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When the long awaited Bribery Act finally came into force on 1 July 2011 most people expected the first prosecution would not commence for many months, if not a year or more and would probably involve a huge bribe.

However, this did not prove to be the case as a humble Magistrates Court Clerk, Mr Munir Patel aged 22, proved to be the first person to be charged and found guilty under the Act for taking £500 to avoid putting details of a traffic summons on a court database. The Judge said the indictment involved at least 53 cases in which he had manipulated the process in order to save the offenders from the consequences of their offending.

Mr Patel was sentenced to three years for bribery and six years for misconduct at Southwark Crown Court.

The severity of the penalty reflects the fact that Mr Patel was in a public office and sends a powerful message to all that no matter how modest the amount of a bribe is the consequences can be very severe.

Alan Davies
Partner
T: +44 (0) 118 957 0300
E: alandavies@pitmans.com

Setting up your first business can be a daunting prospect. However, to help you cut through the red tape when embarking on a business venture of your own – and avoid some common legal mistakes – we explain some of the key issues entrepreneurs are likely to encounter when starting out.

1. Legal structure

One of the first legal points to consider is identifying and setting up the most appropriate legal structure for your business. Typically, small businesses start life as a sole trader business or partnership before being formally incorporated as a limited liability company or limited liability partnership. Usually, the best option for your business will depend on what you are intending to do, and the most-tax efficient way to achieve your aims.

The structure you choose will affect various aspects of how your business is run, such as the type and amount of records and accounts that you will need to keep, and your personal liability if your business runs into financial difficulties. However, even if you intend to operate as a sole trader, it is important to ensure you are registered as such for income tax and national insurance purposes at H M Revenue & Customs. As a first port of call, discuss your circumstances and intentions with an accountant for advice on the most tax-efficient structure for you.

2. Business names

Picking a name for your business is an important first task, but it can also be problematic from a legal perspective. It is important to ensure that your business’s name is not the same as any others (or confusingly similar), and that it does not infringe the registered or unregistered trade marks of any third parties. As well as checking trade mark registers, telephone directories, domain name registries, trade journals and trade magazines, there are a number of online resources, such as Companies House and the National Business Register where checks should also be performed.  As this is a highly specialised area, it is recommended that you use a specialist solicitor to perform these checks.

Be aware, too, that use of certain sensitive words in a business name, such as “institution”, “national” and “society”, are restricted by law and it is an offence to register any of those words as part of a business name without the approval of the Secretary of State. It is also an offence to carry on business under a name using an indicators of legal status to which the business is not entitled, for example, using the word “Limited” at the end of your business name when your business has not been registered as a limited liability company.

Before making your choice, run your shortlist past your solicitor so any issues are identified as early as possible.

3. The key legal agreements

Putting the right legal agreements in place to govern the arrangements between you and the other people involved in running your business, and ensuring that these are tailored to your needs, is essential to keeping your business running as smoothly as possible. The type of agreements that you need will, in part, depend on the legal structure you have selected for your business.

For instance, if you choose a limited liability company structure, a key document for your company will be its Memorandum and Articles of Association, which is essentially a ‘rulebook’ directing how the company operates that must be registered at Companies House (and made available for public inspection). However, you may prefer for certain arrangements between you and any other shareholders that have invested in your company to remain private, and a separate shareholders’ agreement that gives certain powers or rights to certain shareholders may be appropriate (for instance, the owner-manager may require weighted voting rights to ensure they cannot be voted off the board).

If, however, you decide a partnership structure is best for your business and co-investors, then a partnership agreement setting out the rules of how the partnership operates (for example, the share of profits each partner is entitled to) is vital to displace the provisions of the Partnership Act 1890 which would otherwise apply to such arrangements by default – and which may have some undesirable consequences.

4. Terms of business

If your business will provide products or services to third parties, or purchase products or services from others, then it is fairly inevitable that you will be requested to enter into terms and conditions of business with those parties with whom you trade. If any of the terms in those contracts seem unusual or unduly onerous, then seek legal advice prior to signing.

Having your own sets of standard terms prepared, which you can then incorporate into your purchase and supply contracts wherever possible, will put your business in a more advantageous position and ensure it is dealing on the most favourable terms that it can.

