Friday, 24 February 2017
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freeport2Freeport Retail Limited, not to be confused with Freeport – the worthless and insolvent company that 'manages' the Alcochete shopping centre just outside Lisbon, recently published its 2013 accounts.

Freeport Retail Limited is a management company set up by the then directors of Freeport back in August 2010. Then Freeport managing director  Robert Hodges, commented a year later after the formation of the company, “The new Freeport Retail offer allows us to grow income from other investors using  the same expertise that have seen us improve profitability of Freeport's assets  year on year for the last four years, in challenging broader economic  condition.”

Can anyone interpret this? There should be a law that punishes overpaid, and often useless, company officers who utter this sort of nonsense. Freeport went on to make losses in the next two years. Furthermore, the term “challenging broader economic conditions” referred to the austerity measures imposed by the Passos Coelho fiasco of a government on the Portuguese people. How did Freeport manage to make such profits?

Quite why Freeport's directors felt they needed yet another company to manage Freeport's affairs is a bit of a mystery. There was already another company called Freeport Retail Limited which was formally wound up on 1 August 2008. How much this company was involved with Carlyle, if at all, has still not been determined, though it was already in the process of being dissolved as far back as March 2006 – before Carlyle, Freeport's ultimate owners, took over Freeport's operations.

There are often legitimate reasons for setting up another separate company; every limited company is legally bound by its constitution (the memorandum of association) which prevents its directors from taking decisions that are outside the purpose for which the company was formed. This is more important in larger companies or public limited companies which may have many shareholders. Shareholders usually do not want directors taking actions for which the company was not formed. Even in smaller companies this can prevent directors taking decisions which are not in  the interests of a company, like one director, in for example a publishing company, suddenly deciding to buy a go-kart (perhaps to let his son use it) and claiming the company could rent it out.

Such actions may seem absurd but they are not unknown. At the time of its formation three of the directors (Robert Hodges, Iestyn Roberts and Eric Sasson), as well as Ian Brownstein (company secretary) were involved with Freeport. They have since all resigned their positions at Freeport (last year) and effectively been replaced by just one person – Matthew Lo Russo.

Unlike worthless (and insolvent) Freeport, Freeport Retail Limited does have a positive balance sheet, with the profit and loss account showing a balance of £181,018 – up from £84,668 in 2012. But, such a figure is meaningless, as we will see.

On the plus side it is nice to see that the company's accountants, Ian S. Anderson, have at least managed to produce a set of accounts that are numerically accurate, unlike the previous year's. There was minor £300 error in the 2012 accounts, which the Institute of Chartered Accountants of England and Wales (of which Ian Anderson is a member) merely referred to as “sloppy”. Even the comparatives (previous year's figures) have been amended to now show the correct amount. That's progress. It's reassuring that a member of an esteemed accountancy body can now add up, or can he?

As already stated, the figure in the profit and loss account is merely a fabrication: it's completely irrelevant. It could almost be anything that you want it to be. When we look at the notes to the accounts we find that the company's main shareholder is CEREP Investment I Sarl, a company registered in Luxembourg. Anybody who has been following my articles on Freeport will know that this company is the ultimate controller of Freeport - at least in Europe, it's ultimate controller is the American private equity firm Carlyle.
 
Freeport's only shareholder is CEREP UK Investment D GP Ltd, a company registered in the UK, and this company's only shareholder is CEREP Investment I Sarl - the main shareholder of Freeport Retail Limited. Now you can see how the circle is definitely squared (or fixed) to ensure that Freeport Retail Limited's profits are determined by its relationship to its main shareholder.
 
In the notes to the accounts, note 4 (relating to related party disclosures) informs us of two things: CEREP  Investment I Sarl is a shareholder (with 200 A shares) and has appointed two directors to the board; during the year Freeport Retail Limited made £1 million worth of “sales” to CEREP Investment I Sarl and its subsidiaries.

Because Freeport has hidden behind, sorry, 'filed abbreviated accounts' it is impossible to calculate how the profit and loss is arrived at. Safe to say, that the majority of its “sales” have either been to CEREP Investment I Sarl and other Freeport/CEREP/Carlyle associations. By the way, the total corporation tax due for all this commercial activity – at least according to the accounts is just £963.

