Foreign Corruption Practices Act (FCPA) successor liability in mergers and acquisitions was recently in the news with the late December 2014 guilty plea of French engineering giant Alstom SA for violating the FCPA's books and records and internal controls provisions.
General Electric (GE) had previously agreed to purchase the core of Alstom's assets in 2015. However, the FCPA investigation of Alstom was creating uncertainties with the sale. The resolution of the criminal charges allows the purchase to proceed without successor liability to GE. Alstom's agreement with the Department of Justice (DOJ) also included a guilty plea by its Swiss subsidiary and two U.S. subsidiaries entering into deferred prosecution agreements.
In settling the cases, DOJ insisted that Alstom, not GE, pay the entire fine of more than $772 million. The Alstom plea agreement specifically provides that "Defendant shall not accept directly or indirectly reimbursement or indemnification from any source … with regard to the penalty amount that Defendant pays… other than [from] a bank, financial institution or creditor." However, going forward any purchaser of substantially all business operations of Alstom or its subsidiaries will be required to take the assets subject to the provisions of the plea agreement and the deferred prosecution agreements. The agreements with the government require the companies to implement a comprehensive anti-corruption compliance program, a merger and acquisition due diligence program and periodic reporting to the government.
The Alstom case, as well as DOJ OpinionRelease 14-02 issued on November 7, 2014, provides useful guidance to any U.S. company seeking to acquire a foreign entity involved in prior corruption. Alstom shows that even a company involved in massive past corruption can be acquired free of successor liability to the extent the purchaser is willing to assume responsibility for the remediation and reporting requirements required in plea and deferred prosecution agreements. In a similar vein, Opinion Release 14-02 provides guidance on pre-acquisition due diligence, post-acquisition compliance and reporting of potential violations. Significantly, the Opinion also identified issues that DOJ would view as problematic, such as the acquisition of contracts or assets obtained through bribery that would provide financial benefits post acquisition.
The facts presented by the Opinion Requestor were straight forward enough. Requestor seeks to acquire the shares of Target Company principally held by its parent (Seller). Seller's shares are not listed in the U.S. Seller and Target have "negligible business contacts, including no direct sale or distribution of their products, in the United States." During pre-acquisition due diligence, Requestor's forensic accountant discovered evidence of improper payments, including gifts and cash donations to governmental officials and government-controlled media, mostly directed at obtaining permits and licenses and to influence publicity. None of the payments involved a U.S. person or issuer and none occurred in the United States. Additionally, Seller and Target had significant books and records deficiencies. Target had no written code of conduct or compliance policies and procedures. Target's employees demonstrated a lack of understanding and awareness of anti-bribery laws and regulations.
Requestor put forth a post- acquisition integration plan that encompassed "risk mitigation, dissemination and training with regard to compliance procedures and policies, standardization of business relations with third parties, and formalization of the Target Company's accounting and recordkeeping in accordance with Requestor's policies and applicable law."
Significantly, the DOJ assumed the accuracy of the Requestor's representation that none of the potentially improper pre-acquisition payments by Seller or Target were subject to the jurisdiction of the United States. As a result, the DOJ would not have jurisdiction with respect to Seller, Target or Requestor for any pre-acquisition payments. As the DOJ noted in the Opinion, "Successor liability does not, however, create liability where none existed before. For example, if an issuer were to acquire a foreign company that was not previously subject to the FCPA's jurisdiction, the mere acquisition of that foreign company would not retroactively create FCPA liability for the acquiring issuers." In reaching this conclusion, the DOJ specifically noted that "Requestor also represents that, based on its due diligence, no contracts or other assets were determined to have been acquired through bribery that would remain in operation and from which Requestor would derive financial benefit following the acquisition."
The DOJ provided further guidance in the mergers and acquisitions context by stating that when engaging in mergers and acquisitions companies should:
- i) "Conduct thorough risk-based FCPA and anti-corruption due diligence;
- ii) Implement the acquiring company's code of conduct and anti-corruption policies as quickly as practicable;
- iii) Conduct FCPA and other relevant training for the acquired entity's directors and employees, as well as third-party agents and partners;
- iv) Conduct FCPA-specific audit of the acquired entity as quickly as practicable, and
- v) Disclose to the (DOJ) any corrupt payments discovered during the due diligence process."
Each situation is fact specific, but each of the steps above should be considered as part of any best practices' procedure when conducting mergers and acquisitions.