Sectors - Written by Barry & Richard on Wednesday, October 19, 2011 0:11 - 3 Comments
Corporates talk to the SFO on matters thrown up in M&A due diligence
Faced with flatline organic growth UK businesses see M&A as a way to kick start revenue increases. Against that backdrop the SFO reports that it too is seeing increase in M&A activity.
The SFO first singled out M&A activity when it published its approach to dealing with overseas corruption around two years ago. This followed requests for a similar procedure to that available in the US through the so-called ‘opinion procedure’.
The guidance issued addresses the question:
“…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.”
The guidance continues:
“…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.”
An uptick in activity
The Director of the SFO, Richard Alderman has in the past expressed disappointment that this requested procedure was, in practice, little used. Speaking recently he said:
“I was rather disappointed at that stage to discover the very limited take up there was for that offer. Quite simply, companies preferred to get on with the deal and come and see us later, if at all.”
However the position appears to be shifting notwithstanding some very tight timescales. Speaking in Washington two weeks ago he said:
“I have been struck in recent months by the fact that a number of corporations have been to see us about some sensitive potential acquisitions where they are identifying some real issues about corruption during the course of due diligence.
Ultimately, the decision about an acquisition is a commercial one and will involve an analysis of risk and reputation as well as many other issues. The corporation and its advisors though want to try to manage the regulatory risk so far as possible by seeking views from the SFO. We have been ready to engage in this. What we do is to talk to the corporation and its advisors about what they are finding and what they propose to do about it if the acquisition takes place. It is quite clear to me as a result of the discussions that a negative response from the SFO is sufficiently important to put the acquisition in jeopardy. On the other hand, a positive view from us on the basis of what the corporation intends to do could enable the acquisition to go ahead.
My view on this, simply stated, is that society benefits if an ethical corporation takes over and sorts out a corporation that has corruption problems. It is something I am keen for the SFO to promote, so far as we legitimately can.”
In another speech he gave more detail saying: “I want to be in a position to give assurance about the approach of the SFO if the corporation does carry out the programme of work that it tells me about. I have found that there has been a lot of recognition of the constructive nature of these discussions.”
We have written before (for example here) about the approach the SFO takes in the context of M&A activity. Importantly the focus of the comments made by the SFO recently focus on the acquiring company sorting out the problems in the new addition to its potential new family member.
The position is more sensitive in relation to individuals who were previously involved in the alleged wrongdoing who may face investigation and prosecution.
One thing is for sure. Against a back drop of acquirers more ready to speak to the SFO without informing the seller, sellers would be well advised to conduct their own pre-sale review to confirm that there is nothing which is likely to give rise to any nasty surprises – whether a last minute price reduction, or worse.