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Jan 19, 2015

FCPA due diligence for international M&A deals

Where acquirer is still held responsible for target's pre-acquisition misconduct, costs can be priced into the deal

M&A activity is expected to continue at a sustained, if not accelerated, pace in 2015 and 2016, according to Deloitte’s 2014 M&A trends report. Moreover, 59 percent of the survey’s corporate respondents and nearly 75 percent of private equity respondents say they expect to acquire a target in a foreign market. In light of that, would-be acquirers should review recent guidance from the US Department of Justice (DoJ) regarding what companies can expect when it comes to FCPA enforcement for any preacquisition misconduct the acquired company may have engaged in.
A client alert issued by Latham & Watkins on Monday says the DoJ’s second and final FCPA Opinion Release of 2014, issued on November 7, ‘is a reminder to US companies and issuers that effective due diligence and integration plans are critical to ensuring they do not become liable for improper conduct by their newly acquired companies after the acquisition is complete.’
The DoJ’s Opinion Release responded to an inquiry by a US-based multinational consumer products company whose due diligence regarding a foreign consumer products company it wants to buy found several payments to foreign officials that were probably improper, as well as significant accounting and record-keeping deficiencies. In this case, the requestor said the target company’s preacquisition conduct had no connection to the US at the time of the conduct.   
Five steps the DOJ encourages firms doing M&A deals to take to ensure FCPA compliance emphasize thorough risk-based FCPA and anti-corruption due diligence, quick implementation of the acquirer’s code of conduct and anti-corruption policies, and speedy FCPA training for the acquired entity’s directors and employees, as well as third-party agents and partners.

‘Sometimes the level of diligence that can be done prior to closing the transaction varies, which the DoJ has recognized in other Opinion Releases, due to legal impediments or other facts that prevent the company from completing the full scope of anti-corruption due diligence,’ says Nathan Seltzer, partner in Latham & Watkins’ white-collar defense and investigations practice and one of the authors of the client alert. ‘But ideally, companies want to have the plans in place to make sure that integration and full assessment of risks takes place as soon as possible after closing, preferably starting on day one.’
Guidance issued jointly in November 2012 by the DoJ and the SEC notes that both agencies have declined to take action against acquiring companies where they voluntarily disclosed and remediated conduct in the M&A context; they have generally taken action against the acquiring company only in limited circumstances where the acquiring company allows misconduct to continue or fails to take the steps to integrate the company and get a compliance program in place.
‘The guidance explains that more frequently, the DoJ and SEC have pursued enforcement action against the target company where violations are discovered pre-closing, or against the acquired company even after the acquisition,’ Seltzer explains.
When it comes to paying settlements for the acquired company’s misconduct, the acquirer can still be on the hook for the costs, Seltzer concedes. But he notes that those costs, like any other pre-existing liability, can be priced into the acquisition. ‘Where preacquisition due diligence is done and issues are identified, that can help value the transaction, even if there is a potential future enforcement action,’ he says.
Seltzer acknowledges that the key steps companies need to take to implement the appropriate policies and training at the acquired company can be time-consuming. Of critical importance, he stresses, is that policies and training ‘resonate with employees outside the US’.
‘There can often be cultural differences that need to be thought through to make sure the policies are put in the right language and conveyed in the right way so that employees understand them and understand the company’s commitment to ethics and compliance,’ he says. ‘And rolling that out – conducting the training, getting on the ground and educating employees – and then addressing the risks with third-party intermediaries, making sure those relationships are consistent with the compliance program, I think those are some of the biggest challenges and time-consuming steps.’

David Bogoslaw

Associate Editor and Online features producer for Corporate Secretary