Category Archives: Latest News

RECENT DEVELOPMENTS – COMPANY FORMATIONS IN GREECE

Articles, Corporate/Commercial Law, Latest News

The Greek Private Capital Company and recent legislative initiatives to meet current business requirements.  

According to the Greek legislation, the following types are the main capital company formations for conducting business in Greece and are usually preferred over entrepreneurships, in principal due to the limited liability of their shareholders : (i) the Greek limited liability by shares company (“Societe Anonyme” – “SA”), (ii) the limited liability company (“EPE”), (iii) the Private Capital Company (“PCC”- “I.K.E.”) and (iv) the European company (“Societas Europea” -“SE”). While the SA has been for years the most common company formation in Greece, recently the P.C.C. has started to gain significant ground due to fewer formal requirements for incorporation that enable its operation literally few days after its registration at the Business Register.

Introduced in Greece in virtue of the law n. 4072/2012, the P.C.C is incorporated pursuant to a simple private agreement signed by its founders. The articles of association are included in the agreement and can be customized according to the special needs or objects of the desired business. The agreement for the company’s incorporation should then be filed with the competent – determined by the place of the company’s registered seat and main business activity – Business Register and the whole procedure for the company’s establishment is completed at the One-Stop-Shop department of the Business Register, within 10-15 days after the submission of the required documentation. Simultaneously with the company’s registration at the Business Register, the company is also directly registered at the Greek Tax Authorities, obtaining a Tax Identification Number, which is necessary for starting conducting business according to its objects. For any amendments to the articles of association or for any shares sale and purchase agreements thereof during the lifetime of the company, a simple private agreement suffices; amendments to the articles of association should be also filed with the Business Register and they come into force upon their registration.

The articles of association of a P.C.C, any amendments thereof and the shareholders’ resolutions could be drafted in one of the official EU languages, but the Greek version shall prevail concerning relations between the company and its shareholders on one hand and third parties on the other hand. The founders of a P.C.C. resolve upon the amount of the share capital, without any limitation as per its minimum amount (this could be even zero). Since the previously imposed tax of 1% on the company’s initial share capital has been abolished (according to law n. 4254/2014, yet remaining for any share capital increase), actually there are not any restrictions towards determining the initial share capital, apart from that this should be deposited at the company’s treasury or bank account within 30 days of registration.

Regarding management, the P.C.C. is managed by one or more administrator(s), whose powers of representation are determined in the articles of association and by the shareholders’ resolutions. The administrator should be a natural person/individual, Greek or European citizen holding a Tax Payer Identification number in Greece, and in case of a non-European resident, a Visa is normally requested (Visa-D for business executives), according to the provisions of law n. 4251/2014 (Greek Immigration and Social Integration Code). The administrator should be also registered at the Greek social security system and pay the respective social security contributions. The administrator is liable towards the company for any breach of the company’s articles of association, of the law or of the shareholders’ resolutions, as well as for any damage caused as a result of breach of duties. Such liability does not exist in case of actions or omissions based on a lawful resolution taken by the shareholders or on reasonable business decision, conducted in good faith, based on sufficient information and only towards the corporate interest. If more managers acted together, they are jointly and severally liable. The shareholders may discharge the administrator(s) from any and all liability during the annual General Meeting of the shareholders which resolves upon the approval of the financial statements of the previous fiscal year.

As per the reporting requirements, apart from obligation to file with the Business Register any amendment to the articles of association as well as any resolution taken by the shareholders or the administrator that should be filed according to the law, the annual financial statements should be also filed with the Business Register and then approved by the shareholders. Greek Law n. 4403/2016, which incorporated into the Greek legal system the EU Directive 2013/34/EC, has recently introduced several developments concerning the commercial companies’ financial statements by regulating their preparation and publication based on their classification, aiming at the facilitation of cross-border investment and the improvement of Union-wide comparability and public confidence in financial statements and reports through enhanced and consistent specific disclosures. This regulation, which is applicable to all capital –by shares – companies, attempts to balance between the interests of the addressees of financial statements and the interest of undertakings in not being unduly burdened with reporting requirements.

The main advantages of the P.C.C. and the flexibility for its incorporation and operation are obvious when compared with the corresponding legal requirements for the incorporation of a Societe Anonyme (“SA”); governed by mandatory legislation (“ius cogens”), i.e. the codified law n. 2190/1920, the Greek SA is incorporated through a notarial deed, executed before a notary public in Greece, which includes the company’s articles of association. The share capital should be always indicated in money even if the shareholders’ contributions consist in kind. The share capital, which should be at least 24.000,00 Euro, must be paid either in cash or in kind within two (2) months after registration. After the execution of the notarial deed for the incorporation, the company should be registered at the competent Business Register and upon its registration, it acquires legal personality. The rest of corporate documentation (minutes of General Meetings of the shareholders and minutes/resolutions of the Board of Directors) do not have to be notarized, except for the General Meetings of the Shareholders in case of one sole shareholder. The SA is managed by a Board of Directors, consisted of at least three members, which may be either individuals or legal entities (in such case for the exercise of management a representative should be appointed). There is not any restriction as per the nationality or residence of the members of the Board of Directors. It should be noted that for some specific activities, SA is the only available company type according to the law and several parameters, beyond the abovementioned basic framework, should be taken into consideration in order to decide upon between P.C.C. and S.A.

The Business Register in Greece has been recently reformed providing access to the existing data base via its website (www.businessregistry.gr), which can be used both by the registered businesses and the public. Until the full integration of all Greek companies/businesses at the general Business Registry at the end of year 2012, different registration systems and registers existed for each company/business type. Thereupon, the reformation of the Business Register has facilitated significantly the capability of the companies to comply with their reporting obligations under the law through its portal (www.businessportal.gr) but has also enhanced the actual publicity of the companies’ data, as required by the law, and thus has reinforced the transparency and the security of the transactions.  Through the platform www.businessportal.gr any business can carry out the entire procedure for submitting a registration request to the Business Register, filing the necessary documents and payment of the relevant fees. The processing and verification of any request as well as the completion of registration are also conducted electronically through the system.

Recently in virtue of Greek Law n. 4441/2016, “e-One Stop Shop” has been introduced. This new, modern institution aims at the incorporation of the most popular types of companies in Greece, through a procedure completed entirely on an electronic platform practicing techniques like “e-ID Authentication Process” (EU REG 910/2014), links between other e-platforms like “TAXIS” (Greek Tax Online Platform) and taking all necessary actions in order for a company to be incorporated online, thus accelerating and facilitating business and corporate activity in Greece.

The combination of a single general Business Register with the establishment of the one-stop-shops for the incorporation of companies constitutes a major step towards simplification of the basic procedures of the Greek business environment, aiming to meet the needs and requirements of the parties involved and the effective use and exploitation of information collected.

In 2017, Greece while being at the heart of the economic recession affecting all financial markets globally and especially EU, struggles to keep up with the current requirements in business activity, by amending its relevant legislation towards the modernization of its corporate, tax and business system thus making great efforts to further promote productivity, investment and employment. Newly introduced, flexible, corporate forms like P.C.C, new institutions and platforms like the Business Register where most of the ordinary corporate actions are completed online, constitute the modern ‘’tools” provided to any entrepreneur who wishes to make business in the country, forming an effective solution by putting in place a flexible framework which can reduce obstacles to the smooth functioning of the market, hoping to make Greece an attractive country not only to visit and explore but also to invest.

The UK Offshore oil and gas industry – current challenges and recent trends

Articles, Energy and Natural Resources, Latest News

The UK’s offshore oil and gas industry has undergone a torrid few years, starting even before the oil price crash of 2014. The industry has of course been here before and has demonstrated itself to be adaptable and resilient. In 2014, with oil prices which had averaged over $100 for several years, production was 1.4 million barrels of oil equivalent (boe) a day, down from a peak of almost 3 million boe a day in 1999, while operating expenditure was through the roof, production efficiency was poor and exploration was at historically low levels, offering little prospect of staving off a slow decline.

Since then the price has crashed to lows below $30, recovering somewhat to the mid-$50s.  The scale of the crisis hitting the industry is demonstrated by the fact that for the first time since the offshore industry began production in 1968, tax revenues in the tax year ending 2016 were net negative i.e. the government paid out £24 million more in tax relief than it received in taxes, while the industry took in less cash than it spent in 2016, for the fourth year in row. With minimal attention in the national press, the brutal discipline of the marketplace has cut the workforce supporting the offshore industry from 450,000 to 330,000 with wave after wave of redundancies.