You must also ensure that the terms of any contract you enter into are properly documented so that you have a record of your contractual obligations towards your customers and suppliers to refer to in the future. Similarly, if those third parties are not performing their own contractual obligations, ensuring that a copy of the contract is kept on your file will assist you and your advisors in identifying and enforcing the contractual rights available to you.

5. Funding

Broadly speaking, funding falls into two camps: debt finance, where your business borrows money from a third party via loans, mortgages, debentures or invoice discounting, and equity finance, where individuals or other companies invest in your company in return for a share in the ownership of the business.

The options available to you will depend on the circumstances of your business. For instance, in order for a bank to be willing to offer your business a loan, it may require you or your business to own assets of a certain value on which the loan may be secured.

Likewise, the options you decide to pursue will depend on the advantages of the type of financing for your business –debt finance, for example, allows you to retain ownership of your business, but repayments must normally be made on fixed dates which may cause problems if your business’s income stream is unpredictable. In many cases, businesses rely on a mixture of both debt and equity finance.

In all cases, you should carefully agree and document the terms of any financial agreement you make – even (or especially) if it is an informal loan from a relative or friend.

6. Regulatory and compliance issues

The legislative obligations that may apply to your business will really depend on the activities your business undertakes. Some regulations, however, are likely to apply to many trading businesses, such as:

• Sale of Goods Act 1979: which requires you to sell goods of satisfactory quality, that are fit for their purpose and that are as you describe them.

• Sale of Goods and Supply of Services Act 1982: which requires you to perform the services you offer with reasonable care, skill, time and cost.

• Trade Descriptions Act 1972: which makes it a criminal offence to knowingly make false or misleading claims about the goods or services you offer, whether written or verbal.

• Data Protection Act 1998: imposes certain restrictions on the way personal data (such as records of the names of any individuals, including your customers) may be handled, and requires you to register with the Information Commissioner’s Office if you process any personal data (unless an exemption applies).

• Proceeds of Crime Act 2002: which creates the money laundering offences that make it a criminal offence to (amongst other things) conceal, disguise, convert or transfer any property that you know or suspect has been obtained from criminal conduct.

To help you get started, the government’s Business Link website provides information on the rules and regulations that apply to particular sectors. Alternatively, contact a local trade association or representative body for advice. The Trade Association Forum’s directory of UK trade associations is available here.

If you intend to engage contractors, staff or workers, in connection with your business then there will be certain legal obligations with which you must comply. Most importantly, the terms agreed between your business and any employee must be set out in a contract of employment along with certain other pieces of information, such as a job description and details of the place of work, as mandated by section 1 of the Employment Rights Act 1996. Again, the Business Link website covers the basics.

For help with more specific and/or complex regulatory issues, you should consult a solicitor.

7. Property

If you decide to run your business from home, it is important to check your planning permission to ensure that you have the required consents to operate a business from your home address. If you need to apply for additional planning permission, contact your local authority.

However, if you decide to lease or purchase business premises, you will need to agree terms with your landlord or vendor, and ensure you understand the terms on which you intend to contract. There should be a formal agreement in place, and you should seek legal advice on negotiating and documenting the terms of your occupation.

8. Intellectual property

Your intellectual property (often referred to as ‘IP’) comprises not only your business name, but also your confidential information (including know-how and trade secrets), trademarks, copyright, patents, goodwill (that is, the reputation and status attaching to your business, products and services), design rights, domain names… the list goes on. You will need to consider how your IP will be protected and who will own it. For example, you should be aware that IP commissioned by you or created by your employees or directors may not be automatically owned by you. You should take advice from a specialist solicitor on what IP rights you have, or are likely to acquire in the near future (such as IP in new products or know-how created by your employees) and how best to protect those rights.

We wish you every success with your new venture, but if you require any legal advice in relation to these and other issues, we are here to help.

For more information, please visit:

Pitmans’ Corporate legal services

Pitmans’ Commercial legal services

Pitmans’ Intellectual Property legal services

Carolyn Butler
Solicitor, Corporate
T: +44 (0)118 957 0234
E: cbutler@pitmans.com

Andrew Peddie
Partner, Corporate
T: +44 (0)118 957 0321
E: apeddie@pitmans.com

Sally Britton
Partner, Intellectual Property
T: +44 (0)20 7634 4623
E: sbritton@pitmans.com

The UK Bribery Act, which comes into force today, is one of the most significant statutes enacted in the last 10 years. The Act establishes a criminal offence for non-compliance, with heavy penalties including unlimited fines and prison sentences. 

