The U.S. Department of Justice (DOJ) and the Securities and Exchange Commission (SEC) have finally issued Guidance on potential violations of the Foreign Corrupt Practices Act (FCPA). In recent years, the government has been aggressively cracking down on companies and individuals for violations of the Act, and companies are expending upwards of hundreds of millions of dollars to investigate, defend and resolve FCPA claims. In the merger and acquisition (M&A) context, companies and their directors and officers have been increasingly concerned about potential exposure for successor liability emanating from FCPA violations by the acquired entity. The new FCPA Guidance may provide some comfort and tips to companies and directors and officers seeking to avoid or minimize such M&A exposure.
Anti-bribery Provisions of the FCPA
The anti-bribery provisions of the FCPA generally make it unlawful for a U.S. company; its directors, officers or employees; or its agents to bribe a foreign official to secure an improper advantage to attract or retain business – also known as the "business purpose test." Enforcement actions are not limited to bribes to obtain government contracts. As reflected by the new Guidance, an improper business purpose may include winning a contract, influencing the procurement process, circumventing the rules for importation of products, gaining access to non-public bid tender information, evading taxes or penalties, influencing the adjudication of lawsuits or enforcement actions, obtaining exceptions to regulations and avoiding contract termination.
Moreover, bribes are not restricted to cash payments and may include "anything of value." Per the Guidance, bribes may include consulting fees, commissions, travel expenses and gifts. While there is no specific monetary limit, the Guidance reflects that small payments and gifts with nominal value will not typically be the subject of an enforcement action unless they are part of a systematic scheme or long-standing pattern of bribes. Other items of nominal value such as a "cup of coffee," "cab fare," "reasonable meals and entertainment expenses" and "company promotional items" are unlikely to be viewed as a bribe. In contrast, extravagant gifts such as "sports cars," "furs" or other "luxury items" are more likely to be viewed as an improper payment.
A number of FCPA enforcement actions have involved the payment of excessive travel and entertainment expenses. Examples of such improper expenses cited in the Guidance include a $12,000 birthday trip for a government official; $10,000 spent on dinner, drinks and entertainment for a government official; a trip to Italy for eight government officials that included $1,000 in pocket money for each official; and a sightseeing trip to Paris for an official and his spouse. However, travel and expenses on behalf of a foreign official for the purpose of visiting company facilities or operations, training, product demonstration or promotional activities may be bona fide expenditures depending on the circumstances.
Under the FCPA, bribery of a "foreign official" is broadly defined to include "any officer or employee of a foreign government or any department, agency or instrumentality thereof." As noted in the Guidance, an instrumentality of a foreign government may include state-owned and state-controlled entities. For instance, many foreign governments own or control certain types of industries such as aerospace and defense, banking and finance, health care, energy, telecommunications and transportation. Officers and employees of such state-owned or controlled enterprises may be considered foreign officials under the Act.
M&A Successor Liability for FCPA Violations
Directors and officers are frequently the subject of shareholder litigation for breach of fiduciary duties in connection with mergers and acquisitions. Shareholders of the acquired entity may complain that the purchase price was inadequate or "too low." Conversely, shareholders of the acquiring entity may contend that the transaction was overvalued and that the directors and officers misrepresented the benefits of the transaction in the merger proxy in soliciting shareholder approval of the deal.
The potential for successor liability for FCPA violations adds a new dimension to breach of fiduciary claims in the M&A context. If it is later discovered that the acquired entity engaged in bribery under the Act, shareholders may bring a derivative suit against the directors and officers of the acquiring entity on the grounds that they did not conduct appropriate due diligence, failed to uncover the FCPA violations and exposed the acquiring entity to successor liability. Once the FCPA violations are uncovered, both the acquired entity and the acquiring entity and their directors and officers may be caught in a complex and expensive web of shareholder litigation, investigations or proceedings by the SEC and DOJ, and internal investigations by an independent committee of the company’s board of directors.
The new SEC and DOJ Guidance highlights this potential successor liability for companies that merge with or acquire another company and urges companies to conduct pre-acquisition due diligence to uncover possible FCPA violations by the acquisition target. As reflected in the Guidance, the benefits of such due diligence are multifold:
- "First, due diligence helps an acquiring company to accurately value the target company." For instance, if the acquisition target acquired a substantial portion of its business and contracts through bribes, this revenue stream may be unsustainable when the bribery is detected and stopped. Moreover, the acquired entity's future business prospects and reputation may be irreparably damaged.
