The Department of Justice has announced that it would take “no action” against a multinational corporation in connection with its acquisition of a foreign corporation with significant record-keeping deficiencies and a history of bribing government officials.
While that decision, Opinion Release No. 14-02, provides important insight to companies conducting mergers and acquisitions around the world, it also raises questions about whether DOJ is clarifying its stated view of how the FCPA applies to those transactions.
Given the risks that are commonly at stake in M&A transactions, it is vitally important for companies to understand how the government views its authority in this area so that they can take the appropriate steps to help minimize potential FCPA liability.
FCPA enforcement involving M&A transactions
It is no secret that DOJ and the Securities and Exchange Commission rely on general principles of successor liability when determining whether corporations should be held liable for violating the FCPA. The Resource Guide to the U.S. Foreign Corrupt Practices Act, issued by DOJ and SEC in 2012, addresses successor liability according to these principles, including black-letter law that a corporation generally assumes the liabilities of another company when it acquires or merges with that company. The Guide, however, contains an important caveat—“[s]uccessor liability does not . . . 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 issuer.”
When DOJ and SEC have pursued enforcement actions following the acquisition of a foreign company not within FCPA jurisdiction, successor liability typically has been limited to instances where the successor company has directly participated in unlawful conduct (i.e. by continuing to make illegal payments post-acquisition) or failed to prevent subsequent FCPA violations from occurring (i.e. by failing to conduct proper due diligence or put proper controls in place).
Opinion Release No. 14-02
In Opinion Release No. 14-02, a multinational company headquartered in the United States (the Requester) sought an opinion on whether DOJ would bring an enforcement action against it if it acquired a foreign consumer products company and its wholly owned subsidiary (the Target). The Requester conducted pre-acquisition due diligence of the Target and uncovered evidence of apparent improper payments (none with a jurisdictional nexus to the US), accounting weaknesses and recordkeeping deficiencies.
DOJ determined that it would not take any enforcement action against the Requester because “none of the potentially improper pre-acquisition payments . . . was subject to the jurisdiction of the United States.” In reaching this conclusion, DOJ relied on three points:
- None of the payments occurred in the United States
- No US person or issuer was identified as a participant in the payments and
- “[N]o contracts or other assets were determined to have been acquired through bribery that would remain in operation and from which Requester would derive financial benefit following the acquisition.”
Based on the reported facts, DOJ reached the correct decision that it should not – nor could it – prosecute a company for pre-acquisition conduct that was beyond its jurisdictional reach. However, instead of resting its decision on the simple notion that “mere acquisition” of a foreign company “would not retroactively create FCPA liability,” it went further seemingly to impose a “financial benefit” test in determining whether a successor company would face FPCA liability for its predecessor’s conduct.
Is DOJ clarifying its stated view of successor liability?
DOJ’s reliance on the fact that no contracts or assets “acquired through bribery” would remain in operation post-acquisition and that no “financial benefit” would be derived from any such contracts post-acquisition raises an interesting question regarding the scope of successor liability under the FCPA. While it is clear that the “mere acquisition” of a foreign company that was not previously subject to the FCPA will not result in liability, the Opinion Release leaves open the question of whether merely deriving financial benefit from a contract or asset “acquired through bribery” can expose a company to potential liability.
Not only would a “financial benefit” test represent a departure from recent enforcement practices, it would contradict the definitive guidance on FCPA enforcement issued by DOJ and SEC. In theGuide, DOJ and SEC provided hypotheticals intended to illustrate how successor liability would apply in instances when a predecessor company had not been subject to US jurisdiction. In one example, theGuide states that no liability would exist for pre-acquisition misconduct where a company discloses the conduct to the government, takes remedial steps designed to prevent continuing misconduct, and makes “certain the illegal payments have stopped.” The Guide does not suggest that FCPA liability could be imposed when a successor company merely derived a financial benefit from a pre-acquisition contract “acquired through bribery” absent some continuing unlawful activity giving rise to FCPA liability.
What it means for companies conducting global mergers and acquisitions: three steps
Opinion Release 14-02 confirms the need for companies to engage in thorough, risk-based due diligence when conducting mergers and acquisitions. But, if Opinion Release 14-02 stands for the proposition that companies must purge themselves of any financial benefit derived passively from a predecessor company’s potentially wrongful actions, then companies will need to:
- adjust their due diligence to identify whether potentially tainted contracts or other assets are operative, and whether the company may derive financial benefit from them
- reexamine whether the assets of businesses they seek to acquire are properly valued given any ongoing tainted contracts and
- assess whether cancelling tainted contracts could expose them to other legal risks.