The ramifications for companies that fail to adequately prevent bribery and corruption are severe. The potential for large fines and prison sentences for executives, combined with the reputational damage to the company, provide strong incentives to implement effective strategies to combat bribery and corruption.
In addition to this, companies are increasingly exposed to private actions by shareholders for failing to prevent and disclose bribery and corruption within the organisation. This trend has played out many times in the United States, the most recent being the class action commenced against Avon Products Inc. following an investigation by the U.S. Justice Department and the Securities and Exchange Commission which settled in August 2015 for US$62 million.
Australia has a seen a recent example of a class action arising following the regulatory investigations into Leighton Holdings for bribery allegations, although this class action was subsequently stayed. With the marked rise in the occurrence of class actions in Australia and the increased vigour with which regulatory agencies are prosecuting bribery cases, it is timely to consider the U.S. experience and what it might indicate for corporates operating both in Australia and internationally.
The United States Experience
The practice of instituting representative actions against companies and directors following a corruption investigation or scandal is not a new one in the United States. Typically, shareholders will either bring:
- a derivative action – a claim on behalf shareholders in the name of the company against directors or other officers who have breached their duties; or
- a securities class action suit, on the grounds that shareholders have acted on false representations regarding the company’s compliance with U.S. anti-bribery laws.
The Avon Case
The settlement of this class action suit, which was filed with the U.S. District Court in Manhattan in August 2015, provides a recent example. The case related to claims that Avon and its senior management misled shareholders by failing to disclose serious issues concerning the company’s compliance with the Foreign Corrupt Practices Act 1977 in China. It was alleged that the company and the implicated officers knew of conduct within Avon China concerning bribes made to public officials; in particular, that employees of Avon China had given $8 million in gifts and hospitality to Chinese public officials. This ultimately led to the Department of Justice and the Securities and Exchange Commission instituting civil and criminal investigations. The shareholders sought damages to compensate them for purchasing Avon shares at what they claimed were inflated prices between 2005, when they alleged that the company and senior management became aware of the conduct, and 2008, when Avon reported its suspicions to U.S. authorities and the market.
Under the proposed settlement agreement insurers will pay $60 million while Avon will pay $2 million. This is in addition to the $135 million paid last year to regulatory authorities to settle the criminal charges and civil investigations.
Not the first and certainly not the last
Importantly, Avon is not the first company to face these types of actions. Wal-Mart in Mexico recently faced a shareholder derivative action against the board of the company for its involvement in bribery and its alleged attempts to conceal the wrongdoing. Similarly, in what has been described as the Brazil’s biggest ever corruption scandal, Petrobras, the state-owned oil company, has lost its motion to dismiss a US$98 billion shareholder class action. That action arose from ongoing investigations into the company as part of ‘Operation Car Wash’ where Petrobras, along with others, are alleged to have participated in a year-long bribery scheme.
Australia: are we next?
Australia has already seen one recent example. In 2013 a shareholder action was filed against Leighton Holdings in relation to allegations of bribery and corruption in Iraq. The claim alleged that the company had breached its continuous disclosure obligations under theCorporations Act 2001 (Cth) by failing to disclose the investigation to the market in a timely manner. While this action was stayed as an abuse of process (as detailed in the introduction to this issue of Class Action Update), there are two factors in the current Australian environment which will likely give rise to an increased number of shareholder class actions for conduct relating to bribery and corruption.
The first is the increased focus on enforcing Australia’s anti-bribery laws. While historically, regulatory agencies have not aggressively prosecuted corporates for bribery and corruption offences, there is a growing sense that this will change. The Australian Federal Police have reported that investigations into Australian companies are increasing with a "good handful of prosecutions in the pipeline". In addition, the Australian Senate is currently conducting an inquiry into foreign corrupt practices by Australian companies. While the outcome of this inquiry will not be known for some time, it is likely to include recommendations designed to increase enforcement of Australia’s anti-bribery laws.
The second factor is the rise of class actions in Australia more generally. As discussed in our recent publication, The Review - Class Actions in Australia 2014/2015, the number of actions being commenced have continued to rise as lawyers and litigation funders look for litigious opportunities in a broader range of circumstances.
This focus on enforcing Australia’s anti-bribery laws, combined with the increased willingness on the part of funders, lawyers and claimants to commence class actions, is likely to result in an increase in the number of actions being brought against companies following regulatory investigations.