Corporate Buyers Beware: FCPA Successor Liability – A Growing Threat
The threat of Foreign Corrupt Practices Act (FCPA) successor liability is a growing concern for U.S. buyers in cross-border deals. U.S. companies can no longer afford to acquire a foreign asset or enter into a foreign joint venture (JV) with the assumption that they can simply address any anti-bribery law violations post-closing. In this heightened FCPA enforcement environment, the U.S. Department of Justice (DOJ) and the U.S. Securities and Exchange Commission (SEC) are holding corporate buyers liable for prior FCPA violations, whether or not they were known at the time of sale. Therefore, it is mission critical for U.S. companies contemplating a cross-border transaction to conduct adequate FCPA-specific due diligence and to address and remediate any issues before entering into the deal.
The FCPA is a U.S. law that bans international bribery of foreign government officials. The statute has a broad reach and covers all U.S. companies, persons and issuers (including their consolidated foreign subsidiaries) as well as foreign companies with sufficient contacts with the United States to support jurisdiction (e.g., those companies trading on U.S. exchanges or that use U.S. banks to transact business). Foreign persons and companies that commit FCPA violations while in the U.S. are also subject to prosecution under the FCPA.
The FCPA prohibits corrupt payments and gifts to foreign officials as a way to get or keep business (whether or not the bribe resulted in any actual business). U.S. regulators have also held companies liable for improper payments or gifts provided by agents, consultants or other third parties working on a company’s behalf. The FCPA also has accounting provisions for U.S. issuers that require them to keep accurate books and records and to maintain sufficient internal controls over corporate assets. The FCPA’s definition of a “foreign official” is quite broad and covers not only those holding public office but also local persons affiliated with foreign state-run or owned organizations (e.g., doctors at a public hospital in Brazil or employees of a state-owned oil company in China). Depending on the geographic market and industry involved, the FCPA risks can be high and any issues should be addressed and resolved in the pre-acquisition phase.
Big Penalties For FCPA Violations
In recent years, U.S. law enforcement authorities have given heightened priority to FCPA investigations and prosecutions, resulting in record-breaking fines and penalties, lengthy prison sentences for individual offenders, and costly and intrusive investigations for companies who find themselves under government scrutiny. In 2010, for example, U.S. regulators assessed a record-breaking $1.8 billion in FCPA penalties and, in 2011, a U.S. court handed down the longest prison sentence in FCPA history – 15 years.
FCPA enforcement of anti-bribery violations is a growing trend that shows no sign of slowing down any time soon. Last year, the DOJ and SEC collected over half a billion dollars in penalties and disgorgements, which marks the fourth consecutive year where such fines exceeded this amount. Currently, there are reportedly over 150 FCPA cases pending.
FCPA Risks In The M&A Context
In the mergers and acquisitions (M&A) context, FCPA successor liability is a real issue. “Buying an FCPA violation” has become a reality for some acquiring companies who fail to conduct adequate pre-merger FCPA diligence or to incorporate the newly acquired entity into an existing compliance program. Buyers of newly acquired assets face potential FCPA liability not only for anti-bribery violations that occurred on their watch but also for pre-closing conduct that they may not have known about. In the worse case scenario, the entire value of the acquisition can be lost. Getting ensnared in an FCPA probe can be costly to resolve and can also lead to parallel investigations in foreign jurisdictions. Moreover, the occurrence of shareholder derivative suits relating to suspected FCPA violations is also increasing.
Importantly, FCPA successor liability is not reserved for only those investors acquiring a majority equity stake in a deal. The U.S. government has aggressively pursued theories of FCPA liability against investors who acquire less than a 50 percent ownership interest, depending on the level of control they exercise (e.g., if an investor has seats on the board of directors or active involvement in managing the investment).
Large FCPA penalties have also been assessed in the M&A context. Indeed, four of the top ten largest FCPA penalties ever assessed relate to a single JV involving four multi-national oil companies where the JV authorized improper payments to foreign officials in order to gain lucrative government contracts. Millions in FCPA sanctions were levied against each of the four JV partners, even though the improper payments were paid through third parties and other agents. One of the JV partners was a subsidiary of a large U.S. oil company. Following a corporate reorganization of this subsidiary in which the improper payments were revealed, the U.S. parent and reorganized subsidiary were assessed $579 million in civil and criminal fines and penalties for the misconduct engaged in by the old subsidiary. These stiff fines were levied even though there was no evidence that the new board or management of the reorganized subsidiary had actual knowledge of any FCPA violations found to have been committed by the old subsidiary. As was the case for this U.S. company and its JV partners, FCPA liability cannot be avoided by a corporate reorganization or by using third parties to make the improper payments. Such strategies proved to be as futile as rearranging the deck chairs on the Titanic.
The clear lesson here is that U.S. companies should understand that FCPA successor liability is very real and acquiring parties need to conduct adequate pre-acquisition due diligence and take affirmative steps to ensure the new company is FCPA compliant and that its employees and other relevant parties are provided anti-corruption training and are fully incorporated into an effective anti-bribery compliance program.
In addition to the high fines and penalties, FCPA violations can result in collateral consequences such as debarment or suspension (e.g., inability to do business with U.S. government), loss of valuable licenses (e.g., export license) or exposure to civil or shareholder class action lawsuits. In the M&A context, failure to detect, isolate and resolve FCPA violations at the pre-acquisition stage can also result in expensive and lengthy investigations, intrusive compliance monitors, negative tax treatment or a potential negative impact on market value or the stock price of the asset(s) recently purchased. Government investigations involving FCPA violations are not only costly, they are also disruptive, causing senior executives and their staff to take time to gather documents and answer questions from investigators instead of focusing on their core business. In order to avoid these unwanted events, it is important for FCPA due diligence to be an integral component of the overall pre-acquisition due diligence plan.
FCPA Implications for U.S. Companies Involved in Cross Border M&A Deals
For U.S. corporations doing business beyond America’s shores, the issue of FCPA successor liability is currently an area of much debate. The U.S. Chamber of Commerce has led an extensive lobbying effort to reform the FCPA. It seeks to limit the extent of FCPA successor liability for acquiring companies, particularly as it relates to pre-closing conduct, and is requesting more clarity in terms of how much pre-closing diligence companies need to undertake to avoid liability. In November 2011, a bill was introduced in the House of Representatives that proposed amendments to the FCPA that included elimination of criminal penalties for successor liability. While the bill did not become law, the legislation is supported by those who feel that the FCPA is being unfairly used to stop or slow U.S. involvement in large international transactions, which they argue impairs U.S. growth and puts U.S. firms at a disadvantage. In response, the U.S. Department of Justice has promised that it will be issuing long-awaited guidance later this year on the FCPA, which will presumably touch on FCPA successor liability issues and other concerns raised by FCPA critics (e.g., the scope of the FCPA’s definition of foreign official; more clarity on the government’s cooperation program, i.e., specific benefits to be gained by self-reporting a suspected violation).
For now, the pace of international deals continues to grow. As U.S. companies continue to search for global opportunities to increase their bottom line, they should plan on including FCPA and anti-bribery due diligence as standard items in their pre-deal diligence plans and move quickly integrate the new company into its compliance program, with a particular focus on providing FCPA training to employees and other relevant parties.