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
General FCPA due diligence issues. A basic understanding of the operations of the target is required, which is determined by requesting the following:
• A list of countries where the target conducts business
• A list of countries where the target has sold directly or indirectly to foreign governments
• A list of companies that the target does business with that are owned by a foreign government
• Estimates of what percentage of the target’s business depends upon dealings with foreign governments and state-owned entities
• Copies of all contracts for purchases by, or sales to, state-owned entities, and details regarding how these contracts were negotiated
• A list of any joint ventures or other arrangements with state-owned entities
• A list of any business relationships with government officials
Compliance and training. Information regarding the target’s training and compliance measures provides a window into the culture of the target. Discovering this type of information is accomplished by requesting the following:
• A description of the target’s antibribery compliance program and all its elements, including training
• A copy of any materials provided to employees as part of their antibribery training
• A description, and contents, of any third-party FCPA compliance training
• A list of all red flags uncovered through the operation of the target’s antibribery compliance program
General due diligence issues: Agents and third parties. Third parties cause many FCPA problems. To minimize this risk, the acquirer should seek information regarding the following:
• Whether the target has hired any foreign officials as agents or in any other role, and whether any of these relationships are ongoing
• The due diligence procedures relating to the hiring of agents, the results of any due diligence performed, and a description of how any red flags discovered during the hiring of agents were addressed
• Any contracts with agents or other third parties, including certifications of FCPA compliance
• Any past or present relationships between foreign officials and any agents hired by, or acting on behalf of, the target
• The services provided by any agents, the total compensation paid in relation to those services, and the basis for establishing the compensation
• Any payments made to foreign officials for any reason, including visits to conferences, trips and entertainment
• The procedures used to reimburse agents for entertainment of foreign officials
• Any hiring by the target of government officials as agents, consultants or in any other business capacity
• Any documents relating to the suspension of payments to agents or other third-party representatives, including information pertaining to the red flags that led to the suspension
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Dealing with potential FCPA issues. Where it appears that the target has paid bribes, there are a number of tough questions for the acquiring company to ask itself before proceeding. These include:
• Is the conduct over? Are there likely other bribery situations that have not yet been discovered?
• Will continuing bribes be required to maintain the acquired company’s business? Will ending the bribes significantly impact the target’s business?
• If it appears that the acquirer will need to terminate personnel who were involved in the bribery, how important are these personnel to the operation of the target’s business? If they are demoted or dismissed, what is the impact on the business of the target?
• Where it appears that third-party agents, consultants, representatives, distributors, joint venture partners and other business partners are involved, what will be the impact of reforming or ending relationships with those parties?
• Where past bribes have been paid, does it appear that disbarment risks are raised, such as the potential loss of government contracts or export licenses?
• How will accounting and disclosure issues be dealt with after the closing?
• Does the price for the target need to be adjusted in light of not only the known corrupt activities, but also those whose discovery might not occur until after closing? Is the possibility of future discoveries taken care of in the sale agreement, including the potential expense of investigations, voided contracts, lost business or other potential problems?
• Is there the potential for shareholder class action or derivative suits?
FCPA considerations do not end when the merger is completed. An acquirer should take immediate steps to integrate the acquired company into its own FCPA compliance program. If the acquiring company, whether part of its due diligence or post-acquisition review, determines that an acquired company employee has engaged in suspect conduct, the company should immediately review the activities of the employee. The acquirer should take steps to discipline the employee and to ensure that the conduct does not recur. Acquirers also should consider integrating third parties into its compliance procedures. Doing so provides additional reassurance that the intermediaries understand the approach of the acquiring company to its FCPA obligations. Finally, the company should conduct a systematic audit to evaluate any known or discoverable red flags.
