A federal appeals court last week affirmed the dismissal of a shareholder derivative suit against some current and former directors and executives of BAE Systems PLC. The suit was filed in 2007 by the City of Harper Woods (Michigan) Employees’ Retirement System. The complaint alleged payment of more than $2 billion in bribes and kickbacks to Prince Bandar Bin Sultan of Saudi Arabia. The alleged purpose was to secure for BAE the $80 billion Al-Yamamah contract from the Saudi Arabian Ministry of Defense for the sale of jet fighters and trainers. The suit claimed the defendants breached their fiduciary duties and wasted corporate assets.
The trial court applied English law to the case. It found that the Harper Woods pension fund — which owned 3,500 of BAE’s American Depository Receipts — had no standing to act as plaintiff. BAE is a publicly owned corporation incorporated in England and Wales. It operates in the United States through its subsidiary BAE Systems, Inc. See City of Harper Woods Employees’ Ret. Sys. v. Oliver, 577 F. Supp. 2d 124 (D.D.C. 2008).
The United States Court of Appeals for the District of Columbia agreed. It said that under the 1843 English case of Foss v. Harbottle, 2 Hare 461, 67 E.R. 189, “the company, not a shareholder, is the proper plaintiff in a suit seeking redress for wrongs allegedly committed against the company.”
The Harper Woods pension fund had argued that even if English law would normally apply, the U.S. federal courts should make an exception and use U.S. law. That would promote the public policy of protecting shareholders and the company itself from law-breaking directors and executives.
The D.C. appeals court refused to create the exception. It found that even if the defendants had paid bribes that broke the law, they hadn’t acted beyond the scope of their legal authority. That gave them protection. It said:
In English law, an ultra vires act is an act “beyond the corporate capacity of a company.” Whether conduct is ultra vires thus depends upon whether a company is capable of performing the act, as set forth in the company’s memorandum of association. . . . [A]t least one English court has held that payment of a bribe is not an ultra vires act where the company’s memorandum authorizes it to provide compensation in return for services rendered in the conduct of its business. See Arab Monetary Fund,  1 Lloyd’s Rep. at 569.
The decision is a big win for BAE (and all U.K. companies threatened with shareholder litigation in the U.S.). But it’s another setback for plaintiffs who bring claims based on allegations that, if true, would violate the Foreign Corrupt Practices Act.
In June 2009, for example, we described how Baker Hughes — for the third time — had beaten back a derivative suit brought after its 2007 settlement of Foreign Corrupt Practices Act violations. The plaintiff in that suit was another pension fund. It tried to sue in state court once and federal court twice, only to be bounced each time on procedural and jurisdictional grounds.
(There’s no private right of action under the FCPA. So private litigants seeking relief have to resort to other causes of action — such as common law fraud, RICO, securities law violations, or breach of fiduciary duties.)
In 2008, the Ninth Circuit in Glazer Capital Management v. Magistri put another obstacle in the path of plaintiffs. The court raised the “scienter” bar for FCPA-related claims against officers and directors under the federal securities laws. See our post More Hurdles For Private Litigants.
The U.K.’s Serious Fraud Office opened an investigation into BAE and the Al-Yamamah contract but closed the file in December 2006. It said threats from Saudi Arabia to end anti-terrorism cooperation could harm Britain’s national security. The U.S. Justice Department has been conducting its own Foreign Corrupt Practices Act investigation but hasn’t released any comments. BAE and Prince Bandar have denied breaking any laws.
In October 2009, the Serious Fraud Office recommended prosecution of BAE for other alleged corrupt payments. The SFO had separately investigated “sales of aircraft in South Africa and the Czech Republic, purchases of two frigates in Romania, and radar equipment for air traffic control in Tanzania.” BAE is the U.K.’s biggest military contractor. It has 32,000 employees in the U.K. and about 105,000 worldwide.
A copy of the December 29, 2009 opinion in City of Harper Woods Employees’ Retirement System derivatively on behalf of BAE Systems PLC. v. Richard (Dick) L. Oliver et al can be downloaded here.