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POST OFFICE LIMITED
BOARD REPORT
GLO separation solution:
cetae Managing Issues Arising from Meeting
Title: GLO Related Matters & Project Date: 28 July 2020
Starling
. Mark Underwood: LCG Ben Foat: Group General
Author: : . Sponsor:
Operations Director Counsel
Input Sought: The Board is asked to:
e Approve, in principle, an internal restructure / ring-fencing whereby a new ‘Historical
Matters’ business unit including a historical Group executive within the existing Post
Office Group, reporting into the existing Post Office Board, noting this does not prevent
a new separate entity being formed in due course.
e Approve the development of an implementation plan which is to be brought back to
Board in September.
Previous Governance Oversight
¢ Pre-Meetings with UKGI 10 June & 30 June, and BEIS 30 June 2020.
e PGLO SteerCo 8July 2020.
e Post Office Group Executive Meeting of 15 July 2020.
Executive Summary
1. Although addressing the issues caused as a result of historical practices is important and
necessary for Post Office to reset the relationship with Postmasters; the amount of
Executive and Board time these matters consume restricts the focus required to ensure
Post Office realises its forward looking strategy. The intensity of these matters will also
likely increase over the next 12 - 24 months.
EE Post O° ce bas
advised UKGI, BEIS and HMT that Post Office will not be able to fund the potential financial
exposure associated with these matters. Post Office will need support from Government.
Talks to agree the appropriate mechanism and quantum, have begun and need to continue
regularly to ensure these are not overlooked particularly in the 3 year funding round which
we understand begins formally in September.
3. In terms of managing the matters which give rise to historical issues and liabilities going
forward, Post Office has 3 options:
i. Do Nothing: These matters and the programme teams continue to be reported up
through the existing Post Office Group Executive and the existing Post Office Board.
ii. Internal Re-structure / Ring-fencing: Ar istorical Matters’ Group Executive
is formed as an additional Business Unit the existing Post Office Group,
reporting into the existing Post Office Board.
iii. Separate Legal Entity: a new legal entity is created, outside of the current Post
Office Group, with a new ‘Historical Matters’ Group Executive reporting into a new
Board.
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4. The recommendation is for Post Office proceed on the basis of option 2. This option is less
complicated than forming a new legal entity outside of the group and does not prevent a
new separate entity being formed in due course, once some of the current ‘unknowns’
become known. If the Board approve this recommendation, immediate next steps include
funding and resourcing a project team, with support from external legal advisers and
consultants. The first deliverable being an implementation plan for the September Board.
Questions addressed
1. What options exist for Post Office to separate itself from managing historical issues arising
from the GLO and Starling?
2. What are the advantages and disadvantages of each option, including the associated
timeframes and costs?
What is the recommended approach and why?
What are the risks of not taking action now?
Report
Context
aw
5. This paper and its recommendation has been brought to the Board owing to the following
developments / ongoing matters:
« The recent decision from the CCRC to refer a number of private prosecutions brought
by Post Office to the Court of Appeal.
¢ The Historical Shortfall Scheme; stood up by Post Office in May 2020, to enable current
and former postmasters who were not claimants in the GLO, to make claims for losses
relating to historical shortfalls.
« Post Office’s defence of a claim brought by CWU to establish ‘worker rights’ (“Starling”)
for a subset of postmasters.
6. The GE and Board receive regular briefings on each of the above matters and will be aware
therefore of the significant financial exposure to Post Office, individually and as a collective.
The GE and Board are also therefore aware of the amount of time these matters consume
at Board and GE Meetings. The level of ‘stewardship’ these complicated matters also require
outside of these meetings from members of the GE, particularly in respect of the Group
Chief Executive Officer and Group General Counsel, is significant.
7. Although addressing the issues of the past which gave rise these matters is important and
necessary to reset and evolve the relationship with Postmasters, the CEO and the rest of
the GE need to be able to focus on delivering a self-sustaining commercial future for the
company.
Options
8. Post Office, UKGI, BEIS and HMT recognise that although Post Office has managed the
financial costs of GLO and Starling related matters to date (including the £58m settlement
figure agreed in December 2019 with the GLO claimants), should any of the potential
financial exposure associated with these matters crystallise, Post Office will need support
from Government.
