SFO powers may punish innocent shareholders

This entry was posted on Tuesday, January 17th, 2012 at 10:14 am

Shareholders and investors have become concerned following a recent court ruling that may allow the Serious Fraud Office (SFO) to claw back dividends paid to innocent shareholders where there is evidence of corporate fraud.

The Financial Times reports that the ruling may set a precedent, allowing the SFO to target dividends that have already been paid to shareholders if it is then alleged that the money was gained through corporate fraud at the company. The money could be reclaimed using “civil recovery proceedings” – regardless of any wrongdoing on behalf of investors – in a move that is seen as a worrying extension of the SFO’s powers.

A concerned investor spoke out saying, “shareholders do not micromanage companies; they employ non-executive directors to manage companies on their behalf”. Other critics have questioned the practice, especially where shareholders have carried out proper due diligence in appointing directors who may then go on to abuse their position.

The current law can force shareholders to repay dividends when they know the company is involved in illegal activity or corporate fraud, but a lawyer suggests that their actual knowledge is in fact very little. “All shareholders can do is draw upon publicly available information”, he said, and this does not include instances of bribery or serious fraud. This possible extension of the law may place more responsibility than is fair in the hands of the investors.

This development comes at a time when shareholders are being held increasingly accountable regardless of their operational control of an organisation, as well as in the face of increasing criticism of the SFO for the way in which it handles its cases.

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