Companies Seek to Recoup Corruption Fine Losses From Former Executives

A decision of the English High Court in January 2010 regarding the potential liability of executives for cartel activities corresponds with the international trend emerging in relation to companies and employees implicated in corruption scandals.

In Safeway Stores and Others v Twigger and Others [2010] EWHC 11 (Comm), the court refused to strike out claims brought by three Safeway companies (now owned by supermarket chain, Morrisons) against former directors and executives (including the former chairman of Safeway, currently chairman of InterContinental Hotels, David Webster) relating to the OFT’s investigation into a cartel involving supermarkets and dairy processors.  The dairy cartel at the centre of the case led to the imposition in 2008 of provisional fines totalling £116 million on Safeway, Asda, Dairy Crest, J Sainsbury, The Cheese Company and Wiseman.

The claims in the current case, which seek to attribute responsibility to directors and executives for the fine (reportedly estimated to be between £10.7 million and £16.4 million) that the OFT will impose on Morrisons in respect of Safeway’s involvement in the cartel and for the legal costs incurred in the OFT investigation, can now proceed to full trial.

While the Morrisons case is unusual in the UK, this is not the first time a company has tried to hold its former directors and executives to account to recoup losses from penalties it has received from the authorities.  In Germany, the engineering company, Siemens AG, agreed at its Annual Shareholders Meeting on 26 January 2010 to implement individual settlements ranging between €500,000 and €5 million with nine former board members who failed to institute efficient control of its operating divisions and prevent corruption.  Corruption was revealed in 2006 and Siemens was fined $1.6 billion by the US and German authorities in 2008.  Siemens will initiate court proceedings against two former executives, Dr Thomas Ganswindt and Heinz-Joachim Neubürger, who have refused to agree to compensate the company.

The Siemens case raised significant insurance implications that will be important for Morrisons if at trial it is successful in deflecting the costs of penalties it has received to individual directors and employees.  Siemens’ insurers refused to provide its €250 million maximum coverage.  Instead, the insurers agreed to cover compensation for losses relating to the corruption scandal up to €100 million.  Siemens agreed to put former board members in a position as if the insurers had paid out the maximum amount as compensation for its claims, unless the former board members wilfully or knowingly violated their duties.  Going forwards, insurers are likely to conduct more thorough risk assessments and due diligence on companies before offering insurance coverage for directors and employees.

The Morrisons case could also create another set of risks for executives in the UK to consider and undermine the efforts of the enforcement authorities to encourage directors and employees to disclose suspected corruption and cooperate with investigations.  Directors and employees might be put off from voluntarily assisting the enforcement authorities if they believe their company might try to recoup from them individually any losses it might receive relating to corruption.  Directors should note, however, that under the provisions of the new Bribery Bill, shareholders will expect them to implement adequate anti-corruption procedures and do all they reasonably can to reduce the chances of corruption occurring at their companies.  Where corruption does occur at companies, failure to implement such procedures could lead to the imposition of heavy fines and related costs by the enforcement authorities.

Sam Eastwood is a litigation partner and Head of the Business Ethics and Anti-Corruption Group and Chris Campbell-Holt is a researcher at Norton Rose LLP, http://www.nortonrose.com/. Chris was a member of the Secretariat of the Woolf Committee that was appointed by BAE Systems’ Board to report on BAE’s ethical policies and processes. Sam can be contacted on +44(0)20 7283 6000 or by email: sam.eastwood@nortonrose.com.

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