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9. Talks to agree the appropriate mechanism and quantum, should begin and continue
regularly to ensure these are not overlooked in the 3 year funding round which we
understand begins formally in September. Post Office should seek two distinct ‘pots’ of
funding; network funding and funding to manage and provide for the potential liabilities
attached to these matters.
10. In terms of the management of these matters going forward, broadly speaking Post Office
has 3 options:
i. Do Nothing: These matters and the programme teams continue to be managed and
reported up through the existing Post Office Group Executive and the existing Post Office
Board,
ii. Internal Re-structure / Ring-fencing: A new ‘Historical Matters’ Group Executive is
formed as an additional Business Unit within the existing Post Office Group, reporting
into the existing Post Office Board. A new executive director within that executive
committee would be appointed to have accountability for managing this programme of
work.
ee I
HM Treasury I
Network ond Post Office
Post GLO Limited
Fanding
{Board}
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iii. Separate Legal Entity: a new legal entity is created, which sits outside of the current
Post Office Group, with a new ‘Historical Matters’ Group Executive reporting into a new
Board. The current programme teams move into this new separate legal entity.
Dapartrore for
Euniness, Energy
Eieoxsiral Seategy
if
Post Office
Limited
{Board}
(—T ~ J
11. Each of the options, along with their respective advantages and disadvantages are set out
below. Also included are indicative timeframes and costs.
Post 610
Funding
Historical
‘Matters
Executive
POL Group
Executive
Considerations Option 1 Option 2 Option 3
Qo Nothing /StatusGuo I internal Restructure / Ring-fencing inside I Create a Separate Legal Entity outside of Post
Post Office Group Office Group
Executive Summary
High Level * No change to the status quo I * Existing Post Office Group Executive I © Existing Past Office Group Executive and Board
Advantages and thus, the simplest of the I — can focus on delivery the future can focus on delivery the future strategy for Post
3 options, with nolead time, I strategy for Post Office. Office.
‘set up’ costs or broader
considerations required.
.
Simpler and cheaper to execute than ® Allows for ‘true’ separation between the
creating # separate legal entity gutside I aranagenent of historical issues and delivery of
of the Post Office Group {and does not I a new strategy.
prevent you from doing so in dae
course, ance some of the current
“unknowns’ become known).
High Level # Not believed to be © Existing Post Office Group Executive Existing Post Office Group Executive and Board
Disadvantages sustainable in the medium to loses oversight of what is an important joses oversight of what is an important matter —
Jong term. matter ~ the appropriate management I the appropriate management of which is
# Existing Post Office Group of which is required in order to reset required in order to reset the relationship with
Executive & Board continue the relationship with Postmasters. Postmasters.
.
to spend a disproportionate I « Challenges regarding establishing clear I © Complicated and expensive, with a long lead
amaunt of time providing and transparent separatian between time and dedicated programme team (with
oversight and management, Post Office Group Executive and external support) required in order to execute,
of these matters. Historical Matters Group Executive.
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I Considerations _ omen Option 2 oo I Option 3 . I
: Deo Nothing / Status Quo _ internal Restructure / Ring-fencing inside Create a Separate Legal Entity outside of Post
Post Office Group Office Group
® Existing Post Office Board continues to
spend a disproportionate amount of
time providing oversight and
management of these matters,
Key Design Principles
Provides No: requires separate funding I No: requires seperate funding No: requires separate funding mechanism with
financing for I mechanism with Government. I mechanism with Government. Post Government, Past Office is unalile to proceed
fiabilities? Post Office is unable to proceed I Office is unable to proceed without a without a separate fanding mechanism in placee,
without a separate funding separate funding mechanism in place, I though Treasury are likely to expect some ferm of
mechanism in place, though though Treasury are likely to expect contribution from Post Office,
Treasury are likely to expect I some farm of contribution from Past
some form of contriinition from I Office,
Post Office,
Provides No: existing Post Office Group I Yes: « new ‘Historical Matters’ Group Yes: a eye ‘Historical Matters’ Group Executive i
bandwidth for I Executive will continue to Executive is formed as an additional formed outside of the existing Post Office Group.
existing Post — I provide oversight of these Business Unit within the existing Post
Office Group I matters, with Group GC as Office Group.
Executive? sponsor.
