Your Questions: Answered - Written by Barry & Richard on Saturday, October 26, 2013 3:23 - 0 Comments
A purchaser worries about liabilities after buying a business with limited information up front
Will my company and my Board of Directors likely be prosecuted if they buy another company which has problems after doing limited due diligence?
My company is considering buying a business. Unfortunately, we are unable to do much due diligence in advance of the sale as we will have to buy in an auction. The seller, has various interested potential purchasers, and has set up a data room. There is limited opportunity to ask more questions and anyway the deal must be done in a couple of weeks. We don’t have much time to do any meaningful due diligence.
Barry & Richard answer
What you describe is a common problem. We are frequently asked to help businesses in similar circumstances to your own. As you say there is a limit to the due diligence that you can do in cases like this.
Under the old Director of the SFO there was a publicised regime where people with questions like these could ask the SFO for guidance. That guidance was withdrawn a year ago (though it was barely if ever used anyway). The new Director of the SFO has famously said that the SFO is not in the advisory and teaching business. His job is to prosecute, not educate, he says.
Companies worry that the position is unclear. Their concerns are compounded under the Bribery Act. Adequate Procedures demand proper due diligence and risk assessment and the recent Transparency International guidance on transactions includes a laundry list of steps to take.
In our view common sense should prevail. The commercial imperitive should drive the decision on whether to buy the company or not. Of course, buying a company with limited due diligence is not without risk. But then your Board will be factoring lots of other risks into the deal as a result. A bribery or fraud problem is just another for them to contemplate and after all, you could get knocked down by a bus tomorrow while crossing the road.
Nothing is without risk.
The key is that you do what you can and that you do the right thing post closing. This means that in cases where you have had limited opportunity to do due diligence up front you should make sure that post closing proper diligence is done. You should be doing this sort of thing anyway as you integrate the new Company into your own business. However, it will be important to specifically include anti-bribery in that process and an independent work stream post closing to look at compliance (or lack of it) needs to be undertaken. If as part of this you uncover a problem it is important that this is dealt with in the appropriate way, namely properly investigated, fixed, cleaned up and remediated.
You should ensure that if money laundering reporting obligations are triggered the appropriate reports are made to the authorities.
The bad news
There is a definite risk for the individuals involved in the targets wrongdoing and possibly even the target itself. The costs of remediation and cleaning up the problems will have to be paid. Likewise, it is possible that the UK money laundering laws will result in any ill gotten gains obtained by the target being recovered by the UK government under money laundering laws.
All these indirectly impact the purchaser. The value of the newly acquired business will be impaired.
The ‘good’ news
However, in our view the chances of the Purchaser itself being prosecuted for the sins of the target if the purchaser ‘does the right thing’ post closing should be slim.