ANALYSIS OF PROVISIONS FORTÍTULO LITIGATION IN SubtítuloCOMPANIES OF THE Ibex 35 Diciembre 2015 Madrid, September 2017 Barcelona • Bogota • Buenos Aires • Havana • Lima • Lisbon • Madrid • Mexico City • Miami • New York City • Panama City • Quito • Rio de Janeiro • Sao Paulo Santiago • Santo Domingo • Washington, DC Index Introduction 3 Analysis of provision of funds for 5 litigation and risks in companies of the IBEX 35 11 Quadruple impact on reputation 12 Team of Specialists Introduction In recent years, we have witnessed a considerable Though they are listed companies, the regulations are increase in the litigiousness of public and private life in relatively ambiguous with regard to the obligation, Spain. Society and companies are taking legal action or otherwise, of providing information on the legal more and more frequently and for a great variety of risks identified (or the lawsuits they are facing), as issues, which has led to severe overburdening of the well as the need to publicize the provisioned amounts courts. Especially during the years of the economic associated with those risks. The regulations makes crisis, that increased caseload has been particularly it obligatory to inform about them if the risk is evident in relation to banking issues. In July this year, high, and it is the company itself and its consultants the consumers’ association FACUA reported that the which are responsible for evaluating that risk, Courts of First Instance specializing in floor clauses without any other reference criteria which would are overwhelmed because they do not have sufficient help to standardize the degree of information and means to cope with the claims filed in this regard. details they must provide. In the end, the decision on As reported in the newspaper El País, according to whether to inform or not is reduced to a relatively data from the General Council of the Judiciary, in the subjective evaluation which depends on the opinion month of June 2017 alone almost 16,000 claims were and experience of the experts and the judgment of the presented to those courts, and it is expected that, over company’s management. the course of the year, they will receive more than 190,000 claims related to mortgage clauses. Likewise, IAS 37 indicates that, if the lawsuits covered by the provisions are related to third parties and the The need for companies to make financial provisions company believes that the amount reported would in order to pay the costs associated with these matters cause damage to the company, it will only inform of has increased very considerably. the facts and not the amounts. In this study, we have examined the public data which Thus, we must understand that, if companies do not the companies of the IBEX 351 provide with regard inform and do not give details of the amount, that is to the amounts and concepts of provisions for legal not necessarily because they have not identified legal risks.2 Those data can generally be obtained from the risks or do not have any lawsuits in progress, but that consolidated annual accounts, though they are also the company and its consultants do not consider the included in the corporate reports and audit reports. risk to be sufficiently high. 1 The IBEX 35 is composed of the 35 companies with the greatest liquidity listed in the Electronic Stock Market Interconnection System (SIBE) in the four Spanish stock exchanges (Madrid, Barcelona, Bilbao and Valencia). 2 The amounts of funds allocated to provisions for litigation are those which the company considers could be necessary to meet the costs of ongoing litigation, or for any risks it has identified, even if there are no lawsuits in that regard. 3 Before going further in the analysis of the figures, it is it is possible that not all the companies include the necessary to explain that provisions are an essential same items in the selected provision. Thus, while some item in the preparation of annual accounts, as well as include, for example, the provisions deriving from the an aspect to be carefully analyzed by external agents, regulatory framework, others only mention the costs because, due to the subjectivity inherent in their equal to the amounts claimed in the lawsuits. nature, they can be a focus of irregularities or ways in which the accountancy can be questioned. In this study, we have taken into account the data attributable to provisions of funds to cover probable lawsuits and other liabilities. Thus, we detail the amounts allocated by the companies of the IBEX 35 to these provisions in 2016 if they were included in the annual accounts, and we outline the most relevant conclusions by sectors of activity and types of risks or lawsuits they must respond to in all the markets in which they are present, though they are listed in Spain. Likewise, in some of the most significant cases, we