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Mergers and the FCPA

Wednesday, July 20, 2011 - 00:00

This article follows up on Parts III and IV of this series (Basic FCPA compliance principles [June, Aftermarket Business World] and Dealing with third parties [July, Aftermarket Business World]) to cover the FCPA problems raised by mergers and acquisitions.

The risks for acquirers take a variety of forms, including the legal risks for the conduct of acquired companies, the financial risks of having paid too much for a company where the risks of a significant fine were unknown or underestimated, and the potential loss of business if the acquirer must terminate transactions tainted by bribery. To avoid these issues, the acquirer should take the following steps:

Due diligence. The goals of an FCPA due diligence inquiry are to (1) determine the risk of the acquisition; (2) ensure proper valuation of the acquired company; (3) determine the potential liability for FCPA violations; (4) minimize unexpected surprises; (5) minimize liability for past conduct; (6) identify future compliance issues; and (7) assist in post-acquisition planning. To avoid unpleasant surprises, the following are the general topics the acquiring companies should address:

• Evaluating the risk profile of the target, including with regard to its industry, government sales and use of third parties
• Evaluating the structure of the target’s operations, including its customer base, its non-US operations and the countries in which it operates
• Determining how the target does business with third parties, what due diligence was performed on them and the extent of business that relies on agents or distributors
• Determining the rigor of the target’s recordkeeping and accounting procedures
• Determining whether the target has appropriate compliance and training procedures
• Determining whether the target conducts periodic reviews and certifications of its third-party intermediaries and whether the target has contractual provisions that allow termination based upon suspected FCPA violations
• Determining whether the target has procedures to help identify FCPA red flags, with appropriate follow up
• Determining whether the target has been the subject of any bribery or anti-kickback investigation by any government
• Determining whether the target’s antibribery compliance structure is appropriate and is run by a senior management-level employee with appropriate resources
• Determining whether the target conducts periodic internal compliance assessments and FCPA audits

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