Overview
In November 2012, the U.S. Department of Justice (DOJ) and the Securities and Exchange Commission (SEC) jointly released their 120-page Resource Guide to the U.S. Foreign Corrupt Practices Act (the "Resource Guide"). While the Guide addresses a range of FCPA issues relevant to publically-traded and private companies, this QuickCounsel distills the Guide down to key points and specific action items that can help in-house counsel avoid or mitigate FCPA liability in the specific context of mergers, acquisitions, and joint ventures.
Successor and JV Liability
As with other aspects of FCPA enforcement, the Resource Guide reaffirms DOJ and SEC's position that acquirers can be held liable for FCPA violations committed by their targets: "[s]uccessor liability applies to all kinds of civil and criminal liabilities, and FCPA violations are no exception."
Consistent with the emphasis on voluntary disclosure that permeates the Resource Guide, DOJ and SEC point to the potential for declinations (and other alternatives to guilty pleas) when an acquirer voluntarily discloses past violations by the predecessor company, remediates the conduct, and cooperates with enforcers. In the acquisition context, however, DOJ and SEC also emphasize that they frequently pursue enforcement actions against only the predecessor company - rather than the acquiring company - thus enabling the acquiring company to avoid potential debarment and other negative repercussions associated with a guilty plea. This is often cold comfort to a company whose new acquisition is devalued by a corporate criminal conviction.
The Resource Guide also reiterates that an issuer can be held responsible for accounting violations of its joint venture partners. Specifically, an issuer can be held directly liable for the "fail[ure] to have adequate internal controls and fail[ure] to act on red flags indicating that its affiliates were engaged in bribery." As reflected in the text of the FCPA, however, if a company owns less than fifty percent of a subsidiary or affiliate, the company is required only to use its "best efforts" to implement adequate internal controls.
Pre-Acquisition Action Items
Given the high costs of an FCPA enforcement action (including investigation, defense, and collateral litigation costs) and the devaluation that often follows an enforcement action, the Resource Guide stresses the importance of pre-acquisition anti-corruption due diligence. Not only can such due diligence prevent the company from buying a corrupt business, the Resource Guide suggests that good faith due diligence efforts can help prevent a criminal prosecution in the event that due diligence fails to catch an existing problem.
Though the Resource Guide does not mandate particular due diligence steps, it suggests that a company negotiating the acquisition of a foreign target (or a target which buys, sells, or otherwise does business internationally) should consider taking the following action items pre-closing:
- Determining the extent of the target company's international operations, including agents, distributors, and sourcing; Having its legal, accounting, and compliance departments review the target's sales and financial data, including its third-party and distributor agreements; Performing a risk-based analysis of the target's customer base; Performing an audit of selected transactions engaged in by the target; Engaging in discussions with the target's general counsel, vice president of sales, and head of internal audit regarding all corruption risks, compliance efforts, and any other major corruption-related issues that have surfaced at the target over the past 10 years. (note that depending on the jurisdiction, the common interest privilege may not protect discussions between an acquirer and a target regarding potential legal violations); and Seeking, in particularly difficult cases, an opinion release from DOJ (which SEC also honors). The exemplar is Opinion Procedure Release 08-02, in which DOJ provided Halliburton with a detailed response to Halliburton's request regarding a potential acquisition on which it could conduct limited pre-acquisition due diligence.
Post-Acquisition Integration Action Items
The Resource Guide also emphasizes the importance of swiftly integrating an acquired company into the parent's compliance program and remediating any problems that were not discovered until after the acquisition has closed.
In particular, DOJ and SEC encourage companies to take the following actions:
- Ensure that the acquiring company's code of conduct and anti-corruption compliance policies and procedures apply as quickly as is practicable to newly acquired businesses or merged entities; Provide anti-corruption training to the directors, officers, and employees of newly acquired businesses or merged entities (and to agents and business partners, when appropriate); Conduct an FCPA-specific audit of all newly acquired or merged businesses as quickly as practicable; and Disclose any corrupt payments discovered as part of its due diligence.
Notably, the Resource Guide identifies a circumstance in which the DOJ and SEC declined to take enforcement action against a publicly held company that identified potential improper payments to local government officials as part of its pre-acquisition due diligence, but swiftly self-reported and remediated. Moreover, the Resource Guide suggests that these steps may decrease the likelihood of an enforcement action even "when pre-acquisition due diligence is not possible."
Conclusion
This QuickCounsel provides in-house counsel with actions that can help avoid FCPA liability in the specific context of mergers, acquisitions and joint ventures. When determining next steps, in-house counsel should also consider whether the parent company itself first needs to take any of the foundational FCPA compliance actions detailed in the Guide.