Perhaps we should take this opportunity to remind the current president of the Institute of Chartered Accountants of England and Wales (ICAEW), Martyn Jones, of his own words when he was inaugurated back in June 2013 -

“The feature of the criteria (a set of principles proposed by Lord Benson which Jones had already referred to) is that rules and standards need to be for the benefit of the public and not for the private advantage of the members [of the ICAEW].”

He added, “we recognise the importance of individuals and companies paying the right amount of tax. Our view is that there is no room in our profession for aggressive tax avoidance and we have told our members that their ethical framework does not allow them to take part in artificial schemes.”(1)

It seems that Ian Anderson, a member of the ICAEW, clearly wasn't listening, or perhaps his own “ethical framework” thinks that a company that made over £1 million worth of “sales” should only have a corporation tax liability of £963. If Freeport Retail Limited isn't part of an artificial scheme which is designed to aggressively avoid paying tax, it's difficult to think of one that is. Compare the £963 corporate tax liability with the £168,074 paid in dividends (down on the £222,033 in 2012) to the directors and shareholders - and we should also assume that all the directors probably received substantial salaries as well.

As already stated, three of Freeport Retail Limited's directors, as well as its current company secretary (Ian Brownstein) were also directors or associated with Freeport up until the September last year. One could be forgiven for thinking that Freeport Retail Limited is really just a mechanism for extracting as much wealth as possible, both from Freeport and some of the other Carlyle-controlled companies in Europe.

Another interesting item that is found in note 5 of the accounts (Ultimate Controlling Party) is the statement that informs us that there is no controlling party of the company. This is difficult to believe, even when you look at all the facts.

Freeport Retail Limited's shareholders according to the annual return 6 August 2013 were CEREP  Investment I Sarl with 200 A ordinary shares, directors Iestyn Roberts and  Christopher Milliken with 360 B ordinary shares, company director Ian Brownstein, with 64 B ordinary shares, and finally Rasath Susiji Liyanarcahchi  with just 16 B ordinary shares. As each share is worth £1 this makes up the £1,000 share capital on the balance sheet (200 A and 800 B ordinary shares).

As well as being informed in note 5 that there is, apparently, no controlling party with regards to the company, a dubious claim, we are also informed that CEREP Investment I Sarl has appointed two directors to the board.

But the accounts have not named the directors. How thoughtless, or was this intentional? Let's see if we can work out who they are.

There are four directors: Roberts, Milliken, Hodges and Sasson. Of the four, Milliken seems to have had the longest association with Freeport going back to the days of the bribing scandal, and Roberts became CEO just before Carlyle took over. Hodges and Sasson were part of the Carlyle European team (Carlyle European Real Estate Partners) since 2001.  The annual return states that both Hodges and Sassoon are managing directors. So given their association with CEREP it's pretty safe to assume that Robert Hodges and Eric Sasson are the two directors appointed by CEREP Investment I Sarl –  which has 200 A shares.

The annual return stipulates that both the A and B shares have the same rights – the right to vote and receive dividends and other distributions in accordance with the articles of association (the company's constitution). The real issue is in the strength of the voting rights, but according to the articles of association it seems all the shares carry an equal vote (article 24.5). Though the articles of association have been signed in the name of CEPERP Investment I Sarl, and the company has appointed two directors (Hodges and Sasson) to the board. It seems that the real reason for the split in shares is that the owners of B shares are entitled to incentive payments (24.3), while the owners of A shares (CEREP) get a 70% ratio of the profit distribution.
 
Two further questions remains: what is the role of the fourth minor shareholder with the 16 B shares, Rasath Susiji  Liyanarcahchi? He is not listed on the annual return as a company officer. Secondly, why are Hodges and Sasson still representing CEREP when they apparently resigned their positions in March last year?
 
None of the above should be seen as needless nit-picking. When it suits them these multinationals (it should be assumed that Freeport Retail Limited is controlled by Carlyle – the ultimate owners of Freeport) will refer to any insignificant part of a contract or legislation that supports their case. It's only fair to do the same to them.  After all, the Alcochete shopping centre is now considered as 'private property' by Freeport, even though it only acquired the land by heavily influencing (some would say 'bribing') the then minister for environment and one of the weakest Prime Ministers to ever head a Portuguese government – the incompetent and some say 'corrupt', Jose Socrates.
 
Salazar must be spinning in his grave!


(1) New ICAEW president makes inaugural speech. Economia, 5 June 2013, accessed 12 January 2014.