Legal Risk Management Advice

Hope Ltd (Hope) is a UK registered multinational with its headquarters situated in London. Hope is one of 15, UK listed synthetic composite material manufactures, whose products are utilised in satellite production. Their specialisation is in raw material extraction, specifically, ‘Unobtanium’, a rare Earth material, in politically unstable and developing countries.
Although most of its operations take place outside of the EU, Hope maintains a processing factory in County Dublin, Republic of Ireland. However its distribution logistics hub is located in Belfast, Northern Ireland. Hope are concerned about the potential disruption to this arrangement in January 2021 due to the UK withdrawal from the EU.
In order to offset any issues re their Irish network and to carry out their functions more efficiently, Hope, under advice from its lawyers, decided to undertake a partnership with Alaracorp (Alara), a UK and US listed marine cargo company that specialises in point to point critical infrastructure materials transport for reconstruction purposes in post conflict transition countries. Alara has a well – developed infrastructure network of suppliers for transport of materials and fuel. It also maintains exclusive access to key docking berths in ports and harbours around the world where they operate. As a result, Hope’s market share has increased from 26 to 37 percent.
As part of the partnership, Hope transferred heavy equipment, personnel and capital resources. The capital injections were financed via loans from investment banks secured by Hope’s shares as guarantee. Alara had previously been under review by the EU Commission for possible infringement of EU competition matters but political instability elsewhere in the union diverted their attention. Hope’s legal director has recently learned that the Commission is planning to turn their attention back to Hope due to concerns about market power of the new partnership.
As a result of Hope and Alara’s new partnership, three of its close competitors, Psycorp Ltd (Psycorp) and Brexcorp Ltd (Brex) and True Inc (True) with market shares of 12 percent and 8 percent and 10 percent respectively, are concerned that they can no longer sustain their business operations in the long term due to the lack of access to ‘Unobtanium’ sources and inability to compete with such an integrated distribution network. Members of Psycorp, Brex and True’s board approached Hope with a proposal that they potentially combine their resources in relation to ‘Unobtanium’ projects.
Hope rejected this advance. However, since making that determination and worried about any potential cooperative efforts by Psycorp, Brex and True, Hope in conjunction with Alara have taken steps to secure their supply chains. They have approached and secured the exclusive services of 4 of the 6 main port facility companies utilised by extractive firms to move their products globally. They have also secured the contracts to provide ‘Unobtanium’ to several satellite manufacturers, by offering the materials at a below market discount price.
Recent reports in the media, however, have alleged that Alara was only able to secure access to the key ports by paying substantial fees to a number of government officials in the foreign countries. There have also been reports from global human rights NGO’S that Alara have been complicit in the growing trend of use of mercenaries for commercial operations.
Although not substantiated, there have indications from local communities, that Alara have contracted with Freya Inc, a private military contractor, to provide security training for its employees working in unstable global locations.
Freya have historically been associated with aggressive commercial operational mandates. In 2019 Freya personnel had been involved in the suppression, intimidation and forced relocation of ‘Crescent Moon’, a local tribe in the Mystic Falls region of Transylvania.
The chairman of Hope, having recently attended a special briefing on risk management, has called a board meeting to discuss recent events and troubled that several large institutional shareholders of Hope had already expressed their concern about the share price and the company’s reputation both domestically in the UK and globally in its areas of operations.
At this meeting, the chief executive officer (CEO) and finance director expressed their opinion that there had been no unwarranted activity that they were aware of either by Hope or firms associated with Hope. Their opinion was that the NGO reports were almost certainly false. They were aware however, that certain operations by Alara and Freya in previous projects in some less regulated 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 of the countries in which they were operating.
They also revealed that, they had managed to secure the contracts with the satellite manufacturers by substantially undervaluing the costs of their materials, but that they would utilise mark to market accounting to offset the values so that it would not impact their profitability in the short term.
They also revealed that they anticipated that Psycorp, Brex and True would not have the financial ability to maintain themselves as competitors to Hope as a result of the Board’s actions and would exit part if not all of the satellite manufacturing market within a reasonable period of time. Once they did, Hope would be able to increase its market share and profits from anticipated future contracts.
In addition, they highlight that Hope has made considerable efforts in recent years to undertake Corporate Social Responsibility (CSR) and 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 respect of the various actions highlighted; the undercutting of prices and the wider CSR issues and reputational damage considerations, they did not expect any legal or reputational issues to arise.
Two non-executive directors (NEDs) were not entirely convinced by the denials of the CEO and finance director or reassured by the opinion from the company’s legal advisers. They insisted on asking for an external Counsel’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 consider Hope’s situation and provide your views about the legal implications surrounding Hope’s activities and whether:
1- Hope is potentially liable under any legal systems, structures or regulations as a result of its operations and agreements;
2- Whether the UK withdrawal will hinder its Irish distribution network;
3- Hope is at risk of facing any governance issues that have been raised as a result of its or its associated firms activities and about the appropriate way forward for dealing with them;
4- Hope is in compliance with applicable UK corporate codes.
5- Further, they would like your view on potential risks and opportunities that the company may need to consider with regard to Corporate Social Responsibility in respects operations in an unstable /developing country. Where appropriate, if you consider it would be relevant, give examples of issues that other companies have faced