Wilful Malfeasance

This series seeks to create awareness among we the people of the award of the International Centre for the Settlement of  Investment Disputes (ICISD)  in favour of the Claimants, Grenada Private Power and WRB Enterprises Inc. – which own the controlling interests in GRENLEC –  in their dispute with the Government of Grenada over the change in the regulatory and legislative environment triggered by the 2016 Electricity Supply Act and the 2016 Public Utilities Regulatory Commission Act.  The Acts were passed in May 2016 and came into force on August 1, 2016.   

1. Recap: 
2. In March 2017, WRB wrote to the Government claiming that the new laws amounted to three separate repurchase events as provided for in its 1994 Share Purchase Agreement through which it had acquired the controlling interest of GRENLEC.  As per the Agreement, Repurchase Events obligated the Government of Grenada to buy back WRB’s shares, to be valued by the formula set out in the Second Schedule of the 2014 ESA.  The Claimants “put”  their shares to the Government for repurchase at EC$19/share or EC$182 mill. in total.
3. Via letter of May 2, 2017, the Government responded that there was a good-faith dispute as to whether the passage of the 2016Acts gave rise to any obligation to repurchase the GRENLEC shares from WRB  and requested negotiations to “resolve the matter”. 
4. Three days later, on 5 May 2017, the Claimants filed a Request for Arbitration with ICSID.

Part 2  highlighted some of the arguments put forward by the Government in support of its counterclaim and the Tribunal’s observations and conclusions re the Government’s arguments. 

Part 3 will specifically highlight the issue of wilful malfeasance on the part of GRENLEC  as the justification put forward by the Respondent/Government for its intervention,  via 2016 legislation,  to put an end to GRENLEC’s monopoly licence.

2. Wilful Malfeasance:

• Repurchase Event:  The Respondent/Government conceded that the abrogation[1] of the monopoly status of GRENLEC under the “2016 restructuring package”   might otherwise constitute a Repurchase Event.
• SPA Provision for Government Intervention:  However, Section 7.9(a)(iv) of the SPA permits Government to intervene in the monopoly where the Claimants have “committed extreme or wilful malfeasance in, or abandonment of, its management of GRENLEC of such a nature and to such a degree as warrants” such Government action with regard to the licence.

2.1 Particulars of the Allegations of “Extreme or Wilful Malfeasance:-

• Not a Genuine Partner:  The Respondent claimed that generally, from the very inception of the Claimants’ investment, their actions show they never intended to be a genuine partner of the Government in the operation of the utility.
• Extracting the Highest Returns:   Instead, at every turn, the Claimants have operated the Company to extract the highest return for themselves, without regard to the objections or warnings of the local directors or other shareholders or the long-term viability of GRENLEC itself.  In support of this allegation, the Respondent gave the following examples:-
  • First Purchase of 2 Caterpillar Generator Units:    GRENLEC’s first major purchase under the Claimants’ control was two Caterpillar generator units.  The purchase was made without consultation with the rest of the  Board, and without disclosing the nature and extent of the relationship between Caterpillar and WRB.  
  • Using Control of Board to Favour Claimants:   WRB  repeatedly used its control of the Board to favour itself and in particular to declare dividend payments without the approval of non-WRB Board members. 
    • Special Dividend:  The Respondent particularly complained about the Special Dividend of EC $57 million issued in 2016, just as this dispute was coming to the fore.
  • WRB Management Fees:    For over 20 years, WRB continued to collect management fees under an arrangement that in 1994 was intended to be transitional to provide time to train qualified Grenadians to take over the senior positions.
  • Fees for Lawyers and Forensic Accountants on Behalf of the Claimants:  GRENLEC paid for work of these professionals which benefit only the Claimants.  GRENLEC paid the Claimants’ legal fees in the early phase of the current ICSID dispute with the GoG  and also paid for the KPMG valuation report that served as the basis for Claimants’ “exorbitant repurchase demand.”   Only the Claimants, not   GRENLEC, would stand to gain from any award this Tribunal might render against the Government.
  • GRENLEC’s Constitutional Claim Against the Government:  The constitutional claim challenged a December 2017 amendment to the 2016 ESA mandating that GRENLEC henceforth pay 5% of its pre-tax profits to the Government to be devoted to whatever purposes a government committee decided.  The Respondent asserted that the Claimants caused GRENLEC to bring “a nominal constitutional claim against the Government…[that] in fact concerns contractual obligations in the SPA” and is intended to benefit the Claimants.
• Supplementary Summary of Wilful Malfeasance:  The Respondent provided the following supplementary summary in support of its claim of “wilful malfeasance”.
  • Legal Regime:   In its negotiations with an inexperienced Government team, the claimants secured a legal regime that combined monopoly power with no cap on returns, all of which was protected by the looming threat of a repurchase penalty.
  • Dividend Payments:    The Claimants caused GRENLEC to issue almost all its profits in dividends, over 60% of which go directly to WRB and its principals or directors, without regard to the capital needs of GRENLEC and the Grenadian economy.
  • Legal Proceedings against Local Directors:   The Claimantscaused the Company to maintain legal proceedings against Local Directors[2]  for two decades for publicly and appropriately challenging the Claimants’ management of GRENLEC.  The Claimants have caused GRENLEC to refuse to pay the legal costs of the four local directors these non-WRB directors spoke out in their capacity as directors in what they consider to be the best interest of the company.
  • Performance re Renewable Energy:  The Claimants have not implemented a single utility-scale renewable energy project:
  • Using Threat of Repurchase Penalty in 1997[3]:  in 1997, the Claimants successfully used the threat of the Repurchase Penalty in the earlier ICSID arbitration to force the Government to retreat from its energy sector reforms.

