Managing bribery, corruption and regulatory risk in M&A deals

Mergers & Acquisitions
Asia Pacific
Mergers and acquisitions and/or joint ventures are integral to many companies’
growth strategies - whether to lower manufacturing costs, consolidate supply
chains, access growing consumer markets, tap into fresh talent or to acquire new
products and technology. Yet, with all of the potential upside of doing deals, there
are also risks.
Compliance regulation
The current regulatory environment - particularly the Foreign Corrupt Practices
Act (FCPA), the UK Bribery Act, as well as many local anti-bribery and corruption
laws - makes it unlawful to pay bribes for the purpose of obtaining or retaining
business. There are also strict requirements around accounting policies and
practices, requiring companies to make and keep books and records that
accurately and fairly reflect their business transactions and to maintain an
adequate system of internal accounting controls. The absence of documented
compliance programs, contracting with intermediaries and agents, providing
corporate hospitality for, or sponsorship of, government officials all carry anticorruption
compliance risks especially where companies are carrying on business
in a country or industry which is perceived to have a reputation for corruption.
Why should companies in Asia care about
compliance risk?
A corrupt or otherwise non-compliant culture carries the risk of some serious
legal consequences and can also undermine the very commercial foundation
of a business or irreparably taint its assets. You should not assume you are not
affected because you are an Asian company that only does business in Asia.
Here’s why:
The net is tightening!
• While most countries in Asia do not yet have the same sweeping extra-territorial
laws or active enforcement as the US or UK, regulators in Asia Pacific are
becoming increasingly active, prompted in part by their US and UK counterparts
and in part by a groundswell of popular anti-corruption sentiment.
Managing bribery, corruption
and regulatory risk in M&A deals
“...every two weeks
regulators open a case
against a company
somewhere in the
world for international
corruption in Asia
Pacific...”
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• Of the top ten biggest settlements under the FCPA, only two are with US
companies. The rest are foreign multinationals, several of whom have no shares
or debt registered in the US. The US authorities have pursued foreign companies
on the slightest of connections to the US (e.g. an email through a US server or
the use of US dollar payments cleared through New York). In fact, every two
weeks, a company somewhere in the world gets a case opened against them
for international corruption in Asia Pacific excluding domestic matters.*
• The strict liability corporate offence under the UK Bribery Act potentially
extends to entities with a demonstrable “business presence” in the UK,
regardless of whether they have an actual branch office there.
• An Asian company buying a target tainted by criminal conduct from a UK
company might find itself in breach of the UK’s anti-money laundering laws for
helping that UK seller effectively realise the proceeds of underlying criminal
activity. Several countries in Asia and beyond have similar sweeping laws.
It could cost you money and lost business
• Clean up costs in terms of investigating and remediating the problems can be
expensive.
• There may be lost revenue and costs associated with loss of business if the
target’s business model is unsustainable.
• You might be excluded from future procurement contracts because you or your
group is tainted by criminal conduct of the target.
• International financial institutions and non-governmental organisations
are becoming more aggressive in sanctioning suppliers and other vendors
if there is a compliance breach in relation to projects that they are funding.
• There may be penalties and costs associated with the threat of litigation or
regulatory criminal and/or civil prosecution for past misconduct that you have
inherited.
• If not fixed, continuing misconduct will trigger future liabilities.
It could damage your reputation...
Think about potential brand damage and, in the case of a listed acquirer, possible
impact on the share price.
Or grow into something even worse...
On discovering corruption in a target’s business, a potential buyer may choose,
or even be obliged under whistleblower rules to disclose a compliance issue to a
regulator. If the regulator uncovers widespread corrupt conduct in the target, this
may not only result in the collapse of the sale, but also significant fines, penalties and
remediation costs for the target.
This is why, when doing deals, buyers must understand all of
the potential pitfalls to determine their best approach - can the
compliance risks be resolved pre-or post-acquisition, or is this a
true deal-breaker? How does this impact deal pricing, structure
and timing? A proper understanding and evaluation of the risks can
even strengthen a buyer’s hand in price negotiations.
Real life case study
We recently advised a prominent
private equity fund during its
acquisition of a company engaged in
the distribution of luxury products
throughout Asia, but with British
connections.
While conducting routine M&A due
diligence, we uncovered damaging
information about the target
company that cast serious doubt on
the future of the deal. The document
stated outright that it was company
policy to follow local market
practice, which meant importing
products illegally and underdeclaring
the value of imported
goods.
Normally a very nuanced approach
to due diligence is required
from the buyer’s team to flush
out compliance issues. “It’s
rather unusual to find a smoking
gun,” says Singapore partner
Andrew Martin, who led the
Baker & McKenzie team. “But in
this case there was a document
referring to illegal activities and
stating, ‘We conduct our business
in accordance with Asian market
practice.’”
With the private equity fund still
eager to acquire the target company,
we mobilised our global network of
compliance lawyers to investigate
the potential compliance issues and
suggest steps to address them. One
thing our lawyers know from years
of handling these cross-border
deals is that when compliance
issues arise, they are rarely confined
to one country. Clients need to
consider whether to review all areas
of a target company’s operations
to determine the scope of the
problem and, if necessary, adopt a
multi-jurisdictional approach to any
further investigation.
______________________
* Data is from EthiXbase, analysis is by Baker & McKenzie. Valid as at June 2013
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And it’s not just buyers - sellers need to be thinking about this too!
Companies seeking to attract a buyer or new investors, or raise funds publicly, should
‘get their house in order’ prior to going to market. Investors and strategic buyers
from the US and Europe may even pay a premium for targets that have a robust
compliance program in place, especially in high-risk jurisdictions and sectors.
Baker & McKenzie’s 3-step approach to keep you
in good compliance health
There is no doubt that compliance can pose significant risks, particularly when a
target is active in perceived high-risk regions or industries.
By bringing the Baker & McKenzie compliance experts into the process early, all risks
can be considered and informed decisions can be taken. Through proper risk evaluation,
planning and execution a compliance breach can be identified and corrected.
It is through our global network of experienced compliance practitioners that
we are uniquely placed to help you navigate the complexity of a plethora of farreaching
local rules that impact your deal and the interplay with overarching
extra-territorial legislation such as the FCPA or UK Bribery Act.
“...regardless of the
technical legal positions,
ignoring corruption or
compliance issues is,
quite simply, bad for
business”
Take stock
We will undertake a pre-acquisition compliance due diligence
review of your target. This will help you:
• Build a detailed picture of the industry and jurisdiction of the
target’s operations, assess its corporate culture, and identify
any potential liabilities
• Understand all of your options in the local law context
• Ask the right questions and get your ducks in a row
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Frame compliance solutions over the course of the deal
process
We will make sure the purchase agreement specifically
addresses any compliance sticking points by:
• Including effective contractual protections
• Incorporating structural protections (e.g. conditions
precedent to remedy matters prior to closing or by carving
out or delaying the acquisition of risky assets)
• Assessing any reporting obligations and options (e.g.
mandatory suspicious transaction reporting or the
consideration of voluntary reporting of events which may
secure more lenient treatment from prosecutors or regulators)
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Post-acquisition integration steps
We will help you with post-acquisition integration measures by:
• Formulating strategies to maintain a clean bill of compliance
health to take the acquired business forward
• Conducting a thorough compliance audit and anti-corruption
check of the acquired business (if pre-acquisition due diligence
has not been possible)
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Comprehensive due
diligence demonstrates
a genuine commitment
to uncovering and