Have you ensured your compliance?

This overview of the Act provides you with the knowledge you need to avoid falling foul of the law.

1. What are the offences under the Act?

The Act introduces four main offences:

• Making bribes;
• Receiving bribes;
• Bribery of foreign public officials; and
• The corporate offence of failing to prevent bribery (where the only defence is of having ‘adequate procedures’ in place to prevent bribery).

2. What are the penalties?

• Companies – an unlimited fine 
• Individuals – up to 10 years imprisonment, an unlimited fine or both
• Companies who are involved in public contract work could be debarred from tendering for public procurement contracts
• Directors may also be subject to a variety of risks, including prosecution as an officer of a company involved in bribery, and potentially disqualification from acting as a director

3. Are you liable for the actions of other people you work with?

Companies can be liable where offences are committed by their employees, joint venture partners, contractors or agents as the Act imposes liability for the acts of ‘associated persons’, which is very widely defined.

To take advantage of the ‘adequate procedures’ defence against this risk, a company will have to have established robust policies and procedures to show it has a culture resistant to bribery and corruption, and systems in place to enforce that culture.

4. What about corporate hospitality and facilitating payments?

The Guidance that the Ministry of Justice have published to accompany the Act states that reasonable and proportionate hospitality and promotional expenditure is acceptable. Corporate hospitality within reasonable bounds is therefore allowed, but there is no carve-out for “facilitation payments”.

5. Does the Act apply outside the UK?

The first two offences (of bribing and receiving bribes) can be committed outside the UK, but only where the party involved has a close connection with the UK.  The offence of bribing a foreign official will in many cases take place overseas, but to be prosecuted by the UK authorities under the Act, the briber will also have to have a close connection with the UK.  In each case that would require being a British citizen, or being ordinarily resident here, or incorporated in the UK. 

The corporate offence of failing to prevent bribery can be committed by any UK incorporated body, UK formed partnership, or any foreign body corporate or partnership that carries out business or part of a business in the UK. This is regardless of whether the relevant conduct takes place in the UK or elsewhere and whether the bribery is done by a UK person or not.

6. What can you do to reduce your risk?

Companies need to ensure they can bring themselves within the adequate procedures defence to the corporate offence of failing to prevent bribery. This will require the introduction and implementation of appropriate anti-bribery and corruption policies and procedures.

7. What should you do now?

Contact our Corporate team, whose lead contacts are set out below. They can assist you by:

• Reviewing the ‘adequate procedures’ that you already have in place
• Reducing the risk of committing a bribery related offence
• Reducing the risk of fines or imprisonment of your executives
• Sharing best practice recommendations and experience
• Supplying anti-corruption and bribery policy precedents
• Delivering standard commercial and transactional precedents clauses
• Supporting you with relevant employment and HR terms and policies

Pitmans work with leading organisations in this field and are experienced in delivering anti-bribery and anti-corruption advice to its clients. We are also able to undertake detailed risk audits to help resolve your compliance issues.

For further information about the UK Bribery Act, please contact the Pitmans Corporate team, including:

Andrew Peddie
Corporate Partner
T: +44 (0)118 957 0321
E: apeddie@pitmans.com

Adam Dowdney
Corporate Partner
T: +44 (0)118 957 0574
E: adowdney@pitmans.com

Daniel Jacob
Corporate Partner
T: +44 (0)207 634 4653
E: djacob@pitmans.com

The Hargreaves Report  (published 18 May 2011) and the EU Commission’s blueprint for intellectual property rights  (published 24 May 2011) propose a number of reforms to the respective intellectual property rights regimes (UK and EU) that are designed to encourage innovation and creativity in a world where digital content is playing an increasingly large role in financial terms. Copyright, in particular, takes centre stage in both reports, as it is intrinsic to the development and exploitation of digital content and this note is a high-level summary of the recommendations made in each report that are specific to copyright.

Technological Development Drives Copyright Issues

The widespread use of digital technology (coupled with an almost exponential increase in computational power and memory space in average computer hardware) has created a very large pool of creative effort. Anyone with a computer and a broadband connection has access to a large amount of copyright material and is able to modify such material and/or create new works.

