Have a look at the following extracts taken from D&O marketing literature:
“We have witnessed Directors and Officers claims become a standard feature of the litigation scene, which is hardly surprising given the social and legislative climate which appears daily to increase the burden on Directors and Officers.”
“Directors, officers and managers of businesses are becoming increasingly aware of their corporate obligations in an environment where the legal landscape is ever-changing, more litigious and complex.”
Similar language, but it’s the date that differs. The first was used in 2000, the latter is currently in use by a D&O insurer in 2017. We would guess the same language has been seen many times during the period in between. The context to this constant legislative evolution is not to suffocate organisations, but to seek to keep them honest and to protect innocent people – employees, pensioners and others reliant on the future of a company, such as suppliers, manufacturers or customers.
Deferred Prosecution Agreements (”DPAs”) are an example of this, but should they worry directors? They were introduced by The Crime and Courts Act 2013 into England, Wales and Northern Ireland on 24th February 2014 and are applied through section 7 of The Bribery Act (failing to prevent bribery). In a nutshell, they involve a company and the SFO agreeing to suspend charges that would otherwise be prosecuted, if the company meets a series of terms. It provides an alternative solution to organisations when concerned about potentially criminal conduct taking place. The terms would typically include:
- a combination of financial sanctions (fines, disgorgement of profits, etc.);
- some terms concerning enhancing compliance procedures; and
- terms concerning ongoing cooperation, for example in the prosecution of individuals.
The DPA effectively provides a different remedy, something between a guilty plea and a civil recovery, where prior to DPAs there was no solution in between these. The terms of each DPA are bespoke, which adds more flexibility to their execution.
To date, there have been 3 DPAs:
- ICBC Standard Bank (fund raising for the government of Tanzania);
- Rolls Royce plc; and
- AN Other Limited (still not public information).
Standard Bank was exactly the kind of situation DPAs were first intended to be used for. There was a very substantial, but narrow, self-contained problem in a large and complex business. The bank did everything right when it became aware of what had happened and there was little more that a prosecution could have achieved that the DPA did not.
There was also an argument that costs and time were saved to dedicate to cases where the allegations were challenged, where those here were not.
Rolls Royce plc created some controversy in that there was clearly a case to be heard. However, the court was satisfied that, notwithstanding the gravity of what had happened, and on the right terms, it could be in the interests of justice to resolve the conduct by way of a DPA rather than a trial. There was also an argument that costs and time were saved to dedicate to cases where the allegations were challenged, where those here were not.
AN Other Limited is interesting because it is a SME (The European definition of SME: “enterprises which employ fewer than 250 persons and which have an annual turnover not exceeding 50 million euro, and/or an annual balance sheet total not exceeding 43 million euro.”). It had cross border issues and acted to correct them. In this case an agreement was reached that provided for terms the company could just about cope with and stay alive, and which the court considered to be in the interests of justice. Absent the DPA, it is likely the result would have been curtains for AN Other Limited.
Despite the limited application of DPAs so far, they are here to stay. For those at the sharp end, the language of the SFO puts a heavy emphasis on coming to the table. From a D&O perspective, unless there is any regularity to the flow of DPAs, and because each one will be specific to a pattern of facts, it is difficult to predict how a policy might respond.
It seems likely a DPA will meet the definition of ‘Claim’ and most policies contain a self-reporting qualification to prevent the application of exclusions. Most policies also have provisions around prevention of notification because of confidentiality agreements, and again this is accommodated or taken into account. Fines will not be covered, so no surprises there. A key aspect is that DPAs are only for use against bodies corporate, partnerships and unincorporated associations and are not for use against individuals, so they may not directly affect a D&O policy (or the D&O section of a policy). What is interesting is the potential conflict between organisations and their directors. Closure to a DPA may be sought by admitting prejudicial facts on behalf of the organisation. However, as the directors and officers are not parties to the DPA proceedings, there is no reason why separate charges could not be brought against the individual directors and officers if breaches or offences are identified through the DPA process. This conflict is exacerbated by the ‘statement of facts’, a key component of a DPA. Directors and Officers will need to carefully balance the requirements of a DPA, which may include admissions by their organisation, with their own position from any potential follow-on proceedings.
As with most things in life, legislation does not stand still and DPAs reflect a disposition to adapt the solutions to match the actuality. Importantly, it sends strong messages about intent and tolerance on standards of behaviour. What we do know, and what hasn’t changed during the intervening 17 years, is that legal proceedings can be long, expensive and can create huge anxiety. It is also very probable that in another 17 years, the marketing literature for D&O will look a lot the same.