The much publicised Bribery Act 2010 (the "Act") came into force on 1 July 2011. For a detailed overview of the Act, the new offences which it creates and the practical implications for commercial organisations read our previous article The Bribery Act 2010 – What's in it for me? Click here.
On the implementation date of the new Act, the international anti-corruption NGO Transparency International (UK) ("TI") published a consultation on anti-bribery guidance for organisations involved in mergers, acquisitions and investments. The proposed guidance from TI highlights that liability under the Act may flow to purchasers and investors looking at targets involved in corrupt practices, and focuses on how the risk can be addressed in pre-transaction due diligence.
The New Corporate Offence
The Act creates four new offences, including a new corporate offence of failing to prevent bribery by associated persons. The new offence extends to the activities of UK registered organisations whether at home or abroad; and to non-UK organisations doing business in the UK.
It will be a defence for an organisation to show that it has put in place 'adequate procedures' designed to prevent bribery.
Potential Liabilities for Purchasers and Investors under the new corporate offence
As the corporate offence is restricted to bribery by 'associated persons', historic corruption within the target company is unlikely to result in liability for a purchaser or investor prior to the acquisition, as the latter only becomes associated on completion of the deal. However, whilst historic corruption will not result in direct liability, the individuals involved in the bribery will still be liable to prosecution. If these individuals are key to the target, the purchaser or investor may suffer the loss of their knowledge and expertise if they are ultimately prosecuted under the Act.
On completion of the deal, the new corporate offence comes into
play. At this stage a purchaser and target become directly
associated. For investor and investee companies the question of
'association' will depend upon whether there is sufficient
control over the investee company, or whether the company provides
sufficient benefit to the investor.
If the target company and purchaser/investor are indeed associated,
bribery which is not discovered during diligence and continues
post-deal could open the investor or purchaser up to liability for
failing to prevent the practice. This liability may be enhanced if
poor pre-transaction anti-bribery due diligence has been
undertaken. Private equity investors will need to be even more
careful, particularly if they fail to investigate the actions of
the target during its management and monitoring of the company
post-completion.
The Proposed Guidance
The Act does not define what will constitute 'adequate procedures' to sustain a defence to the corporate offence and government guidance does not offer a definitive checklist of what is - and what is not - adequate. The proposed focused transactional guidance from TI will be welcomed by investors and purchasers as a practical tool when carrying out their due diligence.
The TI consultation sets out a best practice approach to identify and deal with corrupt practices within a target:
- Anti-bribery due diligence should be conducted for all but the smallest of deals;
- Diligence should be overseen directly by the Board of the purchaser/investor and started early in the process, running alongside legal, financial and other due diligence.
- The purchaser/investor should ensure that it has its own adequate anti-bribery programme in place;
- Any bribery detected during the due-diligence process should be reported to the authorities.
Quoting from a recent Annual Fraud Survey by Ernst & Young, the TI guidance notes that a fifth of companies still do not consider anti-bribery investigations as part of the M&A due diligence process, and a quarter never consider the issue in a post-acquisition review. It is acknowledged that the level of diligence will be transaction-dependant – relevant factors will include the value of the deal, the degree of influence over the target, the risks attached to the target's geographic market and sector and whether the target has an established anti-bribery program already in place.
Reporting obligations in the UK are discretionary when corruption is discovered. The Serious Fraud Office has acknowledged that it is sympathetic to situations where a purchaser or investor discovers corruption as part of its due diligence and will, in certain circumstances, take no action if the purchaser/investor is committed to anti-bribery remedial action.
It seems inevitable that anti-bribery investigations will become a standard step in the due diligence process. Until it becomes clearer how the Act will be interpreted and enforced, there will be some uncertainty as to the kind of questions a purchaser or investor will need to ask of the target company. Companies readying themselves to be acquired or receive investment must prepare for new questions and investigations into their anti-bribery practices and inevitably the warranty protection which investors and purchasers will seek to support this.
We have a strong track record in a wide range of corporate transactions, advising purchasers and investors as well as target and investee companies alike.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.