Emma Reid: It doesn't pay to break the rules on political donations

Published on 12/05/2010 20:18

THE sensitive topic of donations to political parties can be headline news all year round, not least at the time of a general election.

In the run-up to the recent one, Lothian Buses, Warburtons and Diageo all found themselves in the spotlight over political donations or expenditure.

Companies may use such donations to demonstrate their support for political parties, including those who form the new Westminster government and hope to influence at the highest levels.

However, the making of political donations and expenditure is a very tightly regulated area and companies and directors must be aware of the legal requirements and potential pitfalls in order to avoid making headlines for the wrong reasons.

While political matters are at the fore, now is a good time for companies to examine whether any of their activities fall within the remit of legislation on political donations.

The Companies Act 2006 imposes strict requirements on companies and their directors. The act has a wide scope in this area and activities which are neither explicitly political in motive nor consisting of cash payments may be still be "political donations".

Activities relating to the publication of political material are regarded as "political expenditure". The rules affect any activities with UK political parties, independent candidates and parties campaigning in the EU as well other types of organisation that aim to influence support for a political party.

The legislation provides a general rule against companies making a donation or incurring political expenditure without prior shareholder approval.

Consequently, if there is any doubt whether a particular activity falls within the scope of the legislation, it would be sensible to seek approval in order to avoid inadvertent infringement.

The general rule has three exceptions. There is a minimum threshold of 5,000 before donations by a company and its group members require authorisation. Secondly, donations to trade unions are generally exempt. Finally, where a company's usual business includes the publication of news (such as newspapers or media companies) then shareholder approval is not required for activities that would otherwise fall foul of the rules on political expenditure.

Although shareholder authority can be given for a maximum period of four years, if the company is listed on the London Stock Exchange, institutional investors often require that authority to be renewed on an annual basis. Guidance issued by the National Association of Pension Funds recommends that any authority be limited to 18 months, or to the date of the company's next AGM.

The Association of British Insurers' guidance goes even further, stating that listed companies should declare it is not their policy to make political donations and that they do not intend to use the authority conferred for that purpose adding that best practice is to renew the authority annually.

It is worth remembering that political parties are under a duty to publicise donations over 7,500 received by them and that details of a donation made by a director in a personal capacity may be released into the public domain. Although there is no obligation on the director to declare political donations made in a personal capacity per se, the fact that donations may become public knowledge can attract unwelcome attention and consequences for a company – especially if the recipient is deemed to be controversial.

Non-compliance with the legislation is a big risk and may leave directors liable, to the company, for the amount of any donation or expenditure not authorised by the shareholders; payable with interest. In addition, the directors must compensate the company for any consequent loss or damage that it suffers with no limit on this potential liability.

Some comfort is available to directors who have acted honestly and reasonably, as this can form the basis of a defence to liability, and it is possible in certain circumstances for shareholders to approve the actions of directors and exempt them from liability.

So as Westminster ushers in its first coalition government for decades, there may be companies and individuals tempted to donate and perhaps influence those who are new to the corridors of power.

But it will pay to be mindful of the strict rules to ensure a cheque forwarded in good faith doesn't bounce back with unwelcome consequences.

&#149 Emma Reid is a solicitor at McGrigors