As a result of relentless pressure on contractor rates, down-manning and the pruning of discretionary spending, operating costs have fallen from an average of £18 a barrel in 2014 to £11.30 last year while a focus on production efficiency has led to an improvement from 65% to 71% over the same period. This improvement in production efficiency, as well as record levels of capital investment approved while the oil price was still above $100, has resulted in a turnaround in production which has been on the increase for the first time in many years: the 322 oil, gas and condensate fields currently in production produced over 1.7 million boe per day in 2016.  However, new investment is very dependent on the oil price.  Professor Alex Kemp, a leading oil economist based at the University of Aberdeen, argues that at $50 a barrel, new investment activity is stifled and few projects pass investment hurdle rates. Even if Brent crude reaches $60 a barrel, it will be helpful butit is not going to transform the industry as there will still be many fields which remain uneconomic. In the longer term further cost reductions and/or price increases are needed to enhance activity further.

As capital investment is expected to continue to fall from its peak in 2014, the improvement in production levels is likely to be a short-lived respite and total production is expected to begin to fall again within a couple of years, depending on the timing of start-ups.  Nine new fields started up in 2016 including Cygnus, Solan, Laggan and Tormore, but only two new fields were approved, though the forecasts for 2017 are slightly better. With just 23 exploration and appraisal wells being spudded in 2013, down from highs of over 100 in the mid-2000s, discovering new fields to replace those reaching the end of their life is increasingly challenging.  Most new discoveries are small, expected to produce between 10 and 30 million boe, though some of 2016’s start-ups are exceptions – Cygnus is expected to supply 5% of UK gas demand at its peak while Laggan and Tormore have estimated reserves of 170 million barrels. It’s worth remembering, also, that UK domestic production is still meeting around two-thirds of our oil demand and more than half of our gas demand.

While dealing with the day to day pressures of this financial shock, the industry has also been getting to grips with an overhaul of its regulatory regime.  In 2013, recognising the problems facing the industry even then, the government appointed Sir Ian Wood to review existing regulation to see if it was fit for purpose.  He recommended a new tri-partite relationship between the industry, a new better-resourced and independent regulator, and the Treasury representing the interest of the nation in its hydrocarbon resources, to make the most of the remaining reserves of the UK Continental Shelf (UKCS).

Swiftly implementing the recommendations of the Wood Review, which reported in February 2014, the government established a new regulator, the Oil & Gas Authority (“OGA”), initially in April 2015 as a government agency and since May 2016 as a government company.  The OGA is designed to regulate, influence and promote the offshore sector in a manner better suited to the challenges of an ageing basin, with numerous marginal fields dependent on a network of highly-interconnected infrastructure which is reaching the end of its life.  The industry has new legal obligations, incorporated into the Petroleum Act 1998 by the Infrastructure Act 2015, to seek to maximise economic recovery of hydrocarbons in the UK’s territorial waters and Continental Shelf, in particular through collaboration with other industry players, and to comply with a Strategy produced by the regulator to achieve that end, known as “MER UK”.

The OGA has taken over many of the powers and responsibilities formerly held by the Offshore Licensing Unit of DECC, including the power to award licences and grant field development approvals, but the Energy Act 2016 has also given it new powers and greater resources, funded by a significant industry levy.  The new powers include powers to attend industry meetings, to request a broad range of information, and to give non-binding recommendations to resolve disputes.  The OGA also has a greater range of sanctions to impose on those who fail to comply with their obligations under the licence or the MER UK Strategy, including powers to impose fines of up to £1 million and to issue enforcement notices, in addition to the existing powers to revoke, or partially revoke, licences and remove operators.  While the OGA can neither rewrite existing contracts, nor force licensees to invest, it can declare that reliance on existing legal rights is contrary to MER UK, and require licensees who do not wish to invest to divest or relinquish the relevant assets. While such draconian interventions are likely to be rare, and the OGA has to bear in mind the need not to deter investment in the UK, there is a degree of nervousness in the industry as to how the OGA will exercise its very broad discretion.

So far the signals are that the OGA will seek to influence and encourage far more than to compel. This is important. From its relatively recent establishment, the OGA has hit the ground running, having issued a large number of subsidiary strategy documents and delivery plans, as well as establishing a wide-ranging stewardship survey to measure the performance of operators and enable it to benchmark performance, prioritise its regulatory activities, and to develop regional plans for the development of many of the currently uneconomic discoveries.  It has also funded seismic studies to open up new exploration possibilities and is investing in better technology to store and share data.  The organisation is less than 180 people and so will not be able to solve all of the industry’s problems but its proactive approach is showing signs of success – it claims to have successfully intervened in more than 70 cases already to enable development of discoveries, extensions of field life, unblocking of commercial issues, cost savings and improved plant operations.

A significant legal issue for the industry is how to balance its new statutory duty to collaborate to achieve MER UK with its duties to comply with competition law – this is likely to require more frequent substantive analysis of competition law issues to determine whether or not proposals for collaboration, particularly between operators rather than vertical collaboration between operators and the supply chain, are justifiable on competition grounds.

Not all is gloom. The oil and gas industry is resilient and has been at the cliff edge before. A degree of stability in the oil price, closing the valuation gap between buyers and sellers, has enabled something of a resurgence in oil and gas M&A activity.  In the last six months, deals have been signed over almost £5 billion worth of North Sea assets, including Shell’s recent £3billion sale of North Sea assets to Chrysaor, the £993million acquisition of Ithaca Energy by Israeli-based Delek Group and BP’s disposal of an interest in Magnus to Enquest for £68million. Recent transactions have also shown a new appetite for banks to lend and private equity to invest in the sector (the Chrysaor deal was backed by EIG Partners as well with a reserve-based lending package from a consortium of banks while Blackstone and Bluewater Energy have put over £400million into Siccar Point Energy).  One of the factors in enabling deals to proceed is the use of innovative structures, such as those offering upside for the seller (for example, in the Shell/Chrysaor deal, an additional $600 million is payable contingent on the average price of oil between 2018 and 2021 exceeding $60 a barrel and a further $180 million contingent payment is dependent on future discoveries by Chrysoar). The sharing of decommissioning liability is also key to transactions since many assets are at the point where their remaining production will not generate sufficient tax capacity to offset decommissioning costs and allow full relief of those costs: Shell has reportedly accepted continued decommissioning liability of $1bn (about 25% of the total cost) of the assets sold to Chrysaor while in its transaction with Enquest, BP has retained the decommissioning liability. EnQuest will pay BP additional deferred consideration of 7.5% of the actual decommissioning costs on an after tax basis, subject to a cap equal to the amount of cumulative positive cash flows received by EnQuest from the transaction assets.

Given the maturity of the basin and its financial challenges, decommissioning is one of the most significant issues facing the industry over the next decades but also a substantial opportunity for the development of a strong specialist supply chain.  There are about 250 fixed installations, 250 subsea installations, 5000 wells and 3000 pipelines in the UK sector of the North Sea, with much of that infrastructure being well past its original design life. There is evidence that the oil price crash has resulted in some acceleration of decisions to cease production, but this should not be overstated – while COP dates for 72 assets were brought forward in 2016, 33 were deferred and 135 remained the same.  Decommissioning expenditure is currently running at over £1billion annually and it is estimated that over the next ten years around £17.6 billion will be spent on decommissioning. A key plank of the OGA’s activity is to reduce decommissioning costs and therefore the cost to the Exchequer of decommissioning tax relief.  Collaboration between operators and the supply chain over best practice and the use of new technology and between operators on multi-well programmes will form part of this initiative but there are also new legal obligations for licensees to consult the OGA before submitting decommissioning programmes for approval. Lawyers are awaiting revised guidelines from BEIS, which now has responsibility for approval of decommissioning programmes, and from the OGA, to see how this process will work in practice. Reducing decommissioning costs will also reduce the ever increasing burden of decommissioning security, required to protect licensees from joint and several liability for the execution of decommissioning programmes, and vendors from the risk of being brought back to conduct decommissioning under the wide powers of Part IV of the Petroleum Act 1998.

Technology however, will absolutely be the key to the continued success of the sector, demonstrated by the opening in Aberdeen of the Oil and Gas Technology Centre, but along with high-tech tools and innovative methods, the industry is continuing to focus on more efficient ways of working to keep costs down, especially through collaboration under the auspices of Oil & Gas UK and other trade bodies. 2017 sees the industry in a more optimistic mood, but aware of the challenges that lie ahead.

Tips on Preparing for and Navigating through Working Capital Disputes.

Articles, Latest News

When engaged in M&A activity, companies and their counsel must be well prepared to address working capital disputes (post-acquisition disputes that arise due to working capital adjustments). Working capital adjustments, which protect buyers and sellers from working capital volatility after they agree upon a purchase price (and a related working capital target), involve a mix of both legal and accounting concepts and are often filled with contract interpretation and accounting-related nuances.

