Corruption Risks in Mergers and Acquisitions Page 1 of 4 search... home Experts Anti-corruption conference - London 2012-06-26 Corruption Risks in Mergers and American Conference Institute's 4th Russia and CIA Summit on Anti-Corruption Acquisitions 2012-03-20 10th Annual IBA Anti-Corruption Conference 2012-03-12 Best Practice on Anti-Corruption By Robert Mayo and Thibaut Kazemi (Jones Day Paris), with input from James Incentives and Sanctions for Dunlop, Fahad Habib, Linda Hesse and Harriet Terrett (Jones Day Chicago, Dubai, Business Paris and London). 2012-03-05 rmayo@jonesday.com tkazemi@jonesday.com Linda Harriet Thibaut Jim Dunlop Habib Terrett Hesse Kazémi Fahad name What are the main corruption-related risks faced by companies contemplating an M&A email transaction? Send The risks will vary depending on the buyer, the target and the structure of the transaction. The main risks are: (i) acquiring a company that is tainted by corruption, and therefore assuming criminal and civil liability; (ii) paying too much for the acquired company or business, to the extent that part of the revenue and/or profit is based on corrupt behavior, and is therefore not sustainable; and (iii) risk to reputation of the buyer. In addition, there is the risk associated with the drain on management of resolving any issue along these lines that does show up. It can be expensive, time consuming, and distracting. Certain buyers are more exposed than others. A buyer that is subject to robust anti-corruption laws is at risk if it acquires a corrupt company. Also, even if the target is not directly subject to robust regulation at the time of acquisition, the rules or their enforcement may become more strict going forward. Regarding the target, there are a number of red flags that can be easily identified prior to the transaction based on, in particular, its industry, its geographical footprint, its use of external consultants, intermediaries or agents, and its degree of interaction with government officials. The structure of the acquisition will also affect the risk. Purchasing assets only is different from purchasing a company which carries historical liabilities. However, even with a purchase of assets, the possibility of successor liability that may attach to the assets should be analyzed. Deals structured through a joint venture also carry specific risk factors. In many emerging/developing countries, for instance, you have “forced marriage” laws requiring the foreign investor to associate with a local partner. This is particularly true in regulated industries such as mining, banking, pharmaceuticals or telecommunications. If the foreign government does not impose the choice of the partner, the investor usually has, as a matter of fact, only a limited number of serious candidates to consider and many of them have various kinds of connections to the foreign government (ex-ministers, family or extended family ties to influential political http://ethic-intelligence.com/experts/135-corruption-risks-in-mergers-and-acquisitions 6/3/2012
Corruption Risks in Mergers and Acquisitions Page 2 of 4 figures, etc.). Even if the investor and the joint venture carefully avoid any behavior tainted with corruption, this common type of situation may create an appearance of impropriety that is delicate to handle. Are risks the same under the FCPA, UK Bribery Act, and other countries having transposed the OECD Convention? Currently, companies that are subject to the FCPA are generally at greater risk than others, given the vigorous enforcement policy of the U.S. Department of Justice (DOJ) and the U.S. Securities and Exchange Commission (SEC). This category includes U.S. companies, companies with U.S. operations, and any non-U.S. company that is listed on a U.S. stock exchange. Any persons in the United States are also at risk. Under certain agency, aiding and abetting and conspiracy theories, it can also include non- U.S. subsidiaries of such companies, and non-U.S. joint ventures and their non-U.S. partners. The FCPA also directly prohibits any non-U.S. company from committing an act in furtherance of a bribe scheme within U.S. territory. Acts as minor as sending an email to a U.S. bank requesting a fund transfer can constitute an act “in furtherance” of a bribery scheme. Of equal importance, the U.S. government frequently prosecutes individuals, including officials of non-U.S. companies, who face imprisonment if convicted. As for the UK Serious Fraud Office (SFO), it clearly has ambitions to become a leader among anti- corruption regulators. As a result, companies that previously felt unconcerned by U.S. law may now be concerned by the UKBA. Time will tell as to how the UKBA will actually be enforced. Legally speaking, the UKBA is more strict than the FCPA on facilitation payments, with the latter permitting payment to expedite or facilitate routine (non-discretionary) governmental action in certain narrow circumstances. The UKBA also is very broad in its extraterritorial application, reaching any company carrying on all or part of its business in the UK. The UKBA also criminalizes the receipt of a bribe, thereby extending beyond payments to foreign officials. The requirement under the UKBA to have “adequate procedures” as a defense to liability for bribery by associates (such as agents, consultants or advisors) also impacts on transactions. Where problems arise post-acquisition, the SFO will look at what due diligence was done in advance and what integration and remedial actions were agreed, to assess if these were “adequate” to manage post-acquisition corruption risk (the U.S. DOJ will also take this into account in deciding whether to prosecute or accord leniency, but U.S. law accords no statutory defense for “adequate procedures” like the UKBA). At the same time, the SFO does not have unlimited human and financial resources to investigate and enforce the UKBA, so we will have to wait to see how it is actually enforced. Senior representatives of the SFO have previously stated that where a business identifies corruption issues post- acquisition, self-reports them and has a remedial plan in place, there is a presumption that the company should be given a period of time to sort out the problems without fear of prosecution. We note that David Green, a well known regulatory prosecutor in the UK, will be heading up the SFO starting in April 2012. Are listed companies more concerned by corruption risk than others? Yes. First, as mentioned, non-U.S. companies that are listed on a U.S. stock exchange are subject to the U.S. FCPA, and are therefore subject to the vigorous enforcement policies of the SEC and the DOJ. Interestingly enough, the UK Guidance specifically states that it is not expected that the mere fact that a company’s securities have been admitted to the UK Listing Authority’s Official List and therefore admitted to trading on the London Stock Exchange, in itself, would qualify the company as carrying on a business or part of a business in the UK, thereby triggering the application of the UKBA. Second, companies that are public companies anywhere in the world, when they encounter corruption within their organizations, must decide what and when to disclose the information to the market. In France, a company must promptly make public any non-public information that would affect its share price, unless there is a legitimate reason for holding back the information and the company is in a position to keep it confidential. While the U.S. federal securities laws do not provide the same type of an affirmative duty to disclose, companies are subject to strict disclosure obligations and strong incentives to give full and fair disclosure, including as a result of potential 10b-5 liability. In addition, the U.S. Department of Justice and SEC policies place a premium on self-disclosure of illegal conduct. Moreover, the effect of such conduct on a company’s books and records, the need to certify internal controls, and/or the need to reserve for losses associated with unlawful conduct, often convert FCPA violations into matters for disclosure in the company's financial statements. Managing communications is challenging, especially when a company is listed on more than one stock exchange. Also, listed companies may be more sensitive to reputational damage than other companies. We should also mention the Dodd-Frank Act’s whistleblower provisions. In August, the U.S. SEC approved final rules implementing these provisions. The rules provide for awards of between 10% and http://ethic-intelligence.com/experts/135-corruption-risks-in-mergers-and-acquisitions 6/3/2012
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