2.1.1 Tribunal’s Observations:

2.1.1.1.       The Purchase of Two Caterpillar MaK Generators:   

• Conflict of Interest:   The Respondent alleged that WRB had a conflict of interest in causing GRENLEC to purchase electrical generators from Caterpillar while bypassing proper procedures and board approval.  
• Severe Problems:  Both units experienced “severe problems,” with significant adverse impact on Grenada’s electricity supply.  Caterpillar has admitted the severity and extent of the problems.  In a settlement agreement signed in 2001 between Caterpillar and GRENLEC, Caterpillar had to entirely replace one engine and do extensive work to convert the other, “at its sole cost and expense,” and to give GRENLEC a further discount of USD $1 million on the purchase price in exchange for the release of all claims relating to the generators, “including [their] performance, functionality, durability or reliability.”.
• Board of Directors Deliberation:   The Minutes of the GRENLEC Board of Directors record deliberations on the Caterpillar transaction during multiple Board meetings.
• Tribunal’s View:    The Respondent failed to establish any conflict of interest.  If contrary to the Claimants’ argument, there were any procedural irregularities in making the purchase, they did not amount to “wilful malfeasance”.  On the merits, the transaction came within reasonable business judgment.

2.1.1.2 Excessive Dividend Payments

• Using Control of Board of Directors:   The Board has the power to declare dividends by a majority vote.
• Special Dividend 2016:     In the Tribunal’s view, the dividend issue is another manifestation of the Parties’ differing views of GRENLEC’s “social” responsibility. 
  • Corporate Social Responsibility:  The Respondent believes that GRENLEC ought as a “good” corporate citizen to have ploughed more of the profits back into the business for much needed infrastructure and, in particular, renewable energy. 
  • Making Money for Shareholders:  The Claimants argue that they have indeed been good corporate citizens but that, realistically, their investment was intended to make money for the shareholders or investors and they acted accordingly. 
  • Dividend Policy:  GRENLEC’s dividend policy, including the special dividend, did not contravene any corporate contractual or statutory requirement. 
• Provisions in Grenada’s Companies Act:  There is no evidence that any of the non-WRB shareholders sought to use the provisions of the Companies Act – section 241(2)  – to seek remedy in the courts of Grenada for conduct “without valid corporate purpose” or that “discriminates between shareholders with the effect of benefitting the majority” or with “lack of adequate and appropriate disclosure of material information to minority shareholders”.
• Dividend Policy and Wilful Malfeasance:  The Respondent did not establish that the dividend policy pursued by the Claimants demonstrated “wilful malfeasance”.

2.1.1.3 Refusal to Promote Development of Renewable Energy

• The Claimants gave evidence of serious efforts in that regard. The Claimants and the Government blame each other for the lack of progress.
• Does not Amount to Wilful Malfeasance:  The Tribunal did not accept the Respondent’s allegation that the lack of success was “wilful” or that the history of these efforts demonstrate “malfeasance”.