It is particularly important that counsel understand the intricacies of working capital adjustments in order to best serve clients and address working capital disputes, which most often arise when final working capital is significantly different from target working capital. Although each deal’s working capital adjustment is unique, below we provide some guidance for counsel on addressing working capital matters and navigating disputes if and when they arise.

Guidance for Counsel

We find it is most common for sellers to prepare estimated closing balance sheets and the related working capital, for buyers to prepare final closing balance sheets and the related working capital (in transactions other than carve-outs), and for sellers to prepare objection notices. Therefore, we have made these assumptions in the comments below.

Pre-Closing Target and Estimates: The process begins with the parties agreeing on a target working capital amount. Immediately before or after closing, the seller provides an estimated closing statement to determine the amount the buyer is to pay at closing.

The majority of issues and dollars associated with a working capital dispute are decided based upon the wording in the purchase agreement. Buyers often negotiate language favoring a generally accepted accounting principles (GAAP) based closing balance sheet (and associated working capital). Sellers often negotiate language favoring accounting consistent with past practices for the closing balance sheet (and associated working capital). Therefore, counsel should be focused on the working capital and associated definitions as well as the dispute resolution process when constructing the purchase agreement.

Closing Statement: Within a specified number of days after closing, the buyer prepares the closing statement (including the closing balance sheet) with calculations of net working capital, cash, transaction expenses and/or debt as of the closing date in accordance with the terms of the purchase agreement.

Counsel should consider advising clients to be thorough in identifying potential adjustments in their favor at this stage, since buyers normally have only one bite at the apple. In most post-closing disputes, the original buyer-prepared closing statements will be considered final if a dispute arises. Buyers will not normally have an opportunity to make additional adjustments in their favor after issuing the closing statements. Keep in mind, buyers can subsequently agree to sellers’ objections and effectively adjust closing statements when the adjustments are in sellers’ favor.

Objection Notice: After the buyer issues the closing statement, the seller identifies any objections within a specified number of days and issues its objection notice.

Counsel should advise clients to ensure their listings of objections are complete because, similar to buyers’ closing statements, sellers’ objection notices cannot normally be adjusted in their favor after the objection notice is issued. Especially in circumstances in which sellers struggle to get the information needed to properly analyze working capital accounts, objections to entire account balances at the trial balance level can be an effective way to encourage buyers to provide the information needed to analyze accounts and/or continue settlement discussions with buyers.

Settlement Negotiations and Arbitration: Following the issuance of an objection notice, the parties engage in settlement discussions. If they cannot settle the disputed items, the matter is submitted to arbitration.

We suggest buyers and sellers extend the settlement process if they are making progress. Progress includes removing items from an objection notice thereby narrowing the items to be brought to an arbitration. It is normally in both parties’ interests to settle as many items as possible rather than bring all objections to arbitration.

If arbitration is imminent, ensure the parties select a knowledgeable arbitrator experienced in interpreting purchase agreements, addressing discovery requests and structuring the process to ensure both parties receive due process without expanding the scope of the arbitration beyond that mandated in the purchase agreement.

 What You Should Know About the Common Types of Working Capital Disputes

 As mentioned earlier, working capital disputes are unique. That said, many disputes have common themes. Below we present some common types of working capital disputes and what you should be aware of with each.

  1. GAAP vs. Consistency

 One of the most common types of disputes centers on whether an item should be accounted for consistently or in accordance with GAAP (if indeed an argument can be made that the item is not accounted for in accordance with GAAP). This may involve, for example, corrections to historical errors. Note that if an item was historically accounted for in a certain manner and the related financial statements were audited and received, an unqualified opinion does not necessarily mean the item was accounted for in accordance with GAAP. One reason for a difference might be materiality. Materiality normally does not apply in accounting arbitrations unless specified in the purchase agreement. Further, accounting arbitrators typically do not rely on another firm to determine whether or not an item was accounted for in accordance with GAAP. Instead, they make that decision themselves.

This issue can be especially contentious because in nearly all cases, an arbitrator is unable to adjust the target. Therefore, it is possible an item in dispute may be accounted for one way in the target working capital and another in the final working capital.

We recently consulted the buyer of a company with significant amounts of inventory recorded on its balance sheet. The purchase agreement required net working capital be calculated in accordance with GAAP consistently applied. After closing, the buyer performed a physical inventory count and determined more than 25 percent of the non-rental inventory balance did not physically exist as of the closing date. The buyer asserted the balances had built up over a number of years due to the seller’s failure to properly relieve inventory as items were used / sold and failure to historically perform physical counts. The seller argued the buyer’s count methodology was inappropriate and that a physical count could not be used to calculate net working capital because similar counts had not been performed historically. The arbitrator agreed with the buyer’s adjustment and concluded the results of the physical count needed to be considered under GAAP per the terms of the purchase agreement.

  1. Consideration of Subsequent Events

 Working capital disputes often involve a disagreement over the relevance of post-closing events to the closing date net working capital, such as the settlement of contested accounts receivable, write-downs of inventories and settlement of contingent liabilities. Buyers should beware of making post-close business decisions such as granting credit to a customer for a disputed invoice in exchange for future business and believing the disputed invoice (accounts receivable) will be reserved and result in a reduction to the closing working capital calculation.

We were the neutral arbitrator for a dispute involving a distributor of residential and commercial products. The purchase agreement provided for baseball-style arbitration, in which the arbitrator must fully rule in favor of one or the other party’s position. Prior to the closing date, the seller began the process of transitioning its product lines to a different vendor. That action arguably rendered certain inventories obsolete. The buyer’s net working capital calculation included a reserve to account for this obsolescence. The seller argued the buyer’s obsolescence reserves were overly aggressive in light of the liquidation value of the inventory and that they resulted from the buyer’s post-closing actions to aggressively change the vendor rather than making the change over a longer time period. The arbitrator agreed with the buyer’s position that the seller’s pre-closing actions reduced the value of the inventory and considered the post-closing events as seller-initiated events. Although the seller’s arguments had some merit, because the arbitration was baseball-style, the arbitrator was forced to accept the full value of the buyer’s reserve rather than give the seller credit for some of its liquidation value arguments.

  1. Procedural Objections

 Typical procedural issues involve the arbitrability of disputes, as well as the timeliness of disputes or the ability to introduce new disputes. Lawyers should advise their clients that entering into an arbitration does not mean a party can introduce new disputes. Quite the contrary, disputes are limited by closing statements, objection notices and even the engagement letter with the neutral accounting arbitrator.

We consulted on behalf of the seller of a manufacturing company. The purchase agreement contained separate purchase price adjustment mechanisms for debt and net working capital. The buyer’s closing net working capital calculation included the balance of outstanding checks as a liability, causing the seller to dispute the calculation because the purchase agreement stated outstanding checks were to be included in the calculation of debt, not net working capital. The buyer argued that even if the outstanding checks liability could not be included in net working capital, it should be reclassified to debt, which would have the same net effect on the purchase price. The accounting arbitrator agreed with the buyer’s position; however, the arbitrator also determined he had no authority to consider the buyer-proposed offsetting adjustment to debt because the seller did not dispute the buyer’s calculation of debt within its objection notice.

Conclusion

Understanding why working capital disputes arise and how they are most often resolved can help counsel bring value to clients when constructing the purchase agreement. It can even help avoid these types of disputes altogether. Advising clients on what purchase agreement language best positions them for potential disputes, how to prepare an effective closing statement or objection notice, what they can expect when requesting closing statement accounting information and support, how to handle discovery and settlement discussions, how to negotiate the arbitration process should settlement discussions fail, how to select an arbitrator, and what type of support and presentations are necessary to be best positioned to win an arbitration are all things on which counsel should be ready to advise its clients regarding each deal.

 

Dispute Resolution – Do You Know The Facts?

Articles, Latest News, Litigation Mediation & Arbitration

Disputes are costing businesses in England and Wales an estimated £11.6 billion each year, with the average amount of resolving the dispute reaching nearly £17,000 in time and money. The largest cause of disputes? For 72% of small businesses, legal struggles are put down to late or non-payment.

The data from the Federation of Small Businesses also found that half a million businesses had disputes which were unresolved, with 19% taking their case to court. However, with only 43% of businesses dealing with a disputer informally or semi-formally, it’s clear that more organisations could benefit from more information on the subject.

As a business owner, you manage and oversee all areas of the business; interacting with a variety of employees, business partners, agencies, contractors and clients. Therefore, it’s to be expected that at times conflicts and issues – however unwarranted – will arise. However, managing these disputes effectively will help to maintain business relationships and brand image, and minimise any damages which may occur.

