Background

Under the Modern Slavery Act 2015, every business trading in the UK with a turnover of at least £36m is now required to publish an annual statement setting out the steps it has taken to ensure that modern slavery is not taking place in its business or supply chain.

Since the introduction of the new law, the focus has been on how to ensure compliance with this requirement.

You can find our insight in this respect here

However, little consideration has been given to the consequences of such a statement being false or inaccurate. This is understandable; the Modern Slavery Act does not actually require businesses to maintain any particular policies or procedures in relation to modern slavery; it merely requires a statement about what businesses have (or have not) done.

With brand reputation forming a bigger part of most businesses' assets than ever before, it would be naïve to assume that the annual statement under the Modern Slavery Act does not matter. If a statement is made to the effect that a business has a comprehensive policy to prevent modern slavery in its supply chain, there may be serious consequences if a modern slavery issue is subsequently identified by a stakeholder or interested party (e.g. NGO / media), or if evidence of due diligence cannot be provided.

It is too early in the life of the Act to know precisely what such consequences may be, but we set out in this article some of the types of claims that could arise as the result of an inaccurate modern slavery statement.

Warranty Claims

On a share purchase, it is standard practice to include warranties in the relevant agreements to the effect that the target company has adequate procedures in place in relation to anti-money laundering, bribery and corruption. It is also standard practice to include warranties regarding the target company's suppliers.

We now recommend to clients that similar warranties are included in respect of the Modern Slavery Act. Specifically, the seller should warrant that the target company has at all times complied with the requirement to make an annual statement and that such statements were accurate and complete at the time they were made.

In our experience of actions brought or threatened by buyers under share purchase agreements, claims are made against compliance warranties in 15% of actions.

On that basis, it seems fairs to assume a similar frequency of claims will arise in due course in relation to warranties regarding annual modern slavery statements. Even where such express warranties are not included in the share purchase agreement, similar claims for fraudulent misrepresentation or negligent misstatement could also be expected (see further below). This seems particularly likely in businesses with supply chain arrangements that are central to the business and its appeal to any purchaser.

Shareholder Actions

The Companies Act 2006 provides a number of remedies to shareholders who consider there to have been a serious failing in the way a company is run. The requirements of the Modern Slavery Act 2015 (MSA) should be read in this context. Whilst the MSA does not introduce any new causes of action in itself, it does demonstrate the increasing importance of supply chain policies and procedures to the market and investors.  In the right circumstances, if an annual statement in respect of the supply chain is found to be seriously inaccurate, shareholders may be justified in bringing actions against the company and/or its management. These would likely be brought in one of two forms.

• Derivative Actions

By a derivative action, a shareholder may make a claim on behalf of the company in respect of wrongs done to the company by its directors. Such actions are governed by sections 260 to 264 of the Companies Act 2006. Essential to such claims are the duties owed by directors to their companies, which are also set out in the Companies Act 2006 (at sections 171 to 176).

In particular, directors are obliged to promote the success of the company and exercise reasonable care, skill and diligence when carrying out their obligations. For any business that attributes particular significance to its supply chain, an incorrect statement under the Modern Slavery Act could have serious reputational consequences and constitute a failure to promote the success of the business or exercise sufficient care.

• Unfair Prejudice

Sections 994 to 996 of the Companies Act 2006 are intended to provide protection to minority shareholders where those in control of the company have caused the shareholder unfair prejudice. Unfair prejudice is a deliberately imprecise term, intended to capture a variety of acts or omissions by a company that could prejudice its shareholders' interests.

One of the established forms of prejudice that can be caused by a company is reduction in the value of a member's shareholding. If, for example, the management of the company are aware of the importance of supply chain compliance to a particular shareholder (or group of shareholders) and to the value of their shares, but intentionally or negligently make an incorrect statement under the Modern Slavery Act, unfair prejudice could be at least arguable.

Actions for Misrepresentation

The law of misrepresentation gives individuals the right to seek redress where they have been induced to enter into a contract by a misleading statement. Depending on the seriousness, the innocent person may have the opportunity to undo ("rescind") the contract or to claim damages, or both in the most serious of cases. In principle, there is no reason why a statement made under the Modern Slavery Act could not amount to an actionable misrepresentation, provide that all of the requisite elements can be proven. Although supply chain statements are not generally made with the express intention of inducing any third party to enter into any contract, this does not mean misrepresentation cannot be found.

The law of misrepresentation is complex and the ability of someone to make a claim is based on a number of factors, including:

• Statement of fact

The misrepresentation must be a statement of fact, and not merely an opinion. Modern Slavery Act statements are likely to satisfy this.

• Reliance

The person bringing the claim must prove that an untrue statement of fact (i.e. the misrepresentation) made by the other party to a contract (or on its behalf) induced him or her to enter into the contract (for example, to purchase shares in a company). The misrepresentation need not be the sole reason for entering into the contract, but must have been a material influence. Although this may be difficult to establish in relation to a Modern Slavery Act statement, it is possible that reliance could be found in relation to companies whose supply chains are central to commercial success. If the supply chain transparency statement were made during a period in which a share sale was being contemplated, then an aggrieved purchaser could perhaps have more reason for arguing that the statement was deliberately made with the intention of falsely stating the health of the companies supply chains.

Currently, businesses are engaged in putting in place processes to give them better oversight and control of their supply chains. However, as the legal requirement to publish an annual supply chain transparency statement matures, it is possible that focus will shift to auditing those processes. Businesses will want to understand whether the steps they are taking are having a positive impact on their supply chains. In addition, as public awareness of the problems of modern slavery increases, businesses should be in a position to identify issues early in order to manage pro-actively any potential reputational risk. Similarly, audit evidence may become important in shaping the contents of the annual statement and enabling it to be signed off by the board of directors.