Provides No: existing Post Office Group I Ne: a new ‘Historical Matters’ Group Yes: a new ‘Historical Matters’ Group Executive
bandwidth for I Executive will continue to Executive will report into the existing. will report inte a new Board gutside of the Past
existing Post I report up into the existing Post I Post Office Board. Office Group.
Office Board? I Office Board. However Post Office Board will retain
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isic ii rity is bein
delegated/transferved to an external enti
mo hrouals claioy
cher novernance agreements} satisfy itself that it
complies with its director's duties,
Any claims management / governance agreements
Funding for * POL to be funded directly by I # POL tobe funded directly by HMT/ I © As POL retains liability for claims, funding must
litigation and HMT / GEIS in respect of BEIS in cespect of i} Network funding: still be provided for claims settlement liability.
claims liability Network funding: and ii) and i} Litigation / claims liability * POL to be funded either directly or indirectly by
Litigation / clalens fabiiity funding, AMT /BEIS, UKGI's current proposal is that HMT
funding. / BEIS will Fund NewCot, which in turn wil
indemnify POL.
© if funding is to be provided by NewCo, PX
Board must be sutistied that NewCo has abilit
isfy funding obligati ewCo will
have no sigalficant assets, Therefore, POL Board
will need to review and be comfortable with
+ in cespect of Litigatian / claiens tiability funding. POL would receive Network funding
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6 GLO separation
Considerations I = Optiond Ration 2 I Optins a
: Deo Nothing / Status Quo _ internal Restructure / Ring-fencing inside Create a Separate Legal Entity outside of Post
Post Office Group oo (Office Group :
funding arrangements between NewCo and BEIS
as shareholder.
Timing * No upfront timing + Establishment of the litigation + Establishment of the litigation
consideration management/governance framework management/governance framework as well as
+ However, any increased as well as additional requirements additional requirements for establishment of
claims management activity sing, executive rectultment, NewCo, including director appointment,
would cansume even more executive recruitment and NewCo
Incorporation/erticles of association,
Establishment of NewCo should be relatively
straightforward and unlikely to cause significant
delays, assuming use of shelf company and
articles reproduced from POL’s existing articles,
However, the additional complexity of
establishing the governance framework on ant
arm's length basis will be more time consurning.
of existing Post Office Group
Executive's time.
Due diligence * No due diligence required Low / medium level of due diligence High level of due diligence required to identify
required to identify personal and assets, personal and business functions to
business functions required to transfer to NewCo,
establish internal ring-fenced business I, Asset, contracts and employee transfer, shared
unit. senvives and change of control due diligence.
# Market/fair value diligence for sale assets .
Transaction # No transaction * No transaction documentation * Business Sale Agreement to transfer required
documentation I dacumentation required. required, assets and business functions to NewCa,
Organisational I » No new or additional * Litigation management/governance _I # Litigation management/governance framewark
structure and structural or governance framework to be established for ring to be established for New(o,
Governance requirements. fenced business unit, # NewCo Executive has day-to-day oversight of
* Existing Post Office Group I * New Historical Matters Executive claims management and reports directly to
Executive retains oversight of I within POL has day-to-day aversight of I NewCo board,
claims management, claims management and reports
directly to gxisting POL board,
*
Re-establishment of Board
Subcommittee. Postmaster
Representative?
Agreements Funding Agreement with Funding Agreement with HMI/ BEIS: Funding Agreement with HMT / BEIS and NewCo:
and contracts HMT / BEIS for for claimsfliabiiities. for daims/liabilities,
claims/liabilities.
*
Employment contract{s) for any new Claims management agreement between POL
No additional agreements or I — designated Historical Matters and NewCo.
contracts required. Executivefemployees.
Indemnity agreement between NewCo and POL.
Shared Services agreement for any POL shares
services required by NewCo,
Confidentiality and Data Sharing Agreements for
providing information on historic claims to New
Co.
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Considerations I = Optiond Option 2 — Option 3
: Deo Nothing / Status Quo _ internal Restructure / Ring-fencing inside Create a Separate Legal Entity outside of Post
oo Post Office Group ae Office Group i
* Licences, permits and insurances required to
operate NewCs as standatone business,
‘* Employment contract(s} for NewCo
Executivefemployees.