If a dispute gets out of hand, then litigation may be the only option left. Yet, not all disputes need to get to that stage. At present, only one in ten resolve their issue using alternative resolution methods such as mediation or arbitration – but, using such alternatives can avoid costly legal expenses.

Mediation resolves misunderstandings and involves a third-party mediator who aids the parties in reaching a settlement. It’s more than likely that a mediator does not have authority to make a binding decision, and is there to oversee the matter instead with an objective view.

Mediation is private and confidential, meaning that disputes are kept away from the public spotlight, and is often the first step. The cost of a mediator is often shared between those involved.

If still unresolved, the next possibility is arbitration.

Arbitration involves submitting a dispute to an impartial person who will then determine a binding decision. The arbitration process does not follow any of the normal legalities when supplying evidence.

An arbitrator may ask for documentation related to the case, and once reviewed will submit a decision.

When compared with mediation, arbitration is a formalised process of dealing with a dispute and reaches a binding decision. Mediation allows either party to withdraw at any time, whereas with arbitration those involved are committed to resolving the dispute.

If the dispute still remains, then businesses may be involved in litigation.

Types of dispute which your business may find itself involved in include employment, contract, fiduciary and commercial.

Below we have listed the most common types of dispute and how they can be resolved.

Employment Dispute

Disputes with employees can arise from a range of issues such as; unfair treatment, unclear job roles, poor communication and working environment and discrimination claims.

Often, employee disputes can be avoided by ensuring that an employment contract is watertight and covers every eventuality. All employees are entitled to a written contract within the first two months of their employment with an organisation. However, it’s worth remembering that verbal contracts should also be upheld – although they are hard to prove in a court of law. To ensure that your business is covered keep all contractual agreements in writing to prevent a dispute arising. This includes covering details which you may deem obvious to state.

As an employer, you should confront disputes head-on, rather than let issues fester. However, this can be tricky if a dispute arises which is outside of the remit that you usually deal with – for example, if you aren’t familiar with the inner workings of a particular department with which the dispute is contained, it can prove difficult to solve.

To effectively manage employee disputes, you should aim to take action as soon as you have evidence of the issue, understand employee boundaries and enable employees to know when a line has been crossed, respect employee differences and confront tension.

To aid management of disputes and grievances, you should set out a policy which details expectations of employees and how such situations will be handled. This can help to make the company stance clear and set out a path to be followed if required.

Director and Shareholder Disputes

When a company is started, little is often thought to what happens if a dispute arises. After all, it’s likely to be the last thing that a business owner or shareholder has on their mind when they start a business. However, disagreements and disputes can occur when relationships between parties break down.

Disputes can derive from a variety of issues such as, disagreements over strategy, level of dividends, salaries paid to shareholders, service contracts and remuneration, conflicts of interest and disproportionate contributions of money or time from shareholders. This list is by no means complete, and these issues can have a devastating effect on director and shareholder relations, and the business in question.

To avoid shareholder disputes, it’s advised that you draw up an agreement which covers likely causes of disputes, financing of the organisation, dividends, directors fees and salaries, responsibilities for key business areas, company objectives and authority required to take certain actions. The agreement should also aim to predict future eventualities as best as you are able to – this will help minimise any future conflicts which may arise in the future. A shareholder agreement should also detail that a majority or all shareholders are required to give approval before the business is bound to a certain development or policy.

To guarantee board members and directors are effective in their role, an open communication policy can help to ensure issues are discussed openly. Before a board meeting an agenda should detail the topics which will feature in the meeting and give directors the chance to reach a consensus prior to the discussion.

Directors are legally required to declare any conflicts of interest which they may have and not use their position to make private properties at the company’s expense.  This is due to the legal responsibilities that director’s hold, which include loyalty, good faith, and duty of care, diligence and skill to aid the success of the company. If these duties and responsibilities are not upheld then they could be disqualified as a director, fined, face criminal prosecution, or made responsible for the company’s debt.

Directors should have the courage to speak up if they feel that a board member is acting improperly. For example, if a simple mistake was made or process overlooked this should be bought to attention and rectified. However, if you feel that a board member is acting deliberately improperly, then you should ensure that there is evidence of your objection in writing, meeting minutes or take legal advice.

If you are found to be taking a blind eye this is not enough to protect you. As a director, you are responsible for keeping yourself informed about what is going on in the business and participate in management meetings.

Commercial Disputes

A commercial dispute often occurs when payment has defaulted on delivery of goods, issues concerning payment or finalisation of a project, and any issues regarding contract obligations.

If you receive notification that your business is part of a commercial dispute, then you should look at the matter immediately. Most formal notifications will include a date which you need to respond or take action by.

To handle a commercial dispute, you should review the terms of your agreement and how clear it was, before discussing how either (or both) sides failed to live up to that expectation. If either side has suffered a loss this should be detailed, alongside any other evidence which you may hold, such as contracts, correspondence, witness statements etc. Any negotiations or attempts to resolve the issue should also be documented.

If the claim is financially driven, then you should take into account the party’s ability to pay by running a credit check. If the case does go to court, then you will want to consider how the costs of proceeding to trial will weigh up against the cost of remuneration.

Going to court can also set a precedent for other suppliers, clients or business partners who may feel the same way. Therefore, avoiding such a public setting, and settling out of court, can help to prevent the case from being made public. Remember to include a confidentiality clause in your settlement.

Where you are required to have an ongoing business relationship, then an amicable settlement should be reached at the earliest stage to avoid any further damages to the partnership. It’s best practice to have legal advisors present and ensure that they are aware of what you are hoping to achieve. Negotiations will often focus on where the breach occurred and how damages can be resolved.

Effective dispute resolution can help to minimise the costs your business may incur, and avoid damaging professional relationships and your brand image. If you are unable to resolve a dispute and the case proceeds to litigation, then you should bear in mind that a willingness to negotiate can often put you in better light.

The Future of Scandal: Technology and Corporate Wrongdoing

Articles, Latest News, Technology Media & Telecoms

The Future of Scandal: Technology and Corporate Wrongdoing

For as long as there has been business and investors, there have been those who have sought to make money illicitly by breaking the rules and misleading others.

Nowadays, corporate scandals come in many shapes and forms, but among the most common are those related to fraud and price-fixing cartels. One thing that links all modern scandals is the importance of electronic devices, both as a means of propagating a scandal and as a source of electronic evidence that can be used to detect a scandal or deal with the legal consequences.

This article examines the life cycle of a scandal; how they are created and how they emerge, as well as offering practical advice on prevention and crisis management.

How do scandals start and how can they be prevented?

A joint report by the International Corporate Governance Network (ICGN), the Governance Institute (ICSA) and the Institute of Business Ethics (IBE) suggests that certain corporate cultures can increase the chance of wrongdoing.

The report highlights some ‘red flags’ that can be an indicator of malfeasance and according to the report are not industry-specific; with examples being drawn from banking, retail, manufacturing and automotive sectors. According to the report there are three main factors that lead to a degeneration in ethical behaviour:

  • “Corporate stress” which encourages employees to take short-cuts
  • Tolerance of minor rule breaches and an atmosphere where rules are pushed to their limits
  • Focus on short-term targets

Much like the ‘Broken Windows’ theory of crime, the report’s authors believe bad behaviour is incremental. What could start as relatively minor breach could develop into something more serious.

Other factors given by the report include:

  • controversial pay deals, such as high executive pay or targets which encourage risk-taking to hit short-term targets
  • complex legal structures which make it hard for boards and management to work out what is going on inside the company
  • poorly executed takeovers which lead to a mix of cultures within a company, with “pockets” of bad behaviour thriving beyond the control of the board
  • lax financial discipline, for example both Northern Rock and RBS had excessive leverage which led to their problems as the crisis hit.

The report also warned of the dangers of “autocratic” chief executives who staff are afraid of angering for fear of reprisals, meaning that vital information about potential problems might never reach senior management.

The report said that the best way of improving companies’ corporate cultures to reduce risk was to get boards more involved and have a better understanding of the way staff are motivated and treated.

Changing company culture can be a long-term process. A more immediate preventative measure is to look to corporate communications. Scandals, particularly cartels, live and die by conversation. Without communication between parties, there can be no cartel, in the traditional sense of the word.

Including checks on communication can be a powerful part of any robust compliance strategy.  Since evidence showing misconduct may be found in written communications and among irregularities found in financial data, savvy compliance officers and in-house counsel regularly conduct mock dawn raids and perform compliance audits. Both these methods are good starting points for companies wanting to take a more proactive approach to compliance.

