Annex B
Departmental Minute dated 17 December 2002
concerning the contingent liabilities remaining with MoD following
the sale of a minority stake in QinetiQ to the Carlyle Group
It is normal practice when a government department
proposes to assume a contingent liability in excess of £100,000,
for which there is no specific statutory authority, for the department
concerned to present to Parliament a Minute giving particulars
of the liability created and explaining the circumstances; and
to refrain from incurring the liability until 14 days (exclusive
of Saturdays and Sundays) after the issue of the Minute, except
in cases of special urgency.
As outlined in Statutory Instrument 1246/2001
(made on 28 March 2001), the Defence Evaluation and Research Agency
(DERA) was renamed the Defence Scientific and Technology Laboratory
(Dstl) and concurrently net assets with an estimated value of
£384.5 million were removed from the Trading Fund. These
net assets were passed to a newly created company, QinetiQ, in
return for a consideration to the Ministry of Defence (MoD) of
shares and debt in the company. QinetiQ is currently 100% owned
by the Government. Two previous Departmental Minutes dated, 4
December 2001 and 8 July 2002 respectively, have been submitted
to Parliament informing of the allocation of liabilities between
QinetiQ and the MoD when QinetiQ was vested as a company.
The US of S announced in the House of 5 December
that a share of QinetiQ is to be sold to The Carlyle Group, to
grow the value of the business. MoD anticipates completing this
transaction with Carlyle early in the New Year. MoD will retain
around 62.5% of the economic interest in the business to ensure
the taxpayer shares in this growth. MoD plans to sell its entire
stake in QinetiQ, probably through a flotation on the stock market,
within three to five years.
During negotiations, and with assistance from
specialist legal and financial advisers, MoD has sought to minimise
the overall level of risk transfer back to the Department. However,
as is normal for transactions of this nature, the MoD has been
required to offer The Carlyle Group (acting through a newly formed
holding company, QinetiQ Holdings Limited) certain indemnities
and warranties. MoD has agreed to indemnify or provide Carlyle
with warranties covering possible liabilities in the following
major areas:
(a) ownership by MoD of the shares in QinetiQ
Group plc;
(b) current or pending litigation;
(c) ownership by QinetiQ of its material
assets;
(d) completeness of the information provided
by the MoD in relation to QinetiQ's title to its premises;
(e) legal transfer to QinetiQ, and ownership
by QinetiQ, of its intellectual property;
(f) tax liabilities incurred but not paid
before completion;
(g) the structure, organisation and solvency
of the QinetiQ group;
(h) the terms and conditions of employment
of QinetiQ's employees and related pension and other benefit arrangements;
(i) compliance by the QinetiQ group with
applicable laws;
(j) certain specific provisions in QinetiQ
accounts;
(k) costs arising but not yet incurred relating
to vesting of certain assets of DERA into QinetiQ; and
(l) compensation for the loss in value of
QinetiQ which could arise if the 25 year Long Term Partnering
Agreement for Ranges and Test and Evaluation services was prematurely
terminated within the first three years;
(m) an actuarial adjustment to the QinetiQ
pension fund the need for which will be assessed after five years
or, if earlier, at the point at which the Government's remaining
stake in QinetiQ is sold;
(n) a specific current claim against QinetiQ
relating to alleged infringement of intellectual property rights.
MoD's liability under this indemnity is uncapped but is expected
to be low (if any).
The actual costs that might arise in these areas
are impossible to predict. MoD has however taken measures which
it believes reduces the potential financial risks to a very low
level. This includes an extensive disclosure exercise within the
Department and QinetiQ. The results of this exercise have been
made available to The Carlyle Group and in general they cannot
raise claims in relation to such matters. MoD has given few absolute
warranties to The Carlyle Group. In general, claims could only
be made if MoD was aware of a potential concern and failed to
disclose the relevant details to the purchaser. In addition, Carlyle
has undertaken that it will not claim in relation to matters identified
as a result of its own extensive due diligence process or which
were known to it at completion.
Wherever possible, MoD has also sought to cap
its exposure under the warranties. The total value of any claims
in relation to items (a)-(i) is capped and in no circumstances
could exceed the level of the cash proceeds that MoD receives
from the initial PPP transaction. Item (j) is capped at £4.3
million, item (k) is capped at £3 million, item (l) is capped
on a sliding scale ranging from £40 million in year one to
zero at the end of year three, item (m) is capped at £45
million. MoD has generally sought to share risk with the company
and in relation to specific liabilities the contingent exposure
of the MoD is for less than 100% of the relevant liability.
Given these protections, the Department has
concluded that accepting these additional contingent liabilities
represents better overall value than the alternative, which would
be to accept a significant, and disproportionate, reduction in
the PPP receipt.
The Treasury has approved these proposals in
principle.
If any of the liabilities is called, provision
for any would be sought through the normal Supply procedure.
If, during the period of 14 days (exclusive
of Saturdays and Sundays) beginning on the date of which this
Minute ws laid before Parliament, a member signifies an objection
by giving notice of a Parliamentary Question or by otherwise raising
the matter in Parliament, final approval to proceed with incurring
the liability will be withheld pending an examination of the objection.
| 
