Management Accounting

How to Prevent Corruption from Marring a Merger

Failing to identify a corrupt M&A target could spawn serious problems for an acquirer’s finances and reputation.
Bryan S. Schultz and David W. SimonMarch 13, 2015

There are hundreds of issues CFOs need to consider when their companies are looking at acquisition targets. Will the merger create cost savings? Are the target company’s books in order? Will assets have to be sold?

David W. Simon

David W. Simon

We’d argue that corruption issues should also be near the top of that priority list. Failing to identify these issues early in the deal process could create serious problems — not just for your company’s finances, but also for its reputation.

Not that it’s easy. The U.S. Department of Justice is aggressively enforcing foreign-corruption regulations and it can be difficult to know whether you’re in complete compliance when you’re overseeing a global operation. It’s best to deal with these issues upfront. Being surprised by a foreign corruption problem could put a quick end to a deal and cause your company considerable embarrassment.

For the financial officers who so often take the lead on due diligence (whether they want to or not), it’s crucial to at least understand where to look for trouble, and what to do when it appears.

Inheriting Liability: New Guidance

An important question in any transaction has always been the extent to which an acquirer could end up buying an FCPA liability along with the target company. Fortunately the DOJ has recently shed some light on the matter. Opinion_Bug7

Last November the DOJ issued a new opinion regarding the legal implications associated with acquisitions that may involve prior bribery by the target. The opinion included guidance about how the acquiring company can mitigate the risk of being liable for a target’s noncompliance with the FCPA.

In Opinion 14-02, the DOJ concluded that “[s]uccessor liability does not . . . create liability where none existed before.” This opinion confirms the common sense notion that an acquiring entity does not inherit FCPA liability if the target was not subject to the FCPA prior to the acquisition.

Bryan W. Schultz

Bryan W. Schultz

That means that even if the target’s conduct could have violated the FCPA, the FCPA never applied to the target and hence, there is no liability for the acquiring company to absorb. Thus, if none of the target company’s bribes were paid in the United States, no U.S. person or issuer was involved in or made the payments, and the acquirer would not obtain any sort of benefit from the contracts/assets that were gained as a result of the prior improper payments, then there’s no transfer of liability.

In reaching its conclusion, however, the DOJ took the opportunity to stress that FCPA due diligence, anti-corruption policies, and training and disclosure of improper conduct are necessities in any acquisition.

That’s consistent with previously announced DOJ principles. In prior advisory opinions, the DOJ has indicated that it wouldn’t charge an acquirer with a target’s prior FCPA violations (where the liability did exist prior to the acquisition) under circumstances where:

  • The acquirer conducted thorough, robust anti-bribery due diligence.
  • The acquirer required transparency from the target to the extent possible, which enabled adequate disclosure to regulators.
  • The acquirer represented that it would correct any FCPA-violative conduct as soon as possible and would promptly integrate the target into the acquirer’s FCPA compliance program.

When read together, the guidance from DOJ reinforces the importance of certain FCPA “best practices” for companies engaged in acquisitions.

Conduct Robust FCPA Due Diligence

Begin the FCPA due diligence process early to assess the risk associated with the target’s geographic footprint, markets, industry, and reputation.

Assuming the initial review generates a “green light” for the transaction, develop an anti-bribery/anti-corruption due diligence work plan, which should be specifically tailored to the target’s FCPA risk profile.

Jesse Beringer

Jesse L. Beringer Jesse Beringer

Part of the FCPA due diligence must be to examine the target’s financial statements. You should also review the following subject areas: the identities of the target’s owners and key employees; the target’s dealings with any foreign officials or state-owned customers; the target’s anti-corruption compliance policies and procedures; any past corruption investigations or violations; and the target’s use of third-party agents to conduct business.

Before finalizing the transaction, you need to require the corporate officers of the target company to acknowledge their understanding of the FCPA and other anti-bribery laws, and to certify that the company has not engaged in conduct that would violate the FCPA. Be sure to include appropriate protections in the deal documents: indemnity for FCPA violations, warranties that the target isn’t owned (in whole or in part) by foreign officials or governments, and the opportunity to recover fees, costs, and other expenses should an FCPA violation be discovered down the road.

Require Transparency from the Target

An important part of the DOJ’s opinion about potential culpability was the fact that those acquirers disclosed to the DOJ the potential FCPA violations uncovered in due diligence. As the DOJ has noted many times, it’s more likely to be lenient when companies make voluntary disclosures than when companies fail to disclose FCPA-violate conduct.

Implement Effective FCPA Compliance

Prompt remediation of any existing FCPA problems and robust and immediate post-closing integration of the target into the acquirer’s anti-bribery compliance program is critical to managing FCPA risk in a transaction. It’s easy to forget about this after a deal has closed. It’s important to stay vigilant to make sure the target company becomes compliant.

The DOJ’s November 2014 opinion confirmed the longstanding understanding that an acquirer doesn’t become liable for pre-closing conduct simply because of the acquisition. Importantly, the opinion provides the DOJ’s most current view of what an acquirer needs to do during the acquisition process. With due diligence, quick corrective actions, and cooperation with the DOJ, you can avoid a potentially disastrous situation.

David W. Simon and Bryan S. Schultz are partners at the Foley & Lardner law firm. Jesse L. Beringer, an associate at Foley & Lardner, co-authored this article.