In a webinar on December 2, 2010, Michael Volkov, partner
in the law firm of Mayer Brown and Ryan Morgan, Sales and Alliance Director of
World Compliance, discussed the implications of the Foreign Corrupt Practices
Act (FCPA) to mergers and acquisition.
They advise that businesses which seek to minimize their
FCPA liability risks should pay careful attention to the potential exposure
created by merger and acquisition activity. This is due to the fact that unwary
companies can "purchase" FCPA liabilities by failing to conduct appropriate due
diligence of their intended transaction partner. On the other hand, companies
alert to those risks have been able to avoid successor liability altogether or,
more frequently, obtain assurance about the scope of potential FCPA liability
before the transaction is complete. Indeed, successor liability may attach in a
stock transfer or merger because the assets and liabilities of the target
company generally transfer to the acquiring company after closing; or the
liability may attach in an asset purchase depending on the extent of the purchase
and whether the target business is continuing or if the purchase agreement
specifies which assets and liabilities transfer.
There are several recent examples where companies, which
acquired targets, sustained large FCPA fines for the FCPA violations the
acquired companies had engaged in prior to the acquisition. These include the
Alliance One matter resolved this past summer with a $4.2 million fine for
pre-acquisition conduct and $10 million in profit disgorgement. There was also
the $240 million fine levied against Saipem for conduct of an acquired
subsidiary of ENI, Snamprogetti, where the conduct at issue occurred over 2
years prior to the acquisition. One of the strongest examples is that of
eLandia International Inc., which acquired Latin Node Inc., in 2007.
Thereafter, it discovered potential FCPA violations, which it self-reported to
the DOJ. As reported in the FCPA
Blog, in addition to a $2 million fine, eLandia also disclosed that its
purchase price for Latin Node "was approximately $20.6 million in excess of the
fair value of the net assets" mostly due to the cost of the FCPA investigation,
the resulting fines and penalties to which it may be subject, the termination
of Latin Node's senior management and the resultant loss of business. eLandia
eventually wrote off the entire investment by placing Latin Node into
bankruptcy and shuttering the acquisition.
Volkov advocated beginning with a risk based assessment to
focus the required due diligence. Such an assessment would focus on several
inquires, these would include such areas as to what countries does the target
company operate in and how they rank on Transparency International's Corruption
Index, including the level of corruption in each country? An inquiry into the
targets business is also critical, for example does the target company sell to
foreign governments and does its business depend on licenses or other approvals
from foreign governments? A thorough investigation should include whether
relationships exist among target company personnel and government officials
through family and friends, etc.
After this more general business risk assessment, the
review should turn to the policies and procedures of the target company. Basic
inquires such as does the target have a FCPA compliance policy and how well
does it maintain compliance records are a good starting point. Does the company
have a hotline and does it conduct FCPA training? A critical inquiry is the use
of third parties as foreign business representatives. Lastly is the target
company or any of its competitors, suspected or under investigation for
corruption and are there any other internal investigations ongoing which should
be reviewed?
Volkov also noted that after the due diligence is
completed, and if the transaction moves forward, the acquiring company should
attempt to protect itself through the most robust contract provisions that it
can obtain, these would include indemnification against possible FCPA
violations, including both payment of all investigative costs and any assessed
penalties. An acquiring company should also include reps and warranties that
the entire target company uses for participation in transactions as permitted
under local law; there is an absence of government owners in company; and that
the target company has made no corrupt payments to foreign officials. Lastly,
there must be a rep that all the books and records presented to the acquiring
company for review were complete and accurate.
The clear trend in FCPA enforcement is an increased and
aggressive level of enforcement activity under the both the DOJ and Securities
and Exchange Commission. Businesses must be particularly heedful in the
engaging in the mergers and acquisitions process, whether acquiring other
companies or being acquired. Due diligence in these situations is critical and
must encompass the full range of FCPA compliance issues. This article has
provided to you a starting point for your analysis.
Visit the FCPA Compliance
and Ethics Blog, hosted by
Thomas Fox, for more commentary on FCPA compliance, indemnities and other forms
of risk management for a worldwide energy practice, tax issues faced by
multi-national US companies, insurance coverage issues and protection of trade
secrets.
This publication contains general information
only and is based on the experiences and research of the author. The author is
not, by means of this publication, rendering business, legal advice, or other
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© Thomas R. Fox, 2010