2.1.1.4GRENLEC’s Payment of Fees of Legal and Forensic Accounting Consultant Benefitted the Claimants not GRENLEC

• The dominant purpose of the legal work was to advance the Claimants’ claim.   In the Tribunal’s view, there was no justification for GRENLEC to fund the work of forensic accountants KPMG whose mandate was to calculate and justify the amount of the Claimants’ compensation. I
• In effect, the GOG as a shareholder was being required to fund in part the litigation against itself.
• Not Wilful Malfeasance:   However, the payments do not amount to such “extreme or wilful malfeasance” as to justify denying the Claimants compensation as per Second Schedule.

2.1.1.5The Management Agreement Fees

• Business Judgement:  In the Tribunal’s view, the assessment of a need for ongoing management services was a matter of business judgment. 
• No Denial of Jobs to Grenadians:  There is no evidence that Grenadians were denied top jobs for improper reasons. 
• Does not Amount of Wilful Malfeasance:  The Claimants have a large investment in GRENLEC’s performance and the decision to continue management services at USD $220,000 per year does not amount to extreme or wilful malfeasance on the part of WRB (even under the Respondent’s broad definition of the term) to justify denial of Second Schedule compensation.

2.1.1.6GRENLEC’s Constitutional Claim Against the Government

• Benefit to GRENLEC:  The purpose of GRENLEC’s claim, whatever its legal merit, was to benefit GRENLEC.  Any indirect benefit to the Claimants would have the same, on a per-share basis, as the benefit to the GOG.   
• Not Wilful Malfeasance:  The GRENLEC litigation for the benefit of GRENLEC does not constitute “wilful malfeasance” by the Claimants in the management of GRENLEC justifying a denial of Second Schedule compensation.

2.1.2Further Observations:

• Reason for Abrogation of Licence:  Wilful Malfeasance was not on the list of reasons proffered by Government for taking back  GRENLEC’s licence.
• • Public Policy Objectives: The 2016 restructuring package was clearly motivated (i.e. caused) by the NNP Government’s public policy objectives, which differed from those of the prior NDC Government, not any malfeasance (belatedly alleged) on the part of the Claimants.
• Exercise of Contractual Rights:   However, dissatisfaction generated by the Claimants’ exercise of contractual rights does not translate into “wilful malfeasance”
• SPA Provisions:
  • Application of the Proportionality Test:  SPA provides for a proportionality test in respect of claims of malfeasance.  Applying the proportionality test required by the SPA, the numerous allegations of management deficiencies laid at the door of WRB  do not justify denial of Second Schedule compensation whether viewed individually or collectively.
  • Prior ICSID Determination::  The text clearly requires a prior ICISD determination that effect BEFORE A licence abrogation in order for the defence of “extreme or wilful malfeasance”  to apply.
  • Benefit to Government:  The provision provides the Government with an opportunity to test its allegations of wilful malfeasance risk-free before an  ICSID Tribunal without triggering a Repurchase Event.   Under a two-stage process, the Government would have the opportunity for sober second thoughts if the Tribunal ruled in favour of the investors on the issue of wilful malfeasance.
  • Compliance:  The two-stage process was capable of compliance but the Respondent chose not to initiate the first stage.
  • Procedure:  The malfeasance issue only surfaced in a formal way when it came time to defend the Claimants’ repurchase demand.  The procedural objection alone was fatal to the Respondent’s “wilful malfeasance” defence.

2.2.Tribunal Conclusion:

• Absence of  Wilful Malfeasance:  The abrogation of GRENLEC’s licence by the GoG was not caused by “wilful malfeasance”.
• Repurchase Event Established:   The Claimants have established a “Repurchase Event” by the GOG’s abrogation of GRENLEC’s 80-year monopoly.  The claimants were entitled to put their GRENLEC  shares for repurchase and payment of compensation.

[1]To formally annul or repeal a law through an act of the legislature, constitutional authority, or custom. …

[2]

[3]On assuming office after the election of  June 1995, the NNP government declared that for procedural reasons the 1994 ESA had never taken effect.  It sought renegotiation of various provisions of the SPA (including the purchase price for the GRENLEC shares).  WRB initiated ICSID proceedings to obliged the GoG to repurchase the shared.  One repurchase event, hurricanes, was removed from the SPA The settlement led to a 1998 Supplemental SPA which affirmed the validity of the 1994 ESA and provided additional related relief to GPP/WRB.