In a previous post, we discussed the importance of considering anti-corruption and bribery risks when engaging in international transactions. In connection with the OECD Convention on Combatting Bribery of Foreign Public Officials in International Business Transactions, Canada, the US and the UK, as well as an increasing number of legislatures around the world have implemented legislation forbidding the transfer of benefits for the purpose of influencing foreign officials. Companies charged under the Canadian Corruption of Foreign Public Officials Act (CFPOA) are criminally prosecuted, and can be forced to pay unlimited fines in addition to suffering irreparable reputational damage.
Asset acquisitions may not shield an acquirer from CFPOA liability
Although the purchase of assets, as opposed to the purchase of shares, typically permits an acquirer to negotiate which liabilities of target are to be assumed post-acquisition, there is no guarantee under Canadian law that the acquirer will be successful in evading any corruption liability incurred by the target prior to the acquisition. Rather, Canadian courts are likely to conduct a fact-dependent investigation to determine whether corruption liability should follow the assets or remain with the target post-acquisition.
Due diligence is essential
Both acquirers and targets benefit from anti-corruption due diligence. An informed acquirer will not only be in a better position to assess corruption risks and re-evaluate the appropriate purchase price, it may also be able to insist on the inclusion in deal documents of representations, warranties and indemnities that protect its interests, or negotiate the implementation of specific measures to resolve any issues identified. Targets who maintain an effective anti-corruption program, including a comprehensive and widely-distributed policy, an effective auditing and reporting structure as well as whistleblower protection mechanisms will also maximize their chances of negotiating a better deal.
Anti-corruption due diligence should include an assessment of the corruption risk in the target's country of residence and industry sector, a comprehensive review of the target's policies, procedures, financial accounts and business development programs as well as consideration of the target's reliance on key relationships with governments (especially with respect to permits, taxes and customs). An effective due diligence program should also incorporate interviews with target personnel and major contractors. Working with independent professionals who understand the local business environment is key to obtaining any meaningful assessment. Any "red flags" identified in the course of due diligence should be subject to additional scrutiny.
Due diligence should also be conducted with respect to any agents, subsidiaries or joint venture partners of the target company. An OECD review of 427 foreign bribery cases prosecuted globally revealed that 75% of cases involved intermediaries such as agents, distributors and brokers or subsidiary companies, local consulting firms and offshore financial centres.
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