In November 2012 the Criminal Division of the U.S. Department of Justice (DOJ) and the Enforcement Division of the U.S. Securities and Exchange Commission (SEC) released "A Resource Guide" clarifying, among other things, their approach to successor liability under the Foreign Corrupt Practices Act (FCPA) in the mergers and acquisitions context. See http://www.justice.gov/criminal/fraud/fcpa/guidance. The Resource Guide provides helpful guidance on the due diligence procedures acquirers can conduct to better evaluate potential post-acquisition liability of, and minimize the likelihood of a criminal or civil enforcement action being filed against, an acquired entity or the acquirer (under the theory of successor liability),[12] in connection with violations of the FCPA.

As noted in the Resource Guide, due diligence relating to the FCPA has four potential benefits:

First, due diligence helps an acquiring company to accurately value the target company. Contracts obtained through bribes may be legally unenforceable, business obtained illegally may be lost when bribe payments are stopped, there may be liability for prior illegal conduct, and the prior corrupt acts may harm the acquiring company's reputation and future business prospects. Identifying these issues before an acquisition allows companies to better evaluate any potential post-acquisition liability and thus properly assess the target's value.

Second, due diligence reduces the risk that the acquired company will continue to pay bribes. Proper pre-acquisition due diligence can identify business and regional risks and also can lay the foundation for a swift and successful post-acquisition integration into the acquiring company's corporate control and compliance environment.

Third, the consequences of potential violations uncovered through due diligence can be handled by the parties in an orderly and efficient manner through negotiation of the costs and responsibilities for the investigation and remediation.

Finally, comprehensive due diligence demonstrates a genuine commitment to uncovering and preventing FCPA violations.

The Resource Guide notes that the government will be lenient if the acquiring company:

  • conducts sufficient and appropriate pre- and post-acquisition due diligence;
  • quickly takes corrective action to remedy any conduct that violates the FCPA; and
  • reports the inappropriate conduct to the authorities.

It is important to note that the Resource Guide only reflects the views of the DOJ and SEC, and applies only to the FCPA. Acquirers also should consider any similar laws that are potentially applicable to such transactions (e.g., the UK Bribery Act).

While the Resource Guide addresses FCPA issues in the context of an acquisition, its suggestions are equally helpful where a private investment fund or other investor is about to make any significant equity investment.

The Resource Guide recommends a risk-based approach to due diligence focusing on anticorruption issues, which should include at least the following:

  • legal, accounting and compliance review of the target's sales and financial data, customer contracts and third-party distributor agreements;
  • risk-based analysis of the target's customer base;
  • audit of selected transactions;
  • interviews with the target's general counsel, compliance and audit personnel, and executives in charge of sales to discuss corruption-related matters; and
  • analysis of the target's anticorruption training to identify shortfalls.

If pre-acquisition due diligence reveals FCPA issues, then remedial action, some taken pre-closing and some taken post-closing, may include any or all of the following:

  • ensure improper behavior has ceased;
  • require the target to terminate, suspend, or reprimand employees or agents responsible for the improper conduct;
  • disclose the improper conduct to the DOJ and the SEC;
  • require the target's distributors and other agents to sign anticorruption certificates, complete anticorruption training in their language, and sign new contracts that incorporate FCPA anticorruption warranties, representations and audit rights;
  • integrate the target into the acquirer's internal compliance and training programs; and
  • communicate the acquirer's compliance policies and procedures to the target's employees and agents.

Acquisition of a target does not create retroactive jurisdiction for the pre-acquisition misconduct of a target that was not previously subject to FCPA jurisdiction. However, post-acquisition misconduct can trigger FCPA liability. As a result, acquirers should not eschew pre-acquisition due diligence simply because the target, prior to acquisition, is not subject to FCPA penalties.

FCPA violations discovered during pre-acquisition due diligence need not derail a transaction. As the Resource Guide notes,

[I]n a significant number of instances, DOJ and SEC have declined to take action against companies that voluntarily disclosed and remediated conduct and cooperated with DOJ and SEC in the merger and acquisition context. And DOJ and SEC have only taken action against successor companies in limited circumstances, generally in cases involving egregious and sustained violations or where the successor company directly participated in the violations or failed to stop the misconduct from continuing after the acquisition.

For example, in 2004 a Connecticut-based acquirer discovered FCPA violations by its target. The target and the acquirer disclosed the conduct to the DOJ and the SEC. The target paid $1.1 million in disgorgement, pre-judgment interest and civil penalties. The acquirer proceeded with the acquisition and entered into an agreement with the government to ensure the target's full compliance with its non-prosecution agreement.

These pre- and post-acquisition due diligence steps are important to ensure that any FCPA-related issues are identified and addressed quickly.