Acquisitions and ABC due diligence: The law and unintended consequences
While the UK Bribery Act has failed to result in a flurry of bribery-related corporate prosecutions since coming into force in 2011, it would be naive to think it has achieved nothing. The business world is now acutely aware of corruption risk and its economic impact. The Act has driven the embedding of a much more visible compliance culture, with greater engagement at board level of matters concerning anti-bribery and corruption. Indeed, anti-bribery and corruption policies and standards are now fundamental pillars of the internal compliance framework for most multinationals. In particular, we are seeing a far greater focus on pre-acquisition anti-bribery due diligence.
Pre-transaction due diligence is a well-established stage in the acquisition or merger process but it is widely understood that there are limits to what even the most comprehensive due diligence enquiries will uncover.
The last few years have seen numerous examples in a variety of industries where an acquirer learns that its newest asset is not necessarily free from the taint of bribery. Both FCPA and UK Bribery Act guidance make clear that under certain circumstances, an acquirer/joint venture partner can be found liable for the acts of its predecessor in title or partner: this risk of successor liability is very real for acquiring corporates. It should be noted that although the UK Act does not include a specific concept of Successor Liability, it is clear that in practice, once an acquisition is made, the purchaser inherits any previous failings which, if not remedied as part of the acquisition must be dealt with promptly on acquisition to avoid liability. Acquiring companies face a steep challenge in attempting to ensure their procedures are deemed adequate when they may be faced with an inherited contravention of the law.
With the best of intentions, a purchaser can find its investment under the scrutiny of regulatory and enforcement agencies. In some cases, the mere fact of such an investigation can be price-sensitive and lead to reputational damage.
Consider a joint venture partnership in which one partner is committing certain assets and operating companies to the partnership. The counterparty will naturally be concerned to know how those assets were originally acquired, what compliance controls were in place over that bidding process to ensure it was fair, whether any public officials were involved, the source of funds for the purchase, and confirmation that it was a fair value transaction. The challenge here is to interrogate the original acquisition process and confirm that the assets were taken on by the joint venture party in an unimpeachable manner. However, giving the parties themselves comfort is not in itself sufficient, in view of the wider legal obligations at play. How then can one satisfy the key regulators in an acquisition context?
Late last year a major US corporate in an acquisition process sought guidance from the Department of Justice (DOJ) in circumstances where it had identified numerous payments to public officials. The anti-corruption controls and financial records of the target company were so deficient that the acquirer had been unable to determine whether the assets it was acquiring had been tainted by corruption. In response, the DOJ issued FCPA Opinion Release 14-02 by way of guidance. Although the guidance was specific to the requesting party’s individual circumstances, certain general propositions can be taken from it. In summary, the regulator indicated it would not take enforcement action where:
- the acquirer undertook a reasonable due diligence investigation under the circumstances;
- the acquirer has post-acquisition plans to implement anti-corruption controls within the target; and
- the acquirer has no knowledge of tainted assets from which it will derive a financial benefit going forward. In the instant case, the Opinion Release made clear that no contracts or other assets that were acquired through bribery from which the acquirer would derive financial benefit would remain in operation following the acquisition.
In a similar vein David Green QC, the Director of the UK’s Serious Fraud Office, has clarified that in an M&A scenario where historical conduct which might have breached the then law is discovered, insofar as that conduct has been terminated and there has been a change of management, policies and procedures, it is unlikely, even if the evidential test were met, that it would be in the public interest to prosecute the target or its successor.
To stay on the right side of the ‘adequate procedures’ analysis, it seems most sensible to approach bribery and corruption issues thoroughly and methodically with appropriate due diligence not least to inform the indemnities sought from the seller. That being said, the acquirer’s responsibility does not end with comprehensive anti-corruption due diligence. The tyres of any existing anti-corruption policies and practices within the target have to be systematically kicked by way of a corruption-specific audit. Any corrupt payments or practices that are discovered must be brought to the attention of the appropriate regulator as soon as possible. The acquirer’s compliance programme and anti-corruption policies must then be implemented quickly post-completion. Training must then be rolled out to directors, employees and third parties with whom they do business on their legal obligations in relation to bribery and corruption.
This recent guidance tells us that regulators appreciate there are limits to what even the most thorough due diligence can reveal about a target's corruption history. While there is no lowering of the bar in terms of the compliance standards expected by the two major anti-bribery frameworks, there is comfort in knowing that genuine efforts to investigate a target and correct any compliance failings after the event will be acknowledged.
Pictured - Chiz Nwokonkor, Managing Associate, with international law firm King & Wood Mallesons