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FCPA Risks and Merger and Acquisitions: The Evolving Policies (Part I of III)

Global companies that grow through a deliberate merger and acquisition strategy continue to face significant anti-corruption risks.  The list of FCPA enforcement actions includes numerous examples of companies that settled FCPA matters because of post-acquisition conduct, which usually reflects inadequate post-acquisition procedures.

Despite the obvious risks and the Justice Department’s and SEC’s efforts to afford some flexibility in this area, global companies usually fail to devote adequate attention and resources to mitigating these risks.

In a recent speech, Deputy Assistant Attorney General Matt Miner from the DOJ’s Criminal Division, announced the application of the FCPA Corporate Enforcement Policy to anti-corruption issues that may arise when acquiring a company.

Before discussing this, it is important to understand how DOJ and SEC policies have evolved over the last ten years.  Starting in 2008, in what has been termed the Halliburton Opinion Letter, No. 08-02 (Here), Halliburton sought DOJ guidance when Halliburton was legally restricted from completing pre-acquisition due diligence on a target company because of unique country laws applicable to the target company.  Halliburton was concerned that, if it went ahead with the acquisition, that the company could face successor liability for any conduct that was not uncovered in the due diligence that occurred prior to the acquisition.

In response, the Justice Department outlined a solution under which it would not prosecute Halliburton for such violations that Halliburton acquired, provided that Halliburton completed with strict post-acquisition audit and reporting requirements.  Specifically, Halliburton provided a detailed 180-day work plan pursuant to which it would conduct a robust post-closing anti-corruption compliance review of the target and would inform the DOJ at regular intervals of the review’s findings.  While providing a measure of comfort, the burdens of these requirements turned out to be less than practicable.  Further, in response to growing complaints from the business  community around 2010 and efforts to relax the FCPA requirements, DOJ and the SEC took steps to relax the requirements outlined in the Halliburton Opinion Letter 08-02.

In the FCPA Guidance issued in November 2012, and in relevant enforcement actions, beginning with Johnson and Johnson in 2011 (Here), a new approach was outlined.

First, the FCPA Guidance affirmed that successor liability could not be applied to create liability where none existed before, meaning that a successor company could not be charged with pre-acquisition conduct where the predecessor company’s activities was not subject to the FCPA.

Second, the FCPA Guidance outlines that companies are encouraged: (a) to conduct a thorough risk-based pre-acquisition due diligence on potential acquisitions; (b) ensure that the acquiring company’s code of conduct and compliance policies and procedures regarding the FCPA and other anti-corruption laws apply as quickly as is practicable to newly acquired businesses or merged entities; (c) train the directors, officers, and employees of newly acquired businesses or merged entities, and when appropriate, train agents and business partners, on the FCPA and other relevant anti-corruption laws and the company’s code of conduct and compliance policies and procedures; (d) conduct an FCPA-specific audit of all newly acquired or merged businesses as quickly as practicable; and (e) disclose any corrupt payments discovered as part of its due diligence of newly acquired entities or merged entities DOJ.

In those cases where an acquiring company complies with these five specific requirements, DOJ and the SEC have emphasized that they may decline to bring an enforcement action.  In fact, DOJ and the SEC have only acted against successor companies in situations involving egregious and sustained violations or where the successor company directly participated in the violations or failed to stop the misconduct after the acquisition.

The important distinction in these requirements is the requirement that the acquiring company take the required steps “as quickly as practicable,” in contrast to strict deadlines set in the Halliburton situation.  In two important enforcement actions (Johnson and Johnson and Data Systems & Solutions LLC (here)), DOJ and the SEC included language requiring such affirmative post-acquisition tasks: within 12 months (training and application of compliance policies) and 18 months after closing for completing a post-acquisition FCPA audit (Johnson and Johnson); and  “as soon as practicable” (DSS).  Since the DSS decision, DOJ and the SEC have consistently used the “as soon as practicable” standard.

Returning now to DAAG Miner’s speech concerning the application of DOJ’s FCPA Corporate Enforcement Policy to mergers and acquisitions, DAAG Miner outlined how the Policy will apply in this context.  Under the FCPA Corporate Enforcement Policy, companies can earn a presumption to a declination, absent aggravating factors, if they: (1) voluntarily disclose the FCPA misconduct; (2) fully cooperate with the DOJ investigation; and (3) implement timely and appropriate remediation to the company’s compliance program.

DAAG Miner explained that the Policy would apply to successor companies that voluntarily discloses wrongdoing to the DOJ (typically discovered in pre-closing due diligence or post-closing audits), cooperates with the government investigation and implements remedial measures.  By offering a presumption of a declination, DOJ is encouraging “companies with robust compliance programs” taking over “problematic companies” to implement strong compliance practices quickly after acquiring another company.

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