Adequate Procedures, Financial Services, US Foreign Corrupt Practices Act & Dodd Frank - Written by on Monday, June 6, 2011 23:47 - 0 Comments

Financial Services: M&A due diligence (Part 2)

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Last week we met with Richard Alderman, Director of the SFO, and Vivian Robinson (SFO GC).

One question which came up was on the subject of M&A transactions.  We wrote about these back in March. We work closely with our corporate lawyer colleagues assisting on M&A.

Barry started life as a corporate lawyer specialising in cross border work and it was representing clients in far flung countries which led him to a life of crime…

With that background in corporate law we offer rare insight into corporate transactions.

A key problem from an M&A standpoint is time.

There often isn’t any.

Deals sometimes need to be done in a very short time frame without the luxury of a full due diligence procedure.  The risk of these “quick and dirty deals” is often (but not always) priced in.

How does that fit with a Bribery Act requirement to undertake Bribery due diligence as part of Adequate Procedures to prevent bribery?

We posed the question.  Richard Alderman’s response was pragmatic.

Subject to one proviso, he said that if there simply is not time then the SFO would not seek to penalise an ethical acquirer.

The proviso is that the SFO would expect a corporate which bought a business in a hurry to undertake post acquisition due diligence.  If that diligence revealed bribery problems then the SFO would expect the problems to be resolved.

This may include liaising with the SFO about the problems uncovered, the proposals to fix them and the compliance programme going forward.

In many ways this approach mirrors the approach outlined by the US DOJ in the recent Johnson & Johnson Deferred Prosecution Agreement which had this to say on the subject of acquistions:

“new business entities are only acquired after thorough [Foreign Corrupt Practices Act (FCPA)] and anticorruption due diligence by legal, accounting, and compliance personnel. Where anticorruption due diligence is not practicable prior to acquisition of a new business for reasons beyond [the acquirer's] control, or due to any applicable law, rule, or regulation, [the acquirer] will conduct FCPA and anticorruption due diligence subsequent to the acquisition and report to the [DOJ] any corrupt payments, falsified books and records, or inadequate internal controls…[the acquirer should ensure that] policies and procedures regarding the anticorruption laws and regulations apply as quickly as is practicable, but in any event no less than one year post-closing, to newly-acquired businesses, and will promptly:

a. Train directors, officers, employees, agents, consultants, representatives, distributors, joint venture partners, and relevant employees thereof, who present corruption risk to [the acquirer], on the anticorruption laws and regulations and [the acquirers’s] related policies and procedures; and

b. Conduct an FCPA-specific audit of all newly-acquired businesses within 18 months of acquisition.”

Richard Alderman also mentioned in passing that the formal SFO procedure in relation to M&A transactions is a little used procedure.  It may be that this is because it could throw a deal timetable off track.   However in appropriate circumstances it should also be considered.

The SFO guidance on the subject it says:

“….we are ready to offer assistance in one type of case which corporates have mentioned to us. This is where a group (A) is proposing  to take over another group (B) and, during due diligence, discovers overseas corruption issues in (B). (A) is committed to a modern ethical corporate culture and, if the transaction goes ahead, would take the necessary remedial action in respect of what has happened. (A) wishes to know what our approach would be.

We appreciate the need for help in the circumstances and will give (A) assurances about our action. These assurances could be that no action will take place provided that (A) takes the remedial action it has told us that it will take if the takeover goes ahead.

Alternatively, if we find that the corruption is long lasting and systemic, we might say that we would consider a criminal investigation whether at the corporate or individual level. We appreciate that these issues are often likely to be very confidential and price sensitive. We would anticipate that professional advisers would want to discuss a possible approach with the SFO before it was actually made.”

In the US there is a potentially similar approach via the opinion procedure.  In the past the DOJ has taken an intrusive approach for example in the attempted 2008 hostile takeover by Halliburton of UK company Expro – albeit tellingly the guidance was issued in relation to a deal which ultimately never took place!

The quid pro quo of all these approaches is likely to be transparency with the DOJ and/or the SFO as appropriate.

For corporate lawyers this is good news in the context of getting a deal across the finishing line though it does mean that another job will be added to the top of the post closing to do list…

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