With the general election scheduled for 12th December 2019, now is a good time to remind directors of the legal restrictions on making political donations or incurring any political expenditure on behalf of a company.
Recently, pub chain JD Wetherspoon PLC (“JD Wetherspoon”) came under fire after it was reported that information from the Electoral Commission showed that JD Wetherspoon spent thousands of pounds on beer mats which supported the Leave campaign in the run up to the 2016 Brexit referendum.
If no shareholder resolution was passed prior to paying for and distributing the beer mats across JD Wetherspoon pubs, this could amount to a breach of the Act. JD Wetherspoon’s founder and non-executive chairman, Tim Martin, is a well-known supporter of Brexit and has reportedly responded to these reports stating that JD Wetherspoon has complied with its responsibilities by reporting the spending to the Electoral Commission
What are the rules?
Political expenditure and donations by companies are regulated by Part 14 of the Companies Act 2006 (the “Act”). Could spending on politically-branded products amount to a breach of the Act?
The Act distinguishes between political donations and political expenditure. The definition of a “political donation” in the Act does not just include a gift of cash, but is drafted widely to catch, for example, hosting a political event for free. Although politically- branded products could not be regarded as a direct political donation, Part 14 of the Act states that companies must obtain shareholder approval prior to engaging in any:
activities that are capable of being reasonably regarded as intended—
(a) to affect public support for a political party to which, or an independent election candidate to whom, this Part applies, or
(b) to influence voters in relation to any national or regional referendum held under the law of the United Kingdom or another member State.
There are some exceptions provided for in the Act, including donations to trade unions and media publications, but importantly, there is no de minimis threshold for political expenditure, unlike political donations where there is a minimum threshold of £5,000. Any political expenditure, no matter how little, must be authorised by the shareholders.
Reporting political expenditure
As well as obtaining shareholder approval, a company that must produce a directors’ report under the Companies Act 2006 is also required to report any political expenditure (including the total amount).
What are the consequences of a breach of the rules on political donations?
If shareholder approval is not obtained prior to incurring political expenditure, directors of a company could find themselves personally liable, on a joint and several basis, to pay the company the total amount of the unauthorised expenditure. Interest on the amount would also be payable.
The directors could avoid this if the shareholders agreed to pass a ratification resolution authorising the political expenditure.
In the run up to voters heading to the polls on 12 December 2019, companies may feel pressure to lend their voices in support of a certain party not least because the result of the General Election could have a huge impact on the economy and consequently for the operating environment for UK companies.
Before incurring any political expenditure or making a political donation, companies should consider the relevant restrictions to make sure that any activity is compliant with the law. Companies should also check their articles of association or internal policies for rules on political donations or expenditure.