will consider their evolution compared to the previous year (2015) and will give some information on the provisions of 2017 which have already been published during the year to date. It is necessary to clarify that, as there is no specific nomenclature used by all companies to refer to the provision set aside for lawsuits, the concept taken into account for this study differs in many cases (some examples are “provision for liabilities”, “provisions for taxes and other legal contingencies and other provisions”, “judicial matters and lawsuits for taxes pending” or “provisions for lawsuits, compensation and other legal or contractual obligations”). Therefore, it should also be noted that 4 Analysis of provision of funds for litigation and risks in companies of the IBEX 35 This study reviews the public information provided 4. Finally, there are also three companies which we in the consolidated annual accounts of the companies were unable to take into account in this analysis of the IBEX 35 in financial year 2016. Thus, we because they do not indicate the amount or give observe that those companies treat the information any other information about their provisions for about provisions for litigation and legal risks in four risks or litigation, either because they don’t exist different ways, depending on whether or not they or because they do not consider them to be of provide information about the amount and about sufficiently high risk to be included in their annual specific cases: reports. Those companies are Técnicas Reunidas, Abertis, and Mapfre. 1. The vast majority of the companies (a total of 21 of the 35 analyzed) indicate both the amount of THOSE WHICH ALLOCATE THE LARGEst their provisions and information and details of AMOUNts: the cases and the types of risks identified. Those 21 companies are: Grupo ACS, Repsol, Endesa, The companies of the IBEX 35 which indicate that Gas Natural, Iberdrola, ArcelorMittal, Acerinox, they have set aside funds for lawsuits and risk in this Acciona, Grupo Ferrovial, Viscofan, Supermercados regard allocated over 11,659 million euros in 2016. To Dia, IAG (Iberia), Mediaset, AENA, Meliá Hotels, give us some idea of the magnitude of that figure, it is BBVA, Banco Santander, Bankia, Indra, Amadeus over five times the amount allocated to the Ministry and Cellnex. of Education, Culture and Sport in the General State Budgets (which was 2,483 million euros in 2016). The company which allocated the largest amount in The need for companies to make financial year 2016 was Banco Santander, with almost financial provisions in order to 3 billion euros, mainly for litigation abroad, notably tax issues in Brazil, the United States and Spain, pay the costs associated with consumer claims in the UK, and commercial lawsuits these matters has increased very with other companies for different matters, as detailed below in the section on the types of legal threats faced considerably by the analyzed companies. Banco Santander was also in first place in 2015.The amount allocated by 2. On the other hand, there are eight companies Figure 1. No. of companies according to which, though they report the amount of the degree of information they provide provisions for litigation, do not give a detailed breakdown of cases or identified risks. Those They indicate the amount companies are Enagás, Inditex, Bankinter, set aside for provisions Caixabank, Banco Sabadell, Merlin Properties, Red for litigation Eléctrica de España and Gamesa. YES NO 3. In addition, there are only three which do They give 21 3 information on the YES not provide a figure which can be attributed cases and/or risks identified 8 3 specifically to the provision for litigation, but NO they do provide information on the cases or the risks identified. Those three companies are Source: in house Telefónica, Grifols and Inmobiliaria Colonial. 5 that banking entity is virtually double that of the On the other hand, it is notable that Bankia was in company with the second largest provision: Repsol, second place among the companies with the largest with over 1.5 billion euros set aside for litigation and provisions in 2016, but then fell to eighth place in legal risks (mainly for tax-related issues). The top 2016. In 2015, its provisions were over 1.9 billion euros, ten is completed by the following companies, in this whereas in 2016 that amount fell to just over 420 order: Caixabank, BBVA, Grupo ACS, Endesa, Iberdrola, million. That fall is due mainly to the payment of 1.78 Bankia, Ferrovial and ArcelorMittal. billion which the company had set aside in 2015 to meet the claims for the return of the amount invested The three companies with the largest provisions by minority shareholders in the initial public offering in 2016 (Banco Santander, Repsol and Caixabank) during the flotation of the banking entity in 2011.