United States: Key compliance takeaways from the Halliburton shareholder derivative action settlement

Enterprise Update

On 19 July, Halliburton settled a shareholder derivative action which had been filed in a state district court in Harris County, Texas, three years ago. The action accused Halliburton board members of facilitating activities violating the Foreign Corrupt Practices Act, such as a bribery scheme in Nigeria, receipt of kickbacks in relation to government contracts and conducting illegal business in Iran. The action further alleged that this misconduct occurred because of a systemic lack or failure of internal controls at Halliburton.

Notably, under the settlement, approved by Judge Josefina Rendon, Halliburton is not required to pay damages; rather, the company agreed to implement changes to corporate governance and internal control. These changes include a number of terms concerning the compensation for officers and directors, improvements of the company's compliance programme and the strengthening of the role of board members.

Among the terms of the settlement are clawback provisions for the recovery of incentive compensation, both monetary and non-monetary. The provisions apply to officers or directors found to have participated in illegal activities or have permitted employees over whom they had supervisory responsibility to do so.

Halliburton also agreed under the settlement to enhance the role of its audit committee in assisting board oversight of Halliburton's risk management activities by holding regular meetings regarding risk management issues and keeping it aware of significant risks. The audit committee will also be required to communicate regular risk management reports to the board and timely disclose illegal activities to the Securities and Exchange Commission.

As part of the compliance-related improvements, Halliburton agreed to enhance its compliance training. Halliburton will be required to train annually, face-to-face or online, employees working in high-risk countries who have a job descriptions associated with business development or procurement activities.

The settlement further stipulates that Halliburton will rewrite its code of business conduct (COBC) in a common language so that it can be understood by a layperson. Halliburton also agreed to clearly state in its COBC that foreign bribery and kickbacks are prohibited and that Halliburton will not use agents recommended by foreign governmental officials without conducting appropriate due diligence.

In addition, the revised version of Halliburton's COBC will incorporate provisions to comply with the UK Bribery Act (the Act). In particular, individuals and entities covered by the Act will be prohibited from engaging in bribery in all commercial transactions (irrespective of whether the bribe is paid to government officials) and facilitation payments paid to foreign officials to expedite functions they would normally do anyway, such as clearing goods through customs.

The terms of the settlement also specified communication requirements. Halliburton must publish newsletters, email updates and intranet postings, authored by or attributed to senior managers, which address compliance, control or ethical issues at least six times per year. Moreover, Halliburton agreed to strive to maintain a ratio of one audit services position for every 5,000 employees and not to allow an individual involved in the company's audit to become Chief Financial Officer for a certain period of time.

The settlement was a beneficial outcome for both sides: for the plaintiffs as they faced difficulties in proving liability of the accused director for the illegal activities, and for Halliburton as it avoided paying damages. It shows that judges are willing to employ means other than the payment of damages as a form of redress for such claims.

The terms of the settlement give specific guidance on good corporate governance and illustrate ways of incorporating international anti-corruption standards. It may well be the case that some of these terms will become standard provisions in COBC of companies in future. Objections to the settlement may be submitted by 17 August 2012.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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