What is a mock dawn raid?                                           

Mock dawn raids are usually conducted by third parties, such as lawyers and ediscovery providers, to deliver the experience of an unannounced inspection from an authority. Computer forensics professionals will seize electronic devices, such as laptops, computers and phones, as well as take copies of data from servers and the cloud. They may also take paper documents. Data stored on these devices will then be forensically copied for analysis and a full audit trail maintained. Other consultants may train a variety of personnel (including receptionists, in-house legal and IT) on the proper procedures to follow when confronted with a surprise inspection.

After a mock dawn raid, it is possible to learn from the experience and identify areas that the company ought to address.

Mock dawn raids are a powerful tool for compliance officers because they can help to assess a company’s level of readiness for investigations and they also send a strong message to employees that compliance is taken seriously

Compliance audits

Authorities such as the European Commission and Competitions and Markets Authority recommend that companies conduct internal reviews to assess compliance. Regularly reviewing samples of electronic communications and information is an important part of an internal compliance audit. The benefit of such audits is to gain insight and to be in the driving seat if anything seems out of place.

Information gathered from interviews may lead the audit toward particular sources of data for review. Email, databases and even social media can be targeted to provide an organisation with a more comprehensive view of the levels of risk to which it is exposed.

As the know-how to interrogate databases develops, companies are increasingly using specialist data analytics tools to proactively examine financial, operational and transactional data. Even light analysis of databases can uncover patterns, anomalies and red flags. For example, data can be arranged graphically to show purchases by country or account number. Outliers such as purchases being made in unexpected countries or to duplicate accounts can then be investigated.

Regardless of the method chosen, organisations that carry out internal reviews to detect wrongdoing, such as corrupt practices and anti-competitive behaviour, are better positioned to defend themselves should a scandal be uncovered.

What industries are at risk from corporate scandals in 2017?

As stated earlier, scandals can stem from misconduct of individuals or small groups of individuals and so in theory any industry runs the risk of a scandal. However, corporate culture aside, some industries are more at risk from corporate scandals emerging simply because they are more heavily regulated than others and the regulator’s focus is increasingly broad.

The Competition and Marketing Authority (CMA) stated that their priorities for 2017 were in the following areas:

  • Consumers’ access to markets and barriers to decision-making
  • Online and digital markets
  • Technology and emerging sectors
  • Regulated sectors and infrastructure markets
  • Markets for public services
  • Sectors that are important to economic growth

Ostensibly, this covers quite a large swathe of industries operating in the UK and beyond. Any corporation whose business activities fall under the above categories should consider making compliance a priority for 2017.

On a more international scale, the European Commission has also laid out its priorities for 2017, and whilst they are broadly analogous with the CMA’s, there are some interesting points to note. Firstly, European antitrust authorities will gain increased powers to prosecute breaches of competition rules under draft legislation to be proposed by next June, following talks between the Commission, corporations and competitions experts.

Currently, the Commission is proposing the following actions to increase the power of national regulators.

  • giving national authorities tools to detect and sanction violations of EU competition rules;
  • encouraging companies to come forward to national authorities with evidence of illegal cartels through ‘leniency’ programmes;
  • ensuring the independence of the national authorities
  • ensuring authorities have sufficient resources and staff

Big data and how companies use big data is also a priority for the Commission.  Companies in possession of big data can potentially trigger both Articles 101 (antitrust cases) and 102 TFEU (abuse of dominance cases). However, the Commission is looking to strengthen its ability to enforce the rules in cases involving big data.

During a speech in late 2016, Margarethe Vestager, the European Commissioner for Competition stated that the Commission does not object to the collection of large data sets as long as they don’t hurt consumers in the process, by undermining competition. In order to combat this, the Commission is aiming to release a proposal on legislation for big data in early 2017. Based on Vestager’s comments in the speech, this is likely to be in the form of a directive rather than a regulation.

She also commented that further scrutiny may be required for mergers with valuable data, even if the turnover of these companies is not large enough to come under the usual merger control criteria. Again, this widens the pool of companies who are at risk of corporate scandals emerging from regulation, bringing in smaller players who might not be prepared for competition scrutiny. Companies handling large data sets should ensure they are up to speed with the latest directives and understand how their data can breach EU law and take steps to ensure compliance.

What should companies do?

Going looking for trouble leaves some companies feeling squeamish, but the authorities often impose lower fines when a company confesses and provides good quality evidence to help the authorities with their investigations.

If the wrongdoing is exposed by a whistle-blower or as a result of a regulatory investigation, this can add considerable pressure to any internal investigation the company chooses to instigate. Companies who are implicated in this way are more vulnerable to penalties. Also, if the matter has had time to grow in scale, they face potentially larger legal penalties and fees than if they had put themselves into the whistle-blower position. And when outside investigators looking at one issue discover further skeletons in the closet, this can lead to further scrutiny, public criticism and costs.

If a company is implicated in a scandal, what is the best way to manage the situation?

  1. Act quickly and launch an internal investigation as soon as possible. Once news of a scandal is in the public domain, an investigation by a regulatory body is almost inevitable. An internal investigation will help get to the heart of the issue and enable a company’s legal team to form a strategy based on evidence found in the investigation. Time is of the essence, so technologies such as predictive coding can help find hot documents as early as possible. Predictive coding learns from the decisions made by human document reviewers to prioritise other similar documents for review and to predict how unseen documents might be categorised.
  1. Think outside the box when it comes to data. Email and calendar appointments are some of the most important sources of electronic evidence, but valuable evidence can be found from other sources, as well. Twitter, Instagram and even GPS data from satellite navigation systems can provide revealing information that may be vital to a case.
  1. Use an experienced digital forensics provider. It is of vital importance that data is collected in a forensically-sound, defensible manner. Digital forensics experts employ the correct techniques to carefully and accurately contain, preserve and extract critical evidence. This includes the implementation of a strict “chain of custody” procedure and audit trail throughout the analysis of the data. Leaving the task of handling such important evidence to in-house IT teams, potentially without advanced forensics knowledge, can compromise the defensibility of a case.

Although corporate scandals and wrongdoing can seem somewhat inevitable, a rigorous compliance regime and a positive company culture can reduce the risk of scandals causing reputational and financial damage should wrongdoing be found.

 

Flag it Up – How can solicitors work to identify and tackle the risk of money laundering in the UK?

Articles, Criminal, Fraud & White Collar Crime, Latest News

Organised crime costs the UK more than £24 billion each year – that’s £1 a day per citizen. The fact that criminals are using the services of legal professionals in order to try to hide the origins of their illicit funds is nothing new, but there are important questions that solicitors must ask themselves to avoid becoming drawn in without their knowledge.

Criminals are likely to have built what appears to be an authentic business to avoid unwanted scrutiny and this makes you and your profession vulnerable to becoming unwittingly involved in serious and organised crime. For solicitors, the consequences of being involved in money laundering, are severe. These can range from loss of your practicing certificate, damage to your own and your businesses’ reputation, significant fines and even a prison sentence. The creation of the Participation Offence in the Serious Crime Act 2015 makes it a crime – punishable by up to five years in prison – to participate in activities which an individual “reasonably suspects” contribute to organised crime.

With this in mind, it is imperative that solicitors continue to take responsibility to comply with money laundering regulations, particularly the obligation to complete adequate due diligence on new and existing clients. By doing their due diligence and submitting quality Suspicious Activity Reports (SARs) where appropriate, solicitors can play a significant part in tackling the threat through identifying potential cases of money laundering before they enter the economic system.

Spotting the red flags

The most effective way to ensure that solicitors remain compliant and are able to spot the red flags of money laundering is to implement an effective and well-documented risk-based approach. This will not only protect a legal firm from criminals, but in the unfortunate event that there is an issue it will reassure law enforcement and the regulator that the appropriate precautions have been taken.

In the first instance, they should step back and consider whether there are any immediately apparent warning signs. By considering whether there are inconsistencies in the information clients provide, if the client runs a cash-rich business, if there are unusual amounts or sources of funds, or any discrepancies in previous transactions, solicitors can begin to assess whether there are any suspicious activities that could ultimately lead to them becoming implicated in a crime.

In order to identify these red flags, firms should always continue to undertake comprehensive due diligence checks on new and existing clients in order to sweep for any risks. But due diligence extends beyond obtaining a passport and utility bill, and adopting a merely tick-box approach. It should be risk based, include lateral and critical thinking, and may include scrutiny of all beneficial owners with a controlling interest of over 25%, in addition to the client. Conducting internet searches on a prospective client could help to pick up any obvious warning signs with regards to their professional credibility.

