Tesco DPA reveals how need to announce price sensitive information creates tension between DPAs and the rights of individuals subject to prosecution

United Kingdom
Following Tesco PLC’s announcement to the London Stock Exchange on 28 March, the SFO has confirmed that it has, in principle, reached a DPA with Tesco Stores Limited (“TSL”) regarding an accounting scandal in 2014, which resulted in the business overstating its profits by £326m, chiefly due to the accelerated recognition of commercial income and delayed accrual of costs. Tesco PLC went on to report a £6.3bn loss in 2015.

The DPA has already been approved in principle by the court (on 27 March) and will only become effective if its final terms are approved by the court on 10 April. If approved, the DPA will result in TSL avoiding a criminal prosecution in respect of false accounting between February and September 2014, by fulfilling certain non-financial conditions, in addition to paying a financial penalty of £128,992,500 and the SFO’s full costs. The SFO has stated that the DPA will only concern the criminal liability of TSL; it does not address whether liability attaches to Tesco PLC or any employee or agent of Tesco PLC or TSL. However, it is noteworthy that Tesco PLC’s statement states that “Subject to approval by the court and compliance with the terms of the DPA, this concludes the SFO's investigation into Tesco”, which in context appears to refer to Tesco PLC and appears to suggest that no further action will be taken against Tesco PLC.

In addition to the proposed DPA, Tesco PLC itself has admitted market abuse in connection with its trading statement of 29 August 2014 (which overstated profits due to the issues referred to above) in that it gave “a false or misleading impression about the value of publicly trading Tesco shares and bonds”. Tesco PLC has therefore agreed with the FCA to a compensation scheme (“Scheme”), for shareholders and bondholders who bought assets in the three weeks following the 29 August trading statement. The Scheme will launch by 31 August 2017 and is open to all purchasers who bought shares or bonds after 29 August 2014 and who still held some or all of them on the last day of trading before the corrective statement was issued on 22 September 2014. The FCA estimates that the total amount available will be £85m plus interest. Despite Tesco PLC’s admission, and in light of the proposed DPA, the FCA will not impose any additional sanction for market abuse.

Comment

DPAs were introduced in 2014, under the provisions of Schedule 17 of the Crime and Courts Act 2013, and can be used for fraud, bribery and other economic crime. If approved, this will be the UK’s fourth DPA (after Standard Bank, “XYZ” and Rolls-Royce), but the first DPA that deals with non-bribery related allegations, with the SFO continuing to send a clear message that it will seek to redress corporate offending by not only pursing corporates in the criminal courts, but also encouraging a culture of self-reporting and cooperation, which can result in avoiding prosecution if certain financial and non-financial conditions are met. TSL’s DPA will not, however, affect the prosecutions of the three former Tesco executives, who are due to stand trial in September.

Two interesting points arise from the announcement -

(1) Unlike the recent DPA involving “XYZ”, which did not name the corporate for fear this might prejudice the ongoing prosecution of individuals connected to the same matter, TSL’s proposed DPA has been announced even before it has been approved by the Court (itself a departure from the norms of the DPA scheme, which is designed the keep the DPA private until approved in open court) and notwithstanding that there are three individuals currently facing trial regarding the same matter. It would appear that this is because the reaching of an agreement over the DPA constitutes inside (price-sensitive) information for Tesco PLC, which it is required to announce to the stock market as soon as possible. Nevertheless, this highlights the tension between the interests of justice for individuals who are yet to stand trial (and whose trials may be prejudiced if the jury are aware that TSL itself has already reached a deal to avoid prosecution for false accounting involving a substantial payment to the authorities) and the interests of market integrity – i.e. the principle that, as a general rule, investors should be given all inside information about listed companies as soon as possible so that they do not deal in shares or bonds on a false premise.

(2) This is the first time the FCA has used its powers under section 384 of the Financial Services and Markets Act 2000 to require a listed company to pay compensation to investors for market abuse, through the agreed compensation scheme. Andrew Bailey, the FCA’s Chief Executive, issued a strong warning by saying that the “dissemination of information that gives a false or misleading impression as to traded securities harms the integrity of our markets”. He added that the FCA is “committed to [the] UK markets being fair, transparent and thus competitive”. The result of this announcement could change the course of two civil claims by investors, who allege that they suffered financial loss by relying on flawed financial statements. Indeed, by reaching an agreement to compensate affected investors (or some of them) in this way, Tesco PLC may well have defused the potential for wider, lengthy and damaging claims being made on the back of the admissions in any agreed DPA.

Although the FCA’s decision is novel, similar approaches have been taken by the courts in recent years to remove a company’s ill-gotten gains following proceedings for offences of bribery and corruption, including dividends obtained through share ownership which were inflated by the wrongdoing committed by the company whose shares were held. In 2011 the SFO obtained a High Court order requiring M.W. Kellogg Limited to pay over £7m, which represented share dividends and interest accrued on them. The dividends comprised profits from contracts in relation to the Bonny Island liquefied natural gas plant in Nigeria, which were held to have been obtained through bribery. Secondly, in 2012, Mabey Engineering (Holdings) Limited agreed to pay over £130,000, which represented sums its received through share dividends derived from contracts won through unlawful behaviour by its subsidiary company, Mabey & Johnson Limited. Our LawNow on that matter can be accessed here.