Consequently, there has been an ‘explosion’ of creative effort as well as of infringement. Not all infringement is the same.  Format-shifting  for private use is a widely accepted practice recognised by copyright owners and creative industries (and some European countries even have a specific ‘private copying levy’ which is imposed on hardware that enables such copying for private use).  On the other hand, the widespread copying of music and audio-visual works (whether using peer-to-peer networks or not) without the copyright owner’s consent is clearly illegal.

The comparatively low cost of high-performance hardware and the power of creative software products have resulted in significant changes to traditional business models. It is much easier for smaller businesses to set themselves up as content creators and distributors. Many new software-enabled services have been developed which use existing content (data, music or audio-visual content) to provide secondary services (such as application development for smart phones or data analysis). In order for such new services to come to the market quickly and at competitive prices, it is essential that the service provider is able to acquire the necessary rights to the underlying content (if any) as quickly as possible and at a predictable cost.

Licensing Problems

Both reports have identified the problems that can be encountered in trying to clear the underlying copyright works:

• a lack of information as to the relevant rights owner;
• inconsistent (and often uneconomic) pricing;
• the need to deal separately with all rights owners of a copyright work; and
• (in the context of the EU single market) the difficulty of obtaining consent for cross-border use).

In a free market, a copyright owner has the right to set whatever price he or she deems acceptable. However, some of the other problems are process-based and are addressed accordingly. The Hargreaves Report advocates the establishment of a Digital Copyright Exchange, which would essentially serve as a collecting society for digital exploitation. All copyright works that are registered with this new body would derive a number of legal and commercial benefits, such as an easier enforcement of rights (along with, perhaps, more remedies available) and the use of standardised licence terms.

A Digital Copyright Exchange fits in well with the recommendations made by the EU, which call for the establishment of a European “rights broker” which would facilitate the licensing of copyright across borders. From the European point of view, the difficulty is not just in clearing all the underlying rights in a proposed new service or work but also removing any artificial borders to the single market.

Both reports touch upon the problem of ‘orphan works’, which are works known to be protected by copyright but with rights owners who can not be traced.  The Hargreaves Report suggests that the new Digital Copyright Exchange could serve as a useful registry of “known copyright” and that any copyright works whose owners are not listed on the exchange would be able to be used in return for a nominal fee. The EU’s report mentions a new “European legislative framework to identify and make available…” orphan works, but does not go into any detail.

Exceptions to Copyright Infringement

Both reports deal with new types of copying which are facilitated by digital technology, e.g. format shifting for personal use.

The Hargreaves Report considers the “fair use” exceptions which are part of the US legislative framework and concludes that this system is not the most suitable for the UK.  It goes on to recommend a number of new, specific exemptions to copyright law in the UK:

• a private copying/format shifting exception (permitted under EU laws);
• one which applies in circumstances where a proposed use of copyright work would not require consent of the copyright owner if the use does not trade directly on the “underlying creative and expressive purpose” of the copyright work;
• the extension of the non-commercial research and archiving exceptions to all forms of copyright; and
• an exception for parody and pastiche.

The EU’s suggests that the answer may lie in the creation of a European Copyright Code, which would codify all entitlements, related rights (such as moral rights, e.g.) as well as exceptions and limitations.

Conclusions

Both reports identify similar problems with copyright and suggest robust measures that streamline rights clearance processes.  However, many recommendations are made at a high level and need a substantial amount of additional detail before they can be implemented. If there is to be a new clearing house or exchange for copyright works, it needs to attract a substantial amount of interest from copyright owners in order to be credible and therefore effective and this may mean that substantial incentives will need to be offered, over and above a theoretical access to a broader market.

Rustam Roy
+44 (0)118 957 0180
rroy@pitmans.com

References:
1. Digital Opportunity, an independent report by Professor Ian Hargreaves (May 2011) (http://www.ipo.gov.uk/ipreview.htm)
2. IP/11/630 (http://europa.eu/rapid/pressReleasesAction.do?reference=IP/11/630&format=HTML&aged=0&language=EN&guiLanguage=en)
3. where a legitimate owner of a copyright work (e.g. music) merely shifts the product from one medium (e.g. CD) to another (e.g., an MP3 player) for personal use.