Asking the right questions

Ultimately, while those working in the legal profession certainly have an awareness of money laundering, and how drastic its impact can be, there can sometimes be a lack of recognition of how it affects them personally. In all cases, solicitors should be looking at the whole picture, in order to build as comprehensive a client profile as possible.

For instance, a solicitor approached by a potential client that differs from their normal client profile should always ask “why me?” irrespective of the size of their firm. If a client is atypical of the regular client demographic, whether due to factors such as scale, sector, jurisdiction or any other reason, they should look to establish why their firm has been approached.

If something doesn’t stack up, asking a direct question is usually the most efficient way to get to the bottom of the irregularity. If the client is subsequently evasive, or if the answer is vague and lacks detail, that should immediately trigger suspicion.

Applying any local knowledge is critical when considering whether a business is legitimate or not. It might be helpful to make a visit to their premises during normal working hours. Often a lot can be taken from an organisation’s place of business that helps to reveal how authentic it is, and it allows legal professionals to make judgments on the accuracy of the information they are providing. For instance, if a firm is asked to work on behalf of a retail outlet that is empty at peak time, this could be an indicator that all is not as it seems.

Taking action

If any due diligence checks call the credibility of the client into question, solicitors should ask themselves if this amounts to suspicious activity, and consider going through the proper reporting processes. As a starting point, they should educate themselves about how low the level of suspicion has to be in order to get to this point. It is critical to remember that this assessment is not about being beyond a reasonable doubt, or building a case against a client. In R vs. Da Silva (2006), it is simply defined as “a possibility, which is more than fanciful, that the relevant facts exist”.

If they decide that a particular client does meet this criterion, solicitors have a legal obligation to submit a suspicious activity report (SAR) in line with internal procedures. Submitting a SAR can be seen as a much more drastic move than it is, and can be a concern for legal professionals. Solicitors are trained to maintain the highest levels of client confidentiality, so there is often apprehension that if the information they have is vague or imprecise; it may appear as if they are taking an extreme step without possessing the requisite evidence.

However, it should always be remembered that submitting a SAR is confidential. And it is also worth noting that if a SAR is not submitted when there are grounds to, solicitors risk breaking the law under the Proceeds of Crime Act 2002, and potentially allow criminals to escape with the proceeds of their wrongdoing.

One additional consideration to take into account is the quality of SARs. If a solicitor is submitting a SAR, they should ensure that it is filled in honestly and correctly, without adopting a defensive tone. Bad quality SARs often lack the information needed to build a wider intelligence picture so it is important to get them right first time, every time. The National Crime Agency (NCA) has created guidance on submitting better quality SARs, and solicitors should review this regularly.

Making a difference

Money laundering is undoubtedly a pervasive influence on the UK economy, and as professionals that are often operating in the financial space, solicitors are at risk of being unwittingly caught up in criminal schemes.

However, by taking a risk-based approach to due diligence, being direct with clients about perceived discrepancies, and submitting SARs if they have suspicion, they can avoid becoming involved. Ultimately, solicitors are in a unique position when it comes to disrupting the risks of money laundering, and can play a huge role in ridding the UK of this threat.

Preparations for MiFID II: IT teams ahead of their Risk & Compliance colleagues within Financial Institutions

Articles, Latest News, Technology Media & Telecoms

A recent study from Aeriandi of IT decision makers and Risk & Compliance managers within UK financial services businesses, has revealed a concerning lack of preparation and understanding of the requirements of MiFID II legislation coming into force in January 2018.

The study, carried out in January 2017 shows that managers and decision makers within these institutions have little understanding of the severity of potential penalties and are struggling to apply the legislation to their businesses.  However, comparing the responses of IT professionals and those responsible for managing Risk & Compliance within a business shows IT teams have a better overall understanding of the consequences of non-compliance.  62 per cent of Risk & Compliance managers admitted to not knowing a company can be fined up to five million euros or 10 per cent of annual turnover, compared to only 42 per cent of IT managers and decision makers.

It would appear however, that a countdown to compliance has begun.  Organisations are now starting to invest time and money in preparations.  30 per cent of respondents say that budget has been allocated this year to help with preparations, and more than a third (36%) report that policy and procedure have now been developed.

The revised Markets in Financial Instruments Directive, commonly known as MiFID II, is due to come into force in January next year.  First introduced by the EU in response to the 2008 financial crisis, MiFID II is a set of sweeping reforms for the financial industry designed to prevent history from repeating itself.  The new legislation governs everything from where and how derivatives can be traded, to measures for reducing volatility and policing potential conflicts of interest among financial advisers.  Achieving compliance is no mean feat and certainly will not happen overnight.  Indeed, MiFID II is widely considered to be one of the most sprawling pieces of financial legislation ever devised, and as a result it presents numerous challenges for those looking to achieve compliance ahead of the deadline in early 2018.

One of the more contentious aspects of the new legislation is the change in requirements relating to the recording and archiving of telephone calls.  The Financial Conduct Authority (FCA) currently mandates that only the telephone conversations of individuals directly involved in trading need to be recorded.  MifID II broadens the scope considerably to include anyone involved in the advice chain that may result in a trade.  Naturally, this has a significant impact regarding the scope of whose conversations must be recorded once the new legislation takes effect.  Conversations between the likes of wealth managers or independent financial advisors and their clients will now all fall under this scope.  Furthermore, the legislation applies to both fixed line and mobile conversations, and all calls must be stored and accessible for a minimum of five years after taking place (seven in some instances).

This particular portion of MiFID II is causing a certain degree of consternation.  Before MiFID II was announced, few financial institutions had the infrastructure in place to meet the new requirements.  Many are still working on how best to achieve compliance and are looking to third party solutions to increase their call recording and archiving capabilities. Leveraging third party expertise enables organizations to achieve ‘out of the box’ compliance.

Choosing the right third party technology can prove difficult without necessarily knowing what to look for in a solution.  There are, however, a number of key requirements that should be considered when assessing call recording and archiving solutions, which will ensure the technology meets the requirements set out by MiFID II:

  • Coverage of all required telephone platforms

MiFID II mandates that calls must be recorded across both mobile and landline platforms, so ensuring the solution has the capability to do this is crucial.

  • Easy implementation and scalability

Will implementing the new solution result in business down time and therefore, loss of revenue?  Many cloud-based recording and archiving solutions no longer require any on-site installation.  This can eliminate potential disruption during integration. Scalability is also a major factor.  Can the solution scale both up to cover busy periods, whilst scaling down to save the organization money during quieter periods?  If not, organizations will likely end up overpaying for excess recording capacity, or having to buy additional capacity at premium pricing on short notice.

  • Access to call recording archives from anywhere

Cloud-based recording and archive solutions offer the ability to access call recordings and archives from anywhere, at any time via a secure online portal. This is particularly beneficial to organizations spread over multiple sites or countries. Vendors specializing in on-site recording and storage often cannot deliver this level of flexibility in terms of recording accessibility, so be careful to ensure any solution being considered can match the needs of the organization.

  • Secure storage and encryption to protect recordings

MiFID II mandates that call recordings relating to a financial transaction must be stored for five years after the transaction was made.  This is a significant rise from the six-month period currently mandated by current FCA legislation.  Not only does this impact heavily on storage resources, it also presents security challenges, particularly if the recordings contain sensitive financial information.  After all, five years is a long time to keep data safe.  Only recording and archive solutions that offer the latest levels of data encryption and provide guarantees about who is able to access recordings should be considered.  If a technology includes outdated encryption or the company does not offer ongoing guarantees regarding upgrades to security as/when they become available, it should be avoided at all costs.

  • Compliance with additional data standards

The primary driver for implementing a suitable call recording and archiving system is to achieve MiFID II compliance.  Many solutions, however, also offer additional layers of compliance such as the Payment Card Industry Data Security Standard (PCI DSS) and BS10008; governing whether recorded content is legally admissible in court if required.  These data standards can bring additional return on any investment made and should be considered when choosing a suitable solution.

With less than a year to go until penalties for non-compliance will kick in, you would hope that those responsible for delivering compliance would be completely prepared.  However, our research demonstrates that for many, planning is still at a very early stage.  Organizations must understand the key areas of impact on their business and start to plan for change.   Detailed risk analysis needs to take place along with mapping out the required processes and procedures for MiFID II compliance.  Only then can a business determine whether their existing solutions will be adequate, or if it needs to roll out a new set of tools and supporting processes.

The impact of the General Data Protection Regulation (GDPR)

Articles, Consumer Protection, Latest News

The GDPR will come into effect on 25th May 2018 and has been described as the biggest shake-up of data protection law for 20 years. James Wickes, CEO and co-founder of cloud-based visual surveillance company Cloudview, looks at the changes businesses need to make and the consequences of getting it wrong.

