Is your business toxic? I do not mean that it had holds
the type of sub-prime Collateral Debt Obligation assets which were so
prominently mentioned in the press just a few years ago. I mean is your
business so devoid of anything close to a best practices compliance
program that you are not able to obtain loans, manage risk through insurance or
other equally traditional business practices? Yesterday I wrote about the new
types of insurance available for investigation of, and claims based upon,
alleged violations of the Foreign Corrupt Practices Act (FCPA). This also
included Directors and Officers liability coverage if such persons are made
parties in a stock holder derivative action based upon violations of the FCPA.
I also wrote about banks and other financial institutions which are now
reviewing compliance programs to determine if they meet some type of minimum best
practices. However, now the failure to have a minimum best practices compliance
program in place may have a more drastic effect; it may deny you the ability to
access your company's value in the capital markets.
There has been much written about Chinese companies
engaging in reverse mergers to obtain access to US capital markets. Writing in
forbes.com, in an article entitled "Chinese
Reverse Merger Companies: The Auditor Angle", Francine McKenna defined
a reverse merger as "through such a transaction the private company becomes a
SEC [Securities and Exchange Commission] reporting company with registered
securities without filing a registration statement with the US SEC." One of the
cornerstones to the FCPA is that if a company is publicly listed it has a books
and records requirement, which is enforced by the SEC. Any company which does
not have a minimum best practices compliance program, including books
and records which accurately reflect all transactions, have made themselves
immediately liable under the FCPA if they become a US publicly listed company
through a reverse merger.
If your company is going through traditional corporate
refinancing in the next 18 months, you had better start to audit, or at a
minimum assess your compliance program. Why? Because any bank or other
financial institution that you go to will want to not only review your
compliance program but may well want to review where that compliance program
may be in terms of an overall assessment of the compliance risks that your
company faces. Are you in the telecom business; pharmaceutical business; energy
business or any other area that the Department of Justice (DOJ) or SEC has
targeted for a FCPA review? You better have all your compliance ducks in a row
and ready to turn over to the financing institution for review.
Selling Your Business
Here is where your company may have risen (or sunk) to
the level of toxic. If a company comes along and wants to purchase some or all
of your business and they look under the FCPA compliance hood, what will they
see? If there is no best practices compliance program in place they may
well not take a second look. If you are a Private Equity company with a number
of Portfolio Companies, what is the state of the compliance program in each
Portfolio Company? If you have one of ten with a best practices compliance
program, does that not "set the bar" for the minimum standard in all the other
Portfolio Companies? While the DOJ has provided guidance in Opinion Release
08-02 and the Johnson & Johnson Deferred Prosecution Agreement (DPA) as to
the steps an acquiring company can take to try and protect itself from
successor liability under the FCPA, no lawyer can assure a client of complete
If you are simply a small business with a superior
product or service and thereby well positioned to sell, what would be the price
carve-out and/or indemnity which you would have to sign if you have less than a
best practices compliance program? What if your compliance program
cannot be assessed in the time available for pre-acquisition due diligence,
would or should a company consider purchasing your business?
Yesterday I focused on some of the market developments
which may drive implementation and enhancements of compliance program.
Compliance programs may now be driven by the ultimate market factor of access
to the value of your company. So we ask again is your company toxic because it
has a less than best practices compliance program?
Ed. Note-to the Braves fans, you really could
not have thought the 106-loss Astros would beat the Cards with the playoffs on
the line. And congratulations to my wife's favorite and Astros' MVP, Hunter
Pence (who just happens to play for the Phillies) for the game winning hit over
the Braves. As to the Red Sox fans, I don't know what to say, it is not as bad
as Bill Buckner but it has to be up there with Buck (F-ing) Dent. I am glad you
had a couple of titles last decade so salve the pain of this one.
Please join Mike Volkov,
Stephen Martin, Jim Feltman and myself on Oct. 6 in NYC for a presentation on "
The Gathering Storm: Anti-Corruption Compliance for Private Equity and Hedge
Funds". The presentation is hosted by World Check and Ethisphere and the event
is complimentary. More information and registration details can be found
If you are in the NYC area I hope you can attend.
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
professional advice or services. This publication is not a substitute for such
legal advice or services, nor should it be used as a basis for any decision or
action that may affect your business. Before making any decision or taking any
action that may affect your business, you should consult a qualified legal
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© Thomas R. Fox, 2011
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