawal-brexit-and-the-good-friday-agreement.] [“The Good Friday Agreement, Brexit, and Rights.” Accessed December 12, 2021. /documents/97/TheGoodFridayAgreementBrexitandRights_0.pdf.]
Consequently, Hope Irish distribution network will not be affected if the Irish and the British government decide to maintain the status quo by continuing to allow free movement of goods and services between the two states and taking all measures to prevent border hardening. The organization’s networks will also remain unperturbed if the two nations decide to maintain the shared regulatory context that has boosted the economic prosperity of Northern Ireland. In addition, if the two nations continue to utilize the EU programs and to fund any efforts that facilitate the enactment of the Good Friday Agreement, then Hope’s networks will not be affected. Therefore, the ultimate impact of BREXIT will depend on how the UK and the Irish governments will decide to deal with the Good Friday Agreement. If the two nations continue to support it, then BREXIT will not interfere with Hopes operations and vice versa.[“Good Friday Agreement.” Mumsnet. Accessed December 12, 2021. /Talk/eu_referendum_2016_/3631334-Good-Friday-Agreement.] [Morris, Tom Edgington and Chris. “Brexit: What's The Northern Ireland Protocol?” BBC News. BBC, November 8, 2021. /news/explainers-53724381.]
3 Whether Hope is at risk of facing any governance issues
Hope is at risk of facing governance issues under chapter 23 of the Bribery Act 2010. According to Section 1 of this Act, a person or an entity will be treated as being guilty if they provide or promise to give financial or any advantage to another person as a way of inducing them to in tern give the bribing individual an advantage over the rest. Based on the reports available in media, Alara bribed some government officials in foreign countries to secure access to some of the major ports, which amounts to bribery. Whether legally recognized as Hope’s partner or not, the fact that the firm engages in activities meant to promote Hope’s business or appearing to promote any of its partner’s business renders the partners whose business the organization’s actions are promoting as being liable.[“Anti-Bribery and Corruption, Anti-Trust and Competition.” KPMG. KPMG. Accessed December 12, 2021. https://home.kpmg/cn/en/home/services/advisory/risk-consulting/forensic/anti-bribery-and-corruption-anti-trust-and-competition-services.html.] [Expert Participation. “Bribery Act 2010.” Legislation.gov.uk. Statute Law Database. Accessed December 12, 2021. /ukpga/2010/23/section/1.] [“UK Bribery Act and Other Anti-Corruption Enforcement.” UK Bribery Act and other Anti-Corruption Enforcement. Accessed December 12, 2021. /practice-areas/white-collar-investigations-and-enforcement/uk-bribery-act-and-other-anti-corruption-enforcement.html.]
Besides, Hope’s association with Alara exposes it to a violation of the cartel offence under Enterprise Act 2002. The Competition Act 1998 defines a cartel as an arrangement between two or more entities with an intention of unfairly controlling the market. Alara has often engaged in cartel activities. Its association with Freya Inc., an organization associated with aggressive commercial operational mandates designed to intimidate the competition amounts to a cartel behavior. Consequently, Alara’s actions with Freya may involve Hope’s products, which makes Hope to be liable to the partner’s actions. Therefore, Hope’s decision to associate with partners who have questionable behavior only exposes it to further legal challenges.[Expert Participation. “Enterprise Act 2002.” Legislation.gov.uk. Statute Law Database. Accessed December 12, 2021. /ukpga/2002/40/part/6/crossheading/cartel-offence.]
4 Whether Hope is in compliance with applicable UK corporate codes.
The UK Corporate Governance Code is established by the countries Finance Reporting Council. According to this code, companies do not exist in isolation. Consequently, directors and the companies they lead should provide and maintain a successful relationship with various stakeholders whose interests they serve either directly or indirectly. The relationship with the stakeholders should be based on respect, trust, and mutual benefit. The organization’s culture needs to promote integrity and openness, value diversity, and be responsive to view of the shareholders and the wider stakeholders. Unfortunately, Hope is not in compliance with the applicable codes. The firs violation of this code regards how they treat their competitors. Competitors are also part of the stakeholders because a stakeholder is any person or entity which has interest in another. Hope’s three competitors, Psycorp, Brex and True, have interest in the organization’s operations and hence qualify as its stakeholders. However, rather than treating them with respect and allowing ground for a fair competition, Hope plans their demise by deciding to offer their materials at a value that is below the market discount price.[“The UK Corporate Governance Code - Financial Reporting Council,” July 2018. /getattachment/88bd8c45-50ea-4841-95b0-d2f4f48069a2/2018-UK-Corporate-Governance-Code-FINAL.PDF.] [“Case Law: Court Confirms One Partner Can Bind a Partnership in England & Wales, Even If Not Authorised To.” ICAEW. Accessed December 10, 2021. /library/subject-gateways/law/legal-alert/2018-02/case-law-court-confirms-one-partner-can-bind-a-partnership-in-england-and-wales.] [Maher, Maria, and Thomas Anderson. “Corporate Governance: Effects on Firm Performance ... - OECD,” 1999. /sti/ind/2090569.pdf.] [Gibbon, Nick, Clive Garston, and Bridget Salaman. “Corporate Governance and Directors' Duties in the UK (England and Wales): Overview.” Practical Law, December 1, 2019. https://uk.practicallaw.thomsonreuters.com/3-597-4626?transitionType=Default&contextData=%28sc.Default%29&firstPage=true.]
Hope does not only violate its competitor’s interests, but also towards the NGOs through denial by its chief executive officer (CEO) and the finance director who expressed their opinion discrediting the human rights NGO’s reports that the organization’s partner, Alara, had been complicit in the growing trend of using mercenaries for commercial operations. The organization had also engaged in another malpractice of securing the contracts with another manufacturer, Satellite Company, by significantly undervaluing the costs of their materials. Such actions violate the UK’s code of governance and even through Hope had tried to clear its name by engaging in some Corporate Social Responsibility activities, the actions that it had either committed directly or through its partners violated the country’s code of conduct.