Data protection is a fundamental concern to all organisations which hold personal information. Next year new, tighter legislation comes into force which has been described by legal firm Wright Hassall as the biggest shake-up of data protection law for 20 years.

The General Data Protection Regulation (GDPR) becomes law on 25th May 2018. It will be directly applicable in the UK without further implementation, and serious breaches could see organisations facing fines from the Information Commissioner’s Office (ICO) of up to €20 million or 4 per cent of turnover, whichever is higher. These increased fines will apply immediately, so organisations need to ensure that their GDPR compliant policies and processes are in place promptly. Large organisations also need to be aware that the size of the fine is calculated on the turnover of the whole organisation, not the operating division or subsidiary in which the breach occurred.

Personal implications for senior executives

Fines, however, are not the only potential penalty. The new legislation could have a personal impact on any senior executive with legal responsibility for their organisation’s behaviour.

The Culture, Media and Sport Committee’s investigation into cyber security, triggered by the cyber-attack on TalkTalk, was published in June 2016 and makes two recommendations. First, it suggests that a portion of CEO compensation should be linked to effective cyber-security. The report says: “To ensure this issue [cyber-security] receives sufficient CEO attention before a crisis strikes, a portion of CEO compensation should be linked to effective cyber-security, in a way to be decided by the Board”.

It goes on to say: “We concur with the ICO [Information Commissioner’s Office] that whilst the implementation of the GDPR will help focus attention on data protection, it would be useful to have a full range of sanctions, including custodial sentences.” So executives could face jail as well as fines for breaching the new regulations.

The need for consent

To understand the implications of the GDPR, we commissioned a briefing note from independent solicitors Wright Hassall. They identified two key issues:

  1. Organisations whose core activity is processing special categories of data or the systematic monitoring of individuals on a large scale will have to appoint a Data Protection Officer to monitor compliance with the rules.
  2. Organisations will have to demonstrate that an individual’s consent to the processing of their personal data is ‘freely given, specific, informed and unambiguous’. In most cases implied consent will not be sufficient. In my area, CCTV, it is as yet unclear to what extent organisations will need to seek to obtain explicit consent from individuals to record them via a CCTV system as we are already are required to make the presence of cameras very clear.

To prepare for the GDPR, the first step organisations should take is to carry out a Privacy Impact Assessment (PIA) to identify the most effective way to comply with data protection obligations and meet individuals’ expectations of privacy. They need to consider whether there is a legitimate reason to collect specific information, whether it is stored securely, with safeguards to prohibit interception and unauthorised access, and whether data is deleted when it no longer serves a purpose. This latter issue has recently been raised as a concern by the surveillance camera commissioner, who points out that the Metropolitan Police are failing to delete number-plate records after two years, but have retained the data since the London Olympics in 2012.

Organisations also need to have a documented information retention policy which is understood by those handling data collection, and ensure that staff know how to respond to requests from individuals for access to their personal data. For more information, the ICO has produced a useful guide.

Personal data is not just text

What many organisations often fail to understand is that personal data covers every type of information, from written text to video and audio. This is increasingly important with the growth of the Internet of Things (IoT). All the data we upload onto our phones, from how many steps we take to changes in our heating systems, could be included if it allows individuals to be identified. IT departments are often responsible for all these devices and all this data.

Yet one area falls outside the remit of ‘traditional’ IT: CCTV, which many organisations use to monitor communal areas, manufacturing sites and warehouses. If video footage enables individuals (clients, employees, or passing members of the public) to be identified, the GDPR is applicable. CCTV surveillance systems should not normally be used to record conversations between members of the public or staff as part of a working environment – this is highly intrusive and unlikely to be justified.

CCTV footage differs from other types of data in that systems are binary in their ability to be secure or accessible. Because IT systems have moved into data centres, or better still, to the cloud, it is relatively straightforward for IT departments to ensure that data protection regulations are met, for example by ensuring that only authorised individuals can access certain information. However, access to current DVR-based CCTV systems has to be physically constrained by using locks or passcodes, as anyone with access to the equipment can access the data. Remote access has to be managed through a VPN (Virtual Private Network) which is expensive to set up, not always secure and inflexible.  Processes also need to be enforced rigorously to ensure data protection standards are met. CCTV is typically seen as peripheral to a business – but the legislation still applies, as do the fines.

One solution to this CCTV GDPR compliance problem is to hold CCTV information securely in the cloud, with access limited to authorised personnel. There is no longer a physical DVR; data is sent directly and securely from the cameras to the cloud. Such systems should be configured to record CCTV data only when needed and should automatically delete it when it is no longer required. Cloud-based CCTV systems should also have all the required security and encryption necessary to protect data and verifiable audit logs to prove that data was handled, transmitted, viewed and deleted appropriately. Not all providers offer this level of end to end service, so organisations still have to take responsibility for ensuring that their cloud provider is compliant with the appropriate regulations. They should also bear in mind that many cloud providers have clauses which allow them to share data with third parties – clearly inappropriate for personal data.

Ignorance is no excuse for breaking the law, and this includes data protection legislation. The new legislation comes into force in just over a year’s time, so organisations need to begin preparing now.

More information is available in the briefing note ‘Is your use of CCTV compliant with data protection legislation’ from Wright Hassall, available on the Cloudview website http://www.cloudview.co/dls/white/Cloudview-CCTV-Article-vanilla-23-05-16.pdf

CFAS, Costs And Professional Conduct Issues – A Whistle Stop Tour Of The Latest Principles To Emerge

Articles, Latest News

A string of recent case law in the UK has provided those of us working in the legal profession with a number of important reminders and clarification on certain points of law in relation to our client retainer and costs.

A number of significant principles have surfaced or in some cases re-emerged over the last few months relating to claim and litigation fee structures, including conditional fee arrangements (CFAs), qualified one-way costs shifting (QOCS) and the proportionality of costs. Drawing on some recent examples of case law, a number of the key principles have been highlighted in the sections below:

Conditional Fee Agreements (CFAs)

Engeham v London & Quadrant Housing Trust and the Academy of Plumbing (in liquidation) [2016] 3 Costs LO 357 reminds us of the importance to identify all defendants in a CFA if you wish to recover costs from them. In this case, a Tomlin Order awarded £10,000 plus costs from the second defendant but the claimant was unable to claim costs because the CFA was limited in its operation only to the claim against the first defendant.

Kupeli v Cyprus Turkish Airlines [2016] 3 Costs LO 365 outlines the importance and relevance of where a client signed the CFA. Here, the defendants claimed that the CFA was unenforceable because it had been signed at a community centre which was an ‘excursion’ under the Cancellation of Contracts made in a Consumer’s Home or Place of Work Regulations 2008 (then in force) and notice of cancellation in writing had not been provided and therefore, they had no liability in costs to the claimants. The judge on appeal disagreed holding that it was not an excursion and therefore, the claimants were entitled to recover their costs.

Radford v Frade [2016] 4 Costs LO 653 highlights the importance of checking the scope of the CFA and ensuring that it covers the work which are you carrying out and hope to recover costs for. The defendant won this case with costs and at Detailed Assessment, submitted a bill of £805,000. The CFA was limited to the pursuit of procedural points and that work came to an end on the making of the Consent Order. The CFA did not extend to work on the defence of the claim, counterclaim or application for summary judgement. Therefore, Radford was not liable to pay for any costs incurred after the consent order.

Surrey v Barnet and Chase Farm Hospitals NHS Trust [2016] 4 Costs LO 571 has had many questioning what advice was given to a client who was a late transfer (shortly before 1 April 2013, being the date from which it was no longer possible for claimants proceeding under a CFA to recover success fees and after the event premiums) from legal aid to a CFA? As it stands, the claimant should be entitled to recover the additional liabilities if the switch to CFA from legal aid was a reasonable choice at the time. The fact that the solicitors did not advise him that the switch would deprive him of the 10% uplift on general damages was irrelevant. However, watch this space; permission to appeal to the Court of Appeal is being sought.

Jones v Spire Healthcare Ltd [2016] 3 Costs LO 487 tells us that a CFA can be assigned from an old firm to a new firm. In this case, the claimant signed a CFA with a firm that subsequently went into administration. A second firm agreed to acquire the claimant’s case and the claimant agreed to move to the new firm. Following settlement via a Part 36 offer the respondent contended that the claimant was not entitled to costs as there was no longer a valid retainer. The case of Jenkins v Young Bros Transport Ltd [2006] 3 Costs LR 495 was followed. It was therefore held that if both firms agree to the assignment and so does the claimant (following being advised of their best interests) and a Deed of Assignment is entered into then it would be ‘unduly restrictive to deny the parties the effects of what they intended’. However, we recommend keeping an eye on this as a case is soon to be appealed to the Court of Appeal in which it was ruled by the District Judge that the assignment was invalid.

