Legal Risk Management

Legal Risk Management
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Consider the following scenario and advise.

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Psycorp Ltd (Psycorp) is one of 7, UK listed construction companies, that specialises in major infrastructure projects in developing countries. Recently, it won a major contract in Cogosia, a developing country, to construct a new hydro-electric power station for the government which will invariably lead to more projects in other countries once it demonstrates the efficiency and speed with which it can undertake such tasks. As a result, its market share has increased from 37% to 47%.

Due to the increased revenue and potential for future contracts, Psycorp Board decided the time had come to list its shares on the U.S. stock exchange and has commenced trading on the New York Stock Exchange.

As a result of winning the contract, two of its close competitors, Novacorp Ltd (Nova) and HydraInc Ltd (Hydra) with market shares of 12% and 14% respectively, who were also bidding on the contract, have decided that they can no longer sustain their business operations and are planning to wind up their operations. However, since making that determination, they have been approached by a member of Psycorp with a proposal to work together on all future projects. Under the proposal, Psycorp would provide access to their geographic mapping and design technology, which is far superior to any other technology presently available, at a substantial discount to the market rate, provided that Nova and Hydra agree to purchase the majority of their construction materials from Psycorp.

A recent report in the media, however, has alleged that Psycorp won this contract by paying substantial bribes to a number of government officials in the foreign country. Internal investigations by Psycorp have led to the belief that the information had come from an employee of the company who had been an observer of the negotiations.

The chairman called an unscheduled board meeting to discuss the matter, aware that several shareholders of Psycorp have already expressed their concern about the share price and the company’s reputation. At this meeting, the chief executive officer (CEO) and finance director expressed their opinion that there had been no payments of bribes and that the media report was almost certainly false and that they would certify as such in the periodic and annual financial reports. They were aware however, that certain operations by Psycorp and its subsidiaries in previous projects in developing nations had not fully complied with all necessary standards and principles of good governance advocated by the UK but were fully compliant with local laws and customs.
They also revealed that, they had managed to undercut other bids by substantially undervaluing the costs of their construction materials as they were aware that both Nova and Hydra would not have the financial ability to match them and were of the view that Psycorp’s substantial financial resources would allow them to sustain losses in this regard for the length of the contract and that the increase in market share and profits from anticipated future contracts would more than offset this loss. In addition, they highlight that Psycorp has made considerable efforts in recent years to promote the image of the company as a ‘global corporate citizen’.

Having obtained an opinion document from the company’s legal advisers, which in their view was privileged, in respects the contract, the undercutting of prices and the wider CSR issues and reputational damage considerations, they did not expect any challenge to the validity of the contract with the foreign government, either from the government itself or from a rival company that had made an unsuccessful bid for the contract.

Two non-executive directors (NEDs) were not entirely convinced by the denials of the CEO and finance director, and were not reassured by the opinion from the company’s legal advisers, which they felt had been given in too much of a hurry. They insisted on asking for a Barrister’s opinion and wanted Counsel’s independent view of the legal and commercial risks in this situation. The chairman asks you, as external counsel, to give your views about the legal implications surrounding the contract and whether Psycorp was potentially liable under any legal systems, structures or regulations as a result of its operations and agreements. They would also like your view as to any governance issues that have been raised as a result of this contract and about the appropriate way forward for dealing with them as well as issues in respects compliance with applicable corporate codes. Further, discuss the risks and opportunities that the company may need to consider with regard to Corporate Social Responsibility in respects operations in developing country. Where appropriate, if you consider it would be relevant, give examples of issues that other companies have faced.


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