Good health and safety corporate governance is essential, especially following the introduction of the offence of corporate manslaughter in 2008, for any corporate entity whose activities create the risk of injury. In this bulletin we consider the nature of the risks from the perspective of the private equity investor and suggest what practical steps can be taken to minimise those risks.
Where do the risks lie?
After every fatality that arises in a workplace context, whether involving an employee or third party, there will be a joint investigation carried out by the police and Health & Safety Executive ("HSE"). The role of the police is to determine whether the circumstances are serious enough to initiate a prosecution against a corporate entity, or an individual, for manslaughter. The role of the HSE is to identify if there have been any breaches of health and safety statute and regulations and to bring a prosecution as appropriate.
In a typical private equity structure the primary focus of the investigation will be upon the operating company ("OpCo") and its senior management team. A financing or other holding company ("TopCo") is unlikely to be implicated provided it did not involve itself in the management of OpCo or operational decisions. Where an individual is both a director of OpCo and TopCo, TopCo should still not be implicated providing relevant acts or omissions of that individual are clearly carried out in his capacity as a director of OpCo and not TopCo.
As to personal liability, the greater risk will again be upon the senior management team of OpCo but that would also include any individuals who have been seconded to that team by the PE manager.
Qualifying the risk
In the case of a prosecution for manslaughter, Guidelines published in 2009 by the Sentencing Guidelines Counsel state that an appropriate fine "will seldom be less than £500,000 and may be measured in millions of pounds." In setting the fine, the Guidelines provide that Judges should have regard to the financial circumstances of the organisation including turnover, profit and assets. Specifically the Guidelines provide that fines must be punitive and sufficient to have an impact on the defendant but in most cases the fine should be one which the defendant is capable of paying. In extreme cases the level of fine may put a defendant out of business and "this may be an acceptable consequence". The Guidelines highlight that the effect upon investors will not normally be a relevant factor for the Judge to consider.
Cotswold Geotechnical Holdings is the first corporate entity to be convicted under the Manslaughter Act. Cotswold was described in Court as being in a "parlous financial state" but was nonetheless fined £385,000 which indicates that very high fines will be imposed. Mr. Justice Field in his sentencing remarks observed that a large fine would cause the company to be liquidated and that people would lose their jobs. He added "it may well be that the fine in terms of its payment will put this company into liquidation. If that is the case it is unfortunate but unavoidable, but it is a consequence of the serious breach".
In addition, any prosecution for manslaughter is likely to attract widespread publicity and a publicity order may specifically be imposed. The greater damage may accordingly be the reputational damage to OpCo's brand. Currently there has only been one prosecution for corporate manslaughter, but as it might typically take the police/HSE between 3 to 5 years to investigate and bring a prosecution, we are only now approaching a time when the first substantive prosecutions are expected to be brought. As the process can take up to 5 years to conclude, the publicity generated is likely to be a negative factor for a considerable period.
Prosecution of corporate entities
Following a fatality a corporate entity may be prosecuted under the Health & Safety At Work etc Act 1974 ("HSWA") and/or for manslaughter under the Corporate Manslaughter and Corporate Homicide Act 2007 ("the Manslaughter Act").
Under the HSWA it is the duty of every employer to ensure, so far as is reasonably practicable, the health and safety of his employees and other individuals who may be affected by the conduct of the business. If a prosecution is brought, it has to be established that the defendant breached its duty of care and that gave rise to a risk of injury that was not merely trivial or fanciful. Cases have, however, established that the evidential standard for the prosecution is low. The burden is upon the defendant to prove its innocence by showing that it did everything, so far as is reasonably practicable, to avoid the risk of injury. Central to that defence will be the ability of the corporate entity to demonstrate an effective corporate governance system.
The Manslaughter Act does not place additional duties upon corporate entities but the effect is again to specifically direct attention to the question of whether the corporate entity has a suitable corporate governance system in place, and the extent to which it was effective.
Prosecution of individuals
If a corporate entity has committed an offence under the HSWA, that Act provides that a director, manager, secretary or other similar officer is also guilty of an offence if the offence "is proved to have been committed with the consent or connivance of, or to have been attributable to any neglect, on the part of any director, manager, secretary or other similar officer…". Despite the seemingly wide ambit of this provision, case law has clarified that the section is aimed at those who are in "a position of real authority, the decision makers within the company who have both power and responsibility to decide corporate policy and strategy." Prosecutions may, however, be brought against any employee who breaches their duty to take reasonable care for the health and safety of themselves and others who may be affected by their acts or omissions at work. An individual may also be prosecuted for manslaughter if the fatality is the result of their gross negligence.
Reducing the risks in practice
Prudent private equity investors should both risk assess the policies and procedures of any potential target business and ensure the adoption of appropriate standards by portfolio companies on an ongoing basis. Whilst different industry sectors will clearly have different risk profiles, health and safety is an area in which private equity investors may champion industry leading standards by driving best practice. Differentiators include:
- engaging dedicated professionals to ensure regulatory compliance and adherence at an operational level;
- addressing any disconnect between compliance professionals and senior management. Health and safety should be treated as a management and not just an operational issue and the demonstrable involvement of senior management. For the reasons listed above, the focus of any investigation will be on systems and procedures;
- capturing know-how from "near miss" incidents; and
- periodic review and audit of systems by external specialists.