Proportionality

In assessing proportionality of costs the court used to avoid ‘double jeopardy’ but since 1 April 2013 Civil Procedure Rule (CPR) 44.3(5) applies and the court will stand back at the end of the Detailed Assessment and reduce the reasonable necessary costs further if required to make them proportionate. The following cases demonstrate.

BNM v MGN [2016] 3 Costs LO 441
Damages recovered were £20,000. Costs assessed at Detailed Assessment to be £167,000. Cut to £83,000 after considering the proportionality issues.

May v Wavell Group plc [2016] 3 Costs LO 455
Damages recovered were £25,000. Costs assessed at Detailed Assessment to be £99,000. The award was reduced to £35,000 plus VAT.

Qualified One Way Costs Shifting (QOCS)

Parker v Butler [2016] 3 Costs LR 435 demonstrates that any appeal which concerns the outcome of a claim or the procedure by which it is to be determined, is part of the proceedings as defined in CPR 44.13 and therefore, QOCS will apply.

Costs Budgeting

Sarpd Oil International Ltd v Addax Energy SA [2016] 2 Costs LO 227 demonstrated that the court can take into account incurred costs even if set out in a costs budget, when considering the reasonableness and proportionality of estimated costs. It was only in relation to the formally approved estimated costs contained within the costs budget that the court would not depart from.

Group Seven Ltd v Nasir [2016] 2 Costs LO 303 highlights the importance of being able to justify your hourly rates, number of people involved in the case and location of the Solicitors. The judge in this case looked at all costs and held that retention of two leading and one junior counsel was not reasonable or proportionate, the case did not involve any sophisticated issues and therefore instructing City of London solicitors was unnecessary (apart from the bank whose decision as a foreign party to instruct London solicitors was understandable), the rates for a City firm would be allowed by reference to the 2010 Guideline rates and the budgeted fees for counsel were reasonable. However, note that the 82nd update at PD3 E7.10 published shortly after states that it is not the role of the court to fix or approve hourly rates.

Churchill v Boot [2016] 4 Costs LO 559 highlights that a costs budget can be amended once it has been set only if there have been significate developments in the case within the meaning of CPR PD 3E para 7.6. In this case the claimant was refused permission to amend his cost budget. It was held that the doubling of the amount claimed, the adjournment of the trial and the further disclosure which has led to updated expert reports were not significant developments because the parties could have envisaged these developments at the time of the original costs budget.

Various Claimants v MGN [2016] EWHC 1894 (Ch) reminds us of what type of costs can be fixed under a costs budget. The court ruled that the determination of figures in the costs budgeting exercise should not include the additional liabilities of the CFA uplift and after the event insurance premiums. It was pointed out that CPR PD 3E para 6(a) provided that unless the court ordered otherwise, a budget had to be in the form of Precedent H. On Precedent H, below the summaries of costs under various headings is the following wording, “This estimate excludes VAT (if applicable), success fees and ATE insurance premiums…..”. The court held that this is a clear direction as to what should not be included.

Part 36

Bolt Burdon v Tariq [2016] 4 Costs LO 617 serves as a reminder of the provisions of Part 36.17 (4). The bank offered a sum as compensation. The firm negotiated a higher sum and claimed fees on the contractual interest that had been awarded, as well as on the principal sum. The defendant objected. The firm made two offers under CPR Part 36. The judgement against the defendants was at least as advantageous as the proposals in the Part 36 offers. The main questions was whether any additional amount was payable within the meaning of r36.17(4)(d) in relation to the firm’s award for contractual interest. The court held that it was because the fees on the contractual interest constituted an additional amount.

The Solicitors Act 1974

Rosenblatt v Man Oil Group SA [2016] 4 Costs LO 539 provides us with a reminder on varying the terms of a retainer with a client. The firm in this case had agreed a fixed fee with a client but on the proviso that it could revisit the fixed fee if any of the assumptions on which they were based proved to be incorrect. The court held that the firm was obliged to notify the client of its intention to change its fee and seek the client’s agreement. As a result, the firm was only entitled to the lower fixed fee of £92,500 plus disbursements instead of their entire bill of £537,949.

Conclusion

The obligations to the client and the Court are always evolving with case law this summary of recent important decisions and reminders takes us back the basics:

  1. Is the CFA valid?
  2. Is the assignment of the CFA valid?
  3. Can you demonstrate the costs are proportionate?

The recent twitter libel case involving the controversial newspaper columnist Katie Hopkins with an award of damages of £24,000 and a interim costs award of £100,000 shows that if the Court is satisfied that the costs are merited they will still make interim payments but the referral for a detailed costs assessment also shows even then the issues will be reviewed.

Non-litigation Options to Resolve Family Dispute

Articles, Family and Matrimonial, Latest News

Family lawyers throughout the UK are increasingly looking for processes which are more human, subtle and responsive to their client’s needs.

As family law solicitors know well, life is never predictable when the most intimate emotional and financial aspects of people’s lives are thrown open to scrutiny and come under (real or perceived) attack.

That’s why it is important to have the broadest range of different options available to try to resolve differences before litigation has to come into play.

Firms like Balfour+Manson, and specialist family lawyers in Scotland more generally, are leading the way in offering a range of non-litigation options to resolve family disputes, often grouped together and described as ADR (Alternative Dispute Resolution). To many clients, that description is meaningless; they are simply interested in knowing which way forward is best for them.

If we are genuine about doing what is in a client’s best interest, we need to talk to them, and listen to their stories, their aims, hopes and fears – then identify which might be the best path to follow.  As family lawyers, we must not give in to temptation to go down the route which seems to offer the “obvious” path or answer.

The best path depends on a number of factors, including the couple’s ability to communicate, level of trust, power balances in the relationship generally and whether there has been any other verbal or physical abuse.

Where the relationship is balanced, communication is good and trust and openness are high, it is frequently possible for clients to resolve their difficulties with a minimum of legal intervention – sometimes referred to as kitchen table agreements.   In such cases, clients take some advice but tend to reach agreement themselves.  A binding contract in the form of a Minute of Agreement is required but can be completed on an “implementation only” basis with minimal intervention.

Where a greater level of intervention is needed, mediation is often a good option. Balfour+Manson has three trained mediators and when instructed as mediators, they are not acting on behalf of either party. Their role is to facilitate constructive discussions directly between two individuals to assist them in reaching a mutually acceptable resolution. As with implementation only agreements, the majority of control is with the individuals, rather than their solicitors.  For mediation to work, clients must be able to sit in a room with each other and communicate in a respectful way.

The requirement to sit in the same room as their estranged partner is also a feature of a third form of resolution, collaborative practice. This is popular with clients who feel they need a greater level of assistance and representation but wish to maintain good levels of communication and work towards a solution to meets the needs of the family as a whole.

Balfour+Manson has four trained collaborative practitioners. They know that neither collaborative practice nor mediation are easy routes.  It can be difficult to sit in a room with a recently estranged partner, particularly if personal trust has been diminished as a result of the separation and the reasons behind it.

Where clients can adopt one of these routes, however, they can ensure, despite their separation, that they have not lost the ability to communicate directly with each other.  That can be particularly important when they have children. Another real benefit of the first three routes of resolution is that the focus is away from written communication. When “positions” are reduced to writing, hurt can be caused, even when not intended – and committing positions to paper means they can do long-term damage.

It is not always possible for clients to resolve matters in a way which involves direct communication.  There may be a breakdown of trust or hurt at a level which means constructive 1:1 discussion is simply not possible.  Occasionally, geographical issues make discussions impractical.  In such cases, it is possible to resort to traditional solicitor negotiation.

Occasionally, no matter how constructive the discussion is, an impasse arises. Whether that is in relation to one point or matters as a whole, it is possible to refer a matter to a specialist family arbitrator if there is a need to ask a third party to make a decision.  At Balfour+Manson, two of our family law partners are qualified as arbitrators, who are effectively private judges.  Ultimately, however, if agreement cannot be reached and the impasse remains, or there is a failure to engage by one party, the courts are there to provide a way of making progress towards overall resolution.  Sometimes, urgent issues arise around a need for protection, either of one party or of a child, and court is the only realistic route to take.

Family lawyers have spent the majority of their working lives being directed to look for outcomes for clients based on their entitlement in terms of the law.  It is essential clients are aware of their rights within the legal framework – but we must we must listen to them and have the confidence to assist them in reaching solutions which fit their own needs in relation to both process and outcome. We must also ensure the outcome is one which they will be content with – not only today, but in the future.