# Appointment letters for NewCo Board.
* AoA and other constitutional documents.
Funding for * No additional operational * Minor additional ongoing operational I © Higher additional ongoing operation funding
ongoing funding required. funding required to support new required te support NewCo as a standalone
operations business unit, including any new business,
employees or roles required to
oversee business unit,
Funding of NewCo either to come directly from
HIMT /BEIS or through payment from FOL for
iitigation management services.
Tax # No additional tax + No additional tax considerations. *# Tax analysis required for transfer of business
considerations. and ongoing relationship between POL, and
NewCo,
* NewCo will require separate tax advice
Regulatory # No additional regulatory + No additional regulatory * Analysis required to determine whether NewCo
considerations, considerations. is undertaking a regulated activity as a ‘Claims
Management Company’.
People and * No additional employment I New business unit to be made up of I ® Appointment of Newto Board ~ who will
pensions or pensions consh existing FOL employees. appoint directors? Will these be the current POL
«+ Employment/appaintment of new directors or a new board appointed by GEIS (as it
Historical Matters Executive. Is outside of POL Grown}?
‘* No additional pensions considerations. I * NewCo to employ new and existing POL
employes ~TUPE considerations.
«© Who will transfer ey
+ Employment/appointment of NewCo Executive.
* Knowledge transfer / culture- How to eloyment/appal
leverage information / learnings to I * Pensions considerations for transferring
ensure that POL retains the lessons ernployees.
Jearnt from GLO and continues to + Who will transfer
embrace additional learnings ard its 1s Knowledge transfer / culture ~ How to leverage
new culture of transparency and information / learnings to ensure that POL
fatness retains the lessons learnt from GLO and
continues to embrace additional learnings and
its new culture of transparency and fairness.
Indicative # No additional costs «© Timing 3-6months # Timing 6-12months
tiemaFrevee weet » Legal fees: cE 100k * Legal fees: c£210k
cost
+» Programme Team: c£240k # Programme Team: c£480k
# Consultancy firm: £ £80k # Consultancy firm: c£ 180k
.
Search, appointment and
Search, appointment and remuneration of
remuneration of members of the members of the ‘Historical Matters Group
‘Historical Matters Group executive: executive and NewCo Board: the
the
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ation
I Considerations Option 1 Option 2 Option 3
Do Nothing / Status Quo Internal Restructure / Ring-fencing inside I Create a Separate Legal Entity outside of Post
Post Office Group Office Group
‘* Total: »£540k + ongoing costs (e.g, * Total: »£890k + ongoing costs (e.g.
remuneration of Exes) remuneration of Exec)
12. The level of cost, complexity and disruption increases as you move from option 1 to option
3. This is to be balanced against the level of genuine separation achieved. ‘Doing nothing’
risks Post Office being unable to realise its forward looking strategy and failing to become
a self-sufficient, commercially sustainable organisation - particularly as the workload and
subsequent required level of ‘stewardship’ from the Group Executive and Board will likely
increase over the next 12-24 months.
13. Given the current unknowns® and the associated cost, complexity and timeframes
associated with the remaining options - the recommendation is that Post Office proceed
on the basis of option 2 - A new ‘Historical Matters’ Group Executive is formed as an
additional Business Unit within the existing Post Office Group, reporting into the existing
Post Office Board.
Next Steps
14, Ifthe Board approve the recommendation, a project team will be resourced and stoad up,
supported by external legal advisers and a consultancy firm. The immediate deliverable,
for the September Board, will be a comprehensive implementation timeline and plan which
will include the considerations set out in the earlier table. This requires funding.
15. Aletter should be sent to UKGI and BEIS setting out the concept and implementation plan.
16. KPMG and Linklaters are well placed to support Post Office with delivery owing to their
involvement on Project Legal Entity Optimisation (LEO). Their support is required owing
to a lack of bandwidth and experience in executing these types of matters within Post
Office. KPMG would be a non-compliant direct award and procurement risk exception
notice will be included within the separate Procurement Board Paper.
7@.g. the merits of claims brought through the historical Shortfall Scheme; the number of referrais which will be made to the
Court of Appeal; whether any historical convictions will be overturned an ims for malicious prosecution brought; whether the
October Starling Tribunal will proceed in October and whether the claimants will actually establish worker status.
8
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