Do Deferred Prosecution Agreements Create Third Party Beneficiaries?
In the field of corporate criminal liability, no subject is hotter than deferred prosecution agreements (DPAs). In these, prosecutors agree with target corporations to defer or refrain from prosecution in exchange for the target admitting allegations and committing to various reforms. Reforms invariably include enhanced internal compliance programs, and sometimes top-level governance changes. Terms provide that if the government determines that the corporation breached, it can prosecute. Given the admissions, conviction then is almost certain.
Several rationales support these functional settlement agreements. These include avoiding the risk of collateral consequences of corporate convictions (such as customer defection and investor withdraws that could ruin a firm, as happened with Arthur Andersen in 2005). They may also be valuable alternatives to straight-up criminal convictions or civil regulation when investigations give prosecutors firm-specific information about corporate defects that the agreements can cure. There are thus both public law enforcement (deterrence) rationales and private corporate rationales (reducing agency costs when managers act against the interests of shareholders).
DPAs are age-old devices but have become popular in the US only the past decade: only a couple dozen were ever used before 2003, but nearly 200 have been formed since. This summer alone, federal prosecutors around the country have entered into a dozen of them with various corporate targets. England is now considering whether to follow this American development.
Many open questions exist. For example, suppose a company breaches the agreement, as Wright Medical was alleged to have done this week. The contracts state the rights of prosecutors clearly–they may proceed with prosecution. Many contracts, including the Wright Medical deal, are silent on another question: are there any third party beneficiaries as a matter of contract law? Are shareholders intended third party beneficaries of DPAs? The issue is the government’s intention in exacting the corporation’s promise. If the rationale is general deterrence, probably not; but if the rationale is reducing agency costs, probably so. Any opinions?