A general counsel of a private equity firm recently told me that it is helpful for him to consider FCPA compliance issues through the lenses of the various actors involved. In that spirit, I offer three perspectives on M&A FCPA due diligence – from the FCPA enforcer, the acquirer, and the target.
For background on the FCPA compliance issues at play in mergers and acquisitions, you can consult a podcast I recorded last week for the Association of Certified Financial Crime Specialists (ACFCS) that is available here. In the thirty-minute podcast, I discuss various issues, including: how the U.S. Department of Justice has typically prosecuted FCPA violations associated with mergers and acquisitions; notable FCPA cases involving acquisitions like Titan,GE Invision, and Delta & Pine Land; guidance from enforcement officials regarding post-acquisition due diligence; and the specific types of due diligence steps that can help mitigate risk.
This podcast, along with guidance from FCPA legal experts like Tom Fox and Michael Volkov, provides a good overview of an increasingly important side of FCPA compliance. In addition, it might be helpful to consider these three perspectives: the perspective of enforcement, the acquirer, and the target.
The Perspective of Enforcement
To enforcement, the prominent legal theory at play when applying the FCPA to mergers and acquisitions is that of successor liability. The acquirer purchases not only the target company’s assets but its liabilities as well. This means that, if the acquirer could have uncovered the target’s FCPA violations through reasonable due diligence and fails to do so, it is considered to have inherited that liability.
The Perspective of the Acquirer
To the acquirer, the most important issue might be one of valuation. In theory, enforcement will hold the acquirer responsible for prior corrupt acts of the target if the acquirer fails to conduct appropriate due diligence and remediate any problems. It will certainly hold the acquirer responsible for any ongoing corrupt acts that take place after closing.
But what might be just as important to acquiring companies is the need to know the real value of the entity they are acquiring. If the target has built its business on corrupt acts, the only way to accurately assign a value to the company is by knowing about those acts and factoring the associated liabilities into the target’s value. In practice, purchasers have lowered prices based on discovered liabilities. Some deals, like Titan, have even fallen through.
If a company wishes to proceed with an acquisition despite uncovering FCPA issues, it must remediate those issues after the deal is done. It must terminate responsible employees, implement heightened controls in areas of prior weakness, and quickly train personnel in high-risk areas. To do this cleanly, it might make sense for the acquirer to maintain the target as its own separate corporate entity until the FCPA concerns are put to rest.
The safest path forward for acquirers is to self-disclose the issues to enforcement. Of course, the acquirer has no legal obligation to do so. But if the acquirer has a sound plan to remediate the issues, incorporate the target into its anticorruption compliance program, and monitor the acquired entity to ensure that prior issues have been resolved, it is likely to avoid successor liability by disclosing. The target itself might very well remain liable, though (see, e.g., GE Invision).
The Perspective of the Target
One thing that often gets lost in the conversation about M&A due diligence is the target’s perspective. A company planning to be acquired can increase its value and minimize potential FCPA roadblocks by implementing an anticorruption compliance program. Without a program in place, the target should expect the possibility of major headaches down the road. As the frequency of FCPA due diligence in mergers and acquisitions increases, the importance of compliance to potential targets will only grow.
This FCPAméricas blog article is not intended to provide legal advice to its readers. The blog entries and posts include only the thoughts, ideas, and impressions of its authors and contributors, and should be considered general information only about the Americas, anti-corruption laws including the U.S. Foreign Corrupt Practices Act, issues related to anti-corruption compliance, and any other matters addressed. Nothing in this publication should be interpreted to constitute legal advice or services of any kind. Furthermore, information found on this blog should not be used as the basis for decisions or actions that may affect your business; instead, companies and businesspeople should seek legal counsel from qualified lawyers regarding anti-corruption laws or any other legal issue. The Editor and the contributors to this blog shall not be responsible for any losses incurred by a reader or a company as a result of information provided in this publication. For more information, please contact Info@MattesonEllisLaw.com.
The author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. Copyright 2012 Matteson Ellis Law, PLLC
About the Author
Matteson Ellis is founder and principal of Matteson Ellis Law PLLC, a law firm focusing on U.S. Foreign Corrupt Practices Act (FCPA) compliance and enforcement. He has extensive experience in a broad range of international anti-corruption areas. Before forming Matteson Ellis Law, he worked on FCPA and anti-corruption matters in the Washington, D.C., offices of Miller & Chevalier Chartered, Coudert Brothers LLP and The World Bank.