Deferred prosecution agreements (DPAs) became part of the prosecutors’ toolbox in 2014, allowing for settlement instead of bringing a case to trial. Recent statements from the Serious Fraud Office (SFO) indicate an increasing willingness to seek DPAs. The SFO has concluded two DPAs so far, and we expect more in the next few months and beyond. This change in emphasis in prosecuting corporate criminal offences, together with encouragement for organisations to self-report, should incentivise the SFO to focus on corporate offending. This will ease the SFO’s investigatory burden, which we then anticipate will free up its resources to open (and close) more cases against companies.

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For prospective deals, PE houses should continue careful vetting of new acquisitions, and ensure compliance with anti-bribery and corruption best practice. Where issues are uncovered on done deals, firms will need to navigate through this new form of prosecution. For exits, resolving issues via a DPA may be useful if a firm is planning a sale, as a looming trial may disrupt the exit process and depress price. DPAs are perceived as a less painful alternative, offering greater certainty and control over the ultimate outcome, and a speedier resolution than a criminal trial. However, in our view, DPAs also present significant challenges for PE.

Firstly, the English court is required to approve each DPA as being in the interests of justice, a two-stage process, which is initially private but eventually made public, alongside a publicly accessible judgment and an agreed statement of facts. Because of this, while DPAs avoid a court case and the associated headlines and conviction, PE firms should be mindful that a DPA will not entirely avoid publicity. In addition, third parties could use the published material against the firm or the portfolio company, for example in civil claims for losses caused by the wrongdoing, as could prosecutors against implicated individuals. Negotiating the terms of the DPA and the nature of the statement of facts is therefore a critical and sensitive process.

Further, a DPA is likely to require a combination of disgorgement of profits (from the wrongdoing), a financial penalty, and an improved compliance programme or monitoring. In a recent DPA, the innocent corporate acquirer of a guilty subsidiary company was required to disgorge a significant portion of the dividends the acquirer had received from the subsidiary, in order to avoid the subsidiary’s insolvency as a result of the penalty imposed. Such a repayment of dividends would be challenging to replicate in a typical PE deal structure, and deal teams should consider the funding of penalties when contemplating a DPA.

The SFO’s increasingly energetic approach combined with the UK government’s intention of increasing the scope of corporate criminality to offences of failure to prevent financial crime and tax evasion, and not merely bribery, means that portfolio companies may come under growing threat of prosecution in 2017 and beyond. DPAs may provide a new way for private equity to address this, but do need to be handled with care.