Below is an excerpt from WilmerHale's 2014 M&A Report, which was released on May 6, 2014. This excerpt summarizes the FCPA risks for purchasers and sellers in M&A transactions and suggests affirmative steps companies can take to manage those risks both pre- and post-closing. View the full report or request a hard copy.
The Foreign Corrupt Practices Act (FCPA) is a criminal and securities statute that is jointly enforced by the Department of Justice (DOJ) and the SEC. The FCPA has two components:
- The statute prohibits any company whether private or public, as well as its officers, directors, employees, stockholders and agents, from making or offering corrupt payments to foreign government officials.
- The statute requires every public company to maintain accurate books and records and to implement adequate internal accounting controls. This requirement is in addition to the internal control requirements imposed by the Sarbanes-Oxley Act.
Investigations and enforcement proceedings under the FCPA have been instituted in record numbers over the past several years, resulting in the payment of hundreds of millions of dollars in fines and penalties. Many of these proceedings have arisen in the M&A context. Companies engaged in acquisition activity should understand the risks posed by FCPA violations and the steps that can be taken to reduce those risks.
US enforcement authorities have made clear their expectation that purchasers of transnational businesses will conduct pre-acquisition FCPA due diligence and will, post-closing, promptly implement appropriate FCPA remediation and compliance integration steps. The joint FCPA guidance issued in 2012 by the DOJ and SEC describes pre-acquisition due diligence and post-acquisition integration as among the hallmarks of an effective compliance program. More recently, the now-former leader of the DOJ's FCPA unit explained that the nature and quality of pre-acquisition diligence is one of the most critical factors that the DOJ considers when making a charging decision in the M&A context. These pronouncements by enforcement agencies, coupled with the results of recent enforcement proceedings, underscore the need for both purchasers and sellers to evaluate FCPA risks and pursue related risk mitigation strategies when undertaking transactions.
The FCPA risks for purchasers
in M&A transactions generally are threefold, any of which may
expose the purchaser to greater regulatory scrutiny or hurt its
stock price:
- Legal Risks:
A purchaser may acquire legacy
as well as prospective legal liability, depending on the
circumstances of the acquisition. For example, a purchaser who
fails to detect ongoing bribery by the target may inherit the
legacy liability of the target for past misconduct, as well as
incurring liability for misconduct after the purchase, when the
purchaser is responsible for the target's compliance with the
FCPA.
- Financial
Risks: A target may
not be properly valued if FCPA issues are not identified. For
example, a purchaser may discover after the closing that it faces
civil and criminal financial penalties, the loss of government
contracts that have been obtained through corrupt conduct, or the
need to terminate the employment of key personnel who have been
involved in misconduct.
- Reputational Risks: Misconduct by a target may tarnish a purchaser's compliance record.
To manage these risks, purchasers in M&A transactions should take affirmative steps to address FCPA issues both pre- and postclosing. While there may be impediments to conducting extensive diligence in some types of transactions (such as auctions or hostile takeovers), purchasers should resist pressures to "get the deal done" without adequate diligence appropriate to the risks of the transaction. The key steps purchasers should take include the following:
- Due
Diligence: Before
entering into an acquisition agreement, the purchaser should
develop a profile of the target in five areas: the target's
industry and business operations, including its interactions with
government officials; the target's past business practices; the
target's corporate structure, subsidiaries and joint ventures;
the target's relationships with its third-party business
partners, such as agents, consultants and distributors; and the
target's anti-corruption compliance program. Depending on the
level of anti-corruption risk that results from this profile, the
depth of follow-up diligence may vary. Typically, at a minimum,
informational interviews with key employees of the target and a
review of basic documentation should be undertaken. If the
anti-corruption risk appears higher, site visits, forensic
transaction review, detailed interviews of employees of the target
and interviews with the target's third-party representatives
may be warranted.
- Transaction
Documents: The
negotiation of acquisition documents also provides the purchaser
with an opportunity to mitigate FCPA risk from the transaction. If
diligence has revealed (or the purchaser suspects diligence will
reveal) potential FCPA liability, the purchaser should consider
provisions such as: representations that the target has not engaged
in corrupt conduct; a closing condition that the purchaser shall
have completed FCPA diligence to the purchaser's satisfaction;
indemnities from the seller for FCPA penalties and investigation
costs; and provisions governing the joint investigation and perhaps
disclosure of potential FCPA liabilities to the government.
- Post-Closing Actions: Once the purchaser assumes control of the target, the purchaser should quickly ensure that: FCPA issues identified in due diligence are fully addressed; improper conduct detected through diligence is stopped; appropriate remediation steps are implemented; and an effective compliance program is instituted at the target, including training of the target's staff.
Sellers also face
FCPA-related risks in M&A transactions. A purchaser's FCPA
due diligence may uncover questionable payments or call into
question the adequacy of the seller's internal controls.
Purchasers may wish to disclose FCPA issues to the DOJ and SEC,
even before an acquisition is completed, potentially leading to
government investigation of and enforcement proceedings against the
seller. These factors could affect whether the transaction
can be consummated and, if so, on what terms. In addition, sellers
face potential risks if their FCPA representations and warranties
are inaccurate. As a result, sellers should consider conducting
their own due diligence prior to embarking on an M&A
transaction, in order to ensure that their representations and
warranties to the purchaser are accurate, as well as to anticipate
potential FCPA enforcement issues.
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. |