Proposed changes to corporate criminal offending should cause corporate dealmakers to review the scope of acquisition diligence, particularly in light of the UK Serious Fraud Office’s (SFO’s) increasing use of deferred prosecution agreements (DPAs), as highlighted by the recent Rolls Royce and Tesco cases.
Expected Expansion of Corporate Liability Offences
As is widely appreciated, corporates can be prosecuted under the Bribery Act for “failing to prevent” bribery. New legislation is set to create offences for a wider range of criminality, starting with the facilitation of tax evasion, but possibly followed by fraud, false accounting and money laundering.
The new style of corporate offences bypasses the long-standing English law requirement that prosecutors prove that a “directing mind or will” (i.e., directors or other senior management) was culpable in order to establish corporate criminal liability. This has made prosecution of large multinationals challenging, as very senior employees may not be privy to decisions made on the ground. The future landscape for corporate prosecutions is expected to more closely map the US, where an employer can be automatically answerable for the crime of its employee.
Impact of Recent Deferred Prosecution Agreements
DPAs became part of the prosecutors’ toolbox in 2014, allowing for settlement instead of prosecuting a case through to trial. The SFO has successfully agreed DPAs with Standard Bank in 2015, “XYZ Limited” last year, but the January 2017, £497 million settlement against Rolls Royce is a landmark for the SFO as the highest ever financial penalty in the UK for criminal conduct. Most recently, the SFO agreed in principle the terms of a DPA with Tesco Stores Limited, pursuant to which Tesco would pay a £129 million fine for false accounting; an amount comparable to a US penalty. Recent statements from the SFO indicate an increasing willingness to seek DPAs, and we expect more DPAs to come. In our view, the scale of fines will increasingly follow those seen in the US; in the Rolls Royce case, the US Department of Justice confirmed to the English court that the fine was in line with US penalties.
DPAs are perceived as a less painful alternative to conviction, offering greater certainty and control over the ultimate outcome, and a speedier resolution than a criminal trial, with less cost and adverse publicity. However, DPAs can present challenges for corporates. Firstly, the English court must approve each DPA as being in the interests of justice, at two hearings, the first private and the second public, alongside a publicly accessible judgment and an agreed statement of facts admitting wrongdoing. Because of this, while DPAs avoid a court case and the associated headlines and conviction, corporates should be mindful that a DPA will not entirely avoid publicity. In addition, third parties could use the court published material against the corporate or its group; for example, in civil claims for losses caused by the wrongdoing. DPAs also commonly require the corporate to assist prosecutors to prosecute implicated individuals. Negotiating the terms of the DPA and the statement of facts is therefore a critical and sensitive process.
What This Means for Corporates and M&A Deals
We anticipate more criminal enforcement. The increased emphasis on resolving corporate criminal offences via DPAs, together with an increased scope of offences may incentivise the SFO and other law enforcement agencies to focus on corporate offending. The ability to resolve investigation without a trial, and the encouragement for corporates to self-report and cooperate, will also ease the investigatory burden, thereby freeing up resources to open (and pursue) more cases.
For prospective deals, acquirers should continue careful vetting of new acquisitions, assessing corrupt activity, corruption risks and compliance with anti-corruption best practices. Further, in anticipation of the introduction of a wider range of corporate liability offences (such as failure to prevent the facilitation of tax evasion), acquirers should consider undertaking increased due diligence in these expanded liability areas.
Where issues are uncovered on done deals, corporates will need to navigate through the new form of prosecution. Corporates will need to consider how best to investigate suspected wrongdoing, and whether (and if so how) to coordinate self-reports to authorities in the UK, the US or other interested jurisdictions. For sales, resolving issues via a DPA may be useful if a corporate is planning a sale, as a looming trial may disrupt the sale process and depress price.
What About Recourse Against the Seller?
Companies that have completed acquisitions must be wary of potential problems affecting target group companies, as there is no limitation period for criminal offences under English law. This means that deal teams need to consider liability issues for prospective and historic deals. Unfortunately, typical deal protections might offer limited protection as indemnities to recover criminal fines from other parties (e.g., sellers) may be unenforceable under English law on public policy grounds. Because of this, acquirers should investigate targets thoroughly and consider diligence findings in light of the overall purchase price they are willing to pay.
The rules are changing, and those out on the playing field will need to adapt their game. Corporates conducting diligence on potential acquisition targets must take note of the evolving legal environment. As the law expands the range of conduct for which corporates can be held automatically liable, dealmakers should ensure they understand the risk that M&A targets might commit these new offences, and the target’s compliance procedures, or else risk having to negotiate a DPA or even face prosecution at a later date.