- "Second, due diligence reduces the risk that the acquired company will continue to pay bribes." Post-acquisition, the acquiring entity may impose strict FCPA controls and compliance to prevent future corrupt acts.
- Third, the M&A parties will have an opportunity before the merger to negotiate the "costs and responsibilities for the investigation and remediation" of the FCPA violations.
- Finally, the Guidance indicates that the SEC and DOJ may decline to take action against companies that voluntarily disclose FCPA violations uncovered during pre-acquisition due diligence.
The Guidance offers several "practical tips" for acquiring companies to reduce successor liability for FCPA violations in the M&A context, including (1) conducting "thorough risk-based FCPA and anti-corruption due diligence" on acquisition targets; (2) ensuring that the acquisition target quickly adopts and implements the acquiring entity's FCPA and anti-corruption policies and procedures; (3) providing FCPA compliance training to the directors, officers, employees and agents of the acquired entity; (4) conducting FCPA audits on the acquired entity; and (5) disclosing to the SEC and DOJ any FCPA violations uncovered during due diligence. As noted in the Guidance, the SEC and DOJ "will give meaningful credit to companies [that] undertake these actions" and may "decline to bring enforcement actions."
Hypothetical FCPA Successor Liability Scenarios
The Guidance provides several hypothetical FCPA successor liability scenarios involving (1) the acquisition of a "foreign company" not previously subject to the FCPA and (2) the acquisition of a U.S. company or issuer already subject to the FCPA.
With respect to successor liability of an acquiring company for FCPA violations involving a "foreign" acquisition target, the following points are made through the examples:
- The SEC and DOJ do not have jurisdiction over a foreign company and cannot pursue the acquiring entity for pre-acquisition FCPA violations by the foreign company.
- If an acquiring entity conducts minimal pre-acquisition due diligence, uncovers corrupt payments by the foreign acquired entity post-acquisition and allows the illegal payments to continue, the SEC and DOJ may prosecute the acquiring company for its own post-acquisition bribery (which is distinct from successor liability).
- If local foreign laws restrict the acquiring company's ability to conduct thorough due diligence and the corrupt payments by the foreign company are detected, remediated, and reported by the acquiring company post-acquisition, the SEC and DOJ may decline to prosecute the acquiring company.
With respect to successor liability of an acquiring company for FCPA violations involving a "domestic" acquisition target, the Guidance underscores the following:
- The SEC and DOJ have declined to prosecute an acquiring company that conducts extensive pre-acquisition due diligence, uncovers and stops the bribery by the acquisition target, requires the acquisition target to implement robust FCPA compliance policies and controls, and requires the acquisition target to disclose the misconduct to the government as a condition of the acquisition.
- The SEC and DOJ are not likely to prosecute an acquiring company that conducts extensive due diligence but nonetheless fails to uncover bribery by the acquired entity until after the acquisition, if the acquiring entity takes the following actions: stops the illegal payments, voluntarily discloses the misconduct to the government, and causes the acquired entity to implement robust FCPA and anti-corruption policies and controls. As noted in the Guidance, the SEC and DOJ recognize that "no due diligence is perfect."
- If the acquiring and acquired entities merge to form a new company and due diligence reveals that both companies were engaging in bribery, the SEC and DOJ may prosecute the new company on the basis of successor liability – particularly if the bribery was prevalent and known to high-ranking senior officials in the companies. Moreover, the SEC and DOJ may continue to monitor the new company to ensure future FCPA compliance.
In short, an acquiring entity and its directors and officers may mitigate their successor liability exposure for FCPA violations if they (1) conduct appropriate pre-acquisition due diligence, (2) voluntarily disclose the bribery to the government, and (3) implement FCPA and anti-corruption policies and controls at the acquired entity.
While shareholder suits against directors and officers are common in the context of mergers and acquisitions, the FCPA adds a new layer of concern. In addition to successor liability for FCPA violations, directors and officers may be liable for breaching their fiduciary duties by failing to conduct adequate pre-acquisition due diligence and failing to uncover, remediate and/or disclose FCPA violations by the acquisition target. As is demonstrated by the Guidance, the best defense for directors and officers is a good offense in the form of extensive due diligence and robust FCPA compliance policies and controls.