Associated persons, Financial Services - Written by on Friday, June 24, 2011 0:20 - 0 Comments

Private Equity: compliance risk for portfolio company bribery?

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Richard Alderman, Director of the SFO, has confirmed that in the SFO’s view Private Equity could have liability for the conduct of its investment portfolio businesses under the Bribery Act.

We have been advising clients of this potential risk in some circumstances for some time – although we are aware that others have disagreed.

Speaking to an audience of Private Equity professionals Richard Alderman said that he assumed that those in the Private Equity industry have “a level of knowledge and due diligence that is very high because of the nature of what you do. You are, therefore, very well informed investors  with a high degree of knowledge of what happens in the companies you invest in. In any dealings we have with you on cases we are likely to start from that assumption.”

This compliment is a double edged sword.  The SFO will assume that Private Equity are knowledgeable about the conduct and activities of their portfolio companies…

In assessing whether a Private Equity company had liability for failure to prevent bribery Mr. Alderman said:

“…we shall need to look at the nature of your interest. If this is simply a portfolio investment and your role is simply one of owners, then employees and agents of the company are not performing services for you. It could be different though if you were far more actively involved in the management of the company and were running it.”

In many cases a Private Equity investor will insert a representative onto the Board of Directors of a portfolio company to represent the views of the investor.

The SFO Director highlighted the risks for Private Equity nominated Investor Director(s) noting:

“There would also be issues if one of your representatives was a senior officer of the company. They will be guilty of an offence if they consent to or connive in bribery. They might be personally liable.”

The potential liability should not in our view drive Private Equity investors to drop the investor protections that they have traditionally required.  Instead private equity investors should take steps to ensure that their portfolio companies are Bribery Act compliant.  Irrespective of potential Bribery Act liability this makes sense from a commercial perspective and valuation as well as other knock on consequences, for example the impact of the UK money laundering legislation.

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