Most folks learn in elementary school the concept of the
'lowest common denominator'. A non-mathematical definition might be something
along the lines of meaning the most basic or lowest of something among a group.
Conversely, there exists the concept of 'highest common denominator" which
might have the opposite definition of the uppermost or maximum of something among
a group. The concept of highest common denominator may now by applicable to
Private Equity companies and the Foreign Corrupt Practices Act (FCPA).
What are some of the ways liability can attach itself to
a Private Equity company for the actions of a Portfolio Company? Although not
yet tested in this context, the Nature's Sunshine case and the theory of
'control person liability' could certainly be one way. Under this theory, if a
person has the "power to direct or cause the direction of the management and
policies to a person whether through the ownership of voting securities, by
contract or otherwise." It certainly would not take much expansion to get to a
Private Equity owner of a Portfolio Company under that theory.
However, there may be a more direct route which is
through one or more of the following: actual knowledge, willful blindness,
conscious disregard or deliberate ignorance. It is through one of these
mechanisms that the 'highest common denominator' comes into play. Typically
Private Equity entities have a variety of Portfolio Companies. This variety can
reach across several industries and equal a large number of Portfolio
Companies. The Private Equity owners may reach down to exercise a large amount
of control over each Portfolio Company. This could lead to actual knowledge of
each Portfolio Company's compliance program.
Nevertheless, a Private Equity company may allow its
individual Portfolio Companies to develop their own compliance programs. This
could lead, through the 'highest common denominator', to a charge of willful
blindness, conscious disregard or deliberate ignorance. How would it work?
Along the following lines: If a Private Equity entity had 10 Portfolio
Companies and one had a best practices compliance program and the others
had something less than best practices, I believe that the Private
Equity entity would be held to the standard of the highest or best compliance
program of any entity in its portfolio. This would put the Private Equity
entity on actual knowledge of a best practices compliance program and
then the Private Equity owner would be consciously disregarding or deliberately
ignoring such best practices for the remainder of its portfolio.
This does not mean that if the Private Equity had one
multi-billion dollar entity and several others in the range of $250 to $750 MM
in value, that it would be held to the standard of the compliance program in
the multi-billion entity but if there are several in the lesser range, it could
well be held to the highest standard of the companies in that lesser range.
That means that if the Private Equity entity is allowing the Portfolio
Companies to implement their own compliance solutions, it may be setting itself
up for liability.
So what is the answer? The first thing that the Private
Equity owner must do is have an assessment of each Portfolio Company's
compliance program. If one has a best practices compliance program such
a program may well need to be implemented across the spectrum of Portfolio
Companies. If not, there may be an action based upon the highest common
Visit the FCPA Compliance and Ethics Blog,
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© Thomas R. Fox, 2011
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