In a recent Opinion Procedure Release (OPR), Number 14-02, the U.S. Department of Justice expressly limited successor liability for a US company purchasing a non-US company that had paid bribes in the past. In so doing, DOJ may have given a little bit of comfort to US companies and issuers thinking about purchasing non-US companies. But as described below, we emphasize “little bit.”
Relevant Facts. The DOJ issued OPR 14-02 on November 7, 2014 in response to a request from a US company (the Buyer) seeking to acquire a non-US company and its wholly-owned subsidiary (the Target). As an issuer of securities in the United States, the Buyer is subject to both (i) the anti-bribery and (ii) the books and records and internal controls provisions of the Foreign Corrupt Practices Act (FCPA).
The Buyer asked the DOJ whether it would take enforcement action against the Buyer, post-acquisition, for conduct by the Target that occurred pre-acquisition. That conduct, according to the OPR, was fairly sketchy: over $100,000 in payments raised compliance questions, including payments to government officials to obtain permits and licenses, and to state-controlled media personnel to minimize negative publicity. Payments apparently took the form of gifts, cash donations, and charitable contributions and sponsorships. (There is no indication that the payments included that peculiarly problematic type of expense, entertainment and hospitality, but maybe DOJ was just being nice.)
In addition to myriad problematic payments, the Target’s books and records were in shambles. An accounting firm hired by the Buyer to assist in due diligence of the Target could not locate or identify many underlying records. Expenses were improperly and inaccurately classified in what books the Target did keep. And the Target maintained no compliance policies or procedures. So it is perhaps not surprising that, as the DOJ notes, the Target’s employees demonstrated poor understanding and awareness of anti-bribery laws and regulations.
In light of its due diligence, the Buyer concluded that the Target was an anti-bribery compliance train wreck. It seems correspondingly safe to conclude that the Target may have violated applicable anti-bribery laws. Yet beauty being in the eye of the beholder, the Buyer went to the DOJ for guidance.
OPRs Generally. The DOJ issues OPRs to respond to requests for such guidance. In each OPR, the DOJ reviews a particular series of facts and then declares its enforcement intentions related to such facts. On average, DOJ has issued between one and two OPRs per year since the early 1980s. While the fact patterns addressed in OPRs change, DOJ’s explicit qualifications to every OPR remain constant: the opinion (i) is not binding, and (ii) can only be relied on by the requesting party, and only if there are no changes to the facts and circumstances as presented to DOJ.
We are sometimes surprised that companies do not take more advantage of the OPR process. After all, it is about the closest a company can come to obtaining safe harbor from prosecution under a particular set of facts. When we have suggested to companies that they consider seeking an opinion from DOJ, the response is often that they do not want to be on DOJ’s proverbial radar screen. Apparently the fear is that by reaching out to DOJ about a ticklish situation, it is more likely that DOJ will reach back out in the future to pursue an enforcement action. There is also concern that DOJ may respond with the wrong answer, i.e., that something is in fact a violation and would trigger enforcement action. Companies may decide they would rather take their chances on particular conduct about which reasonable minds can differ.
Whatever the reason, it is useful that parties – even a very limited number of parties – do occasionally go to DOJ seeking guidance. Where official government guidance has traditionally been lacking, notwithstanding the publication in 2012 of the Resource Guide to the U.S. Foreign Corrupt Practices Act, these occasional insights into the DOJ enforcement mindset are illuminating.
DOJ’s Conclusion – Three Key Takeaways. Returning to OPR 14-02, we think there are the three key takeaways to consider:
First, DOJ stated that it would not take enforcement action against the Buyer for conduct that occurred prior to the acquisition because that conduct was not subject to the FCPA when it occurred. DOJ also expressly acknowledged that the Buyer had developed a plan consisting of pre- and post-acquisition measures to address and remediate any past instances of bribery by the Target. (The DOJ stated that it “expresses no view as to the adequacy or reasonableness of [the Buyer’s] integration of the Target …”) This finding is a relief to any US company or issuer thinking about an acquisition of a non-US company, especially from a country in which bribery is perceived to be widespread.
Second, the DOJ provided useful general guidance – “the Department encourages companies” – about what constitutes an effective FCPA compliance process in the M&A context. The process should include: (i) thorough, risk-based due diligence; (ii) implementation, “as quickly as practicable,” of the acquiring company’s code of conduct and compliance policies; (iii) anti-bribery training for directors, employees, and third-party agents and partners of the acquired company; (iv) an FCPA-specific audit “as quickly as practicable”; and (v) disclosure to the DOJ of any corrupt payments discovered during diligence. While not a safe harbor, DOJ notes that such a process “may, among several other factors, determine whether and how [it] would seek to impose post-acquisition successor liability in case of a putative violation.” Notably, DOJ seems to recognize that all compliance measures cannot be taken on day one post-acquisition – “as quickly as practicable” is pretty quick, but it is not immediately.
Finally, we note that DOJ apparently reached its conclusion at least in part based on the belief that, post-acquisition, no contracts or other assets acquired through bribery by the Target would remain in operation or generate a financial benefit for the Buyer. This makes sense. What we find interesting is the inverse of this statement, namely, that if there were a contract or other asset obtained through bribery, and the Buyer acquired that asset and generated revenue from it, DOJ might try to exercise jurisdiction over the Buyer even if the bribery occurred outside US jurisdiction.
Perhaps this is too strict an interpretation of DOJ’s language in the OPR. But read literally, the OPR seems to suggest that if a company subject to FCPA jurisdiction (Company X) were to acquire an asset from a company not subject to FCPA jurisdiction (Company Y), if Company Y acquired the asset through bribery, and Company X were to continue operating that asset post-acquisition, the DOJ might seek to impose liability on Company X. Such an enforcement action would seem somewhat incongruous with DOJ’s position that a corrupt action not subject to the FCPA would not expose a subsequent acquiror to FCPA liability.
Conclusion. The regulated community is better off thanks to this OPR, since any guidance from DOJ is helpful, even when it leads to other questions. Identification by the government of key elements in an effective compliance process in the M&A context is useful. And it is useful to better understand how companies can insulate themselves from acquiring successor liability for an FCPA violation.
It is nonetheless unfortunate that DOJ continues to be unwilling to articulate a specific safe harbor standard by which companies can assure themselves of non-prosecution. Short of that, and notwithstanding the guidance in this (and other OPRs), companies will continue to have to use their best judgment to make tough FCPA compliance decisions.