A legal minefield

Where there’s a law, there’s aliability. And middle-market companies that get caught out by regulations can be hit with expensive fines or costs. There are myriad rules and regulations beyond the Companies Act that govern corporate behaviour. Some impose a liability not just on the company, but on individual directors and senior managers found to have been negligent. Several of these laws are covered in this guide. But it is also important to be aware of some relatively recent additional legislation.

Corporate manslaughter

The offence of corporate manslaughter (known as corporate homicide in Scotland) came into force in April 2008. Unlike the original proposals, the Corporate Manslaughter Act does not impose new duties or obligations, but it is an added incentive for companies to take their health and safety obligations seriously.

Health and Safety Executive guidelines state that juries are required to consider breaches of health and safety legislation in determining the liability of companies and other corporate bodies for corporate manslaughter/homicide.

“Juries may also consider whether a company or organization has taken account of any appropriate health and safety guidance and the extent to which the evidence shows that there were attitudes, policies, systems or accepted practices within the organisation that were likely to have encouraged any serious management failure or have produced tolerance of it,” says the guidance.

Penalties for corporate manslaughter include unlimited fines, remedial orders and publicity orders. A remedial order will require a company or organisation to take steps to remedy any management failure that led to a death. The court can also impose an order requiring the company or organisation to publicise that it has been convicted of the offence, giving the details, any fine imposed and the terms of any remedial order made.

The original idea behind the legislation was to make it easier to pursue large corporations – and individuals within them – in connection with incidents involving fatalities. It was initiated in response to events such as the 1987 Zeebrugge ferry disaster. But after a slow consultancy process, the provisions were watered down.

As it stands, individuals cannot be prosecuted under the act, although they can be prosecuted for existing health and safety offences and gross negligence manslaughter. No prosecution of a large company has yet occurred.

The only case to date involved the small business of Cotswold Geotechnical Holdings. But it is definitely something for mid-sized companies to watch out for. A proactive approach to health and safety management could mean the difference between a successful or unsuccessful defence.

Bribery and corruption

Oiling the wheels of business is a time-honoured strategy. But where do you draw the line? The Bribery Act, which came into force in July 2011, sets the bar. The act focuses on six core principles designed to ensure businesses compete fairly and ethically – on home turf and overseas. Individuals found guilty of a bribery offence can be fined, spend up to 10 years in prison or both.

There is no limit on fines for corporate organisations. There will also be collateral consequences of a conviction, director disqualification, debarment from public procurement and asset confiscation. The good news is that reasonable hospitality to cement business relationships is fine. The bad news is that facilitation payments are banned. They were already, but perhaps transgressions were not too hotly pursued, as even mega UK companies seem to be taken aback by this provision. This means the law is even more prescriptive than the US Foreign Corrupt Practices Act.

Anti-discrimination legislation

There is a huge amount of legislation designed to prevent companies discriminating against employees or potential recruits. The UK government’s online information service, Directgov, lists the categories to be aware of:

• gender;
• marriage or civil partnership;
• gender reassignment;
• pregnancy and maternity leave;
• sexual orientation;
• disability;
• race;
• colour;
• ethnic background;
• nationality;
• religion or belief; and
• age.

In addition, you can’t dismiss or treat less favourably employees who work part time or are on fixed-term contracts. For mid-sized companies, this can be a difficult area. With a smaller employee base than their large counterparts, they want to ensure that new employees fit in and may try to take the perceived prejudices of existing employees into account. But this could be an expensive mistake.

The risk here is a matter of common sense. Treating all employees equally and wording recruitment advertising so that it does not exclude any people within the listed categories should be standard practice.

Navigating the minefield

Directors’ and officers’ liability insurance is designed to protect a firm’s senior management against allegations of wrongful acts. With so much legislation stacked against these individuals, one would suppose that actions could come from all directions. That may be the case for large multinationals, but the reality for mid-sized companies in the UK is different.

XL’s head of international professional lines in continental Europe, Beatrice Salter, points out that companies of this size tend to be protected against the main source of claims for large multinationals – shareholder actions.

“Generally, these companies do not have a similar large number of powerful shareholders, so actions by such investors are comparatively rare,” she says.

Salter believes that most actions are related to company failure – bankruptcy and insolvency. While being the director of a company that fails is not a crime, wrongful trading – that is, continuing to do business when you believe your company is insolvent or after a liquidator or receiver has been appointed – most certainly is.

While mid-sized companies may not have a large number of powerful activist shareholders, they do have employees – and Salter says these are the second-largest source of claims. “There is potential for employment practice liability-related claims within this sector,” she warns. Knowing the UK anti-discrimination laws is important – but these are a mere “pussy cat” compared with US rules, she says.

North America has very stringent regulations on employment practices, privacy and discrimination so if you have a representative office in the USA, make sure that you observe these rules or you will leave yourself vulnerable to very expensive action, Salter adds.

Even in Europe, cultures differ. For example, in Germany, female employees may not be over-enamoured by the kiss-on-cheek greetings prevalent in other parts of Europe. It’s a matter of understanding where you are doing business and how your employees expect to be treated.