Financial Services - Written by on Wednesday, June 29, 2011 0:18 - 0 Comments

Mergers & Acquisitions – what happens if there are corruption problems in a new acquisition?

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Speaking last week to the Private Equity industry the Director of the SFO, RIchard Alderman, affirmed the view he has relayed to us about the SFO’s position if corruption issues are discovered in a target company.

Earlier this month we wrote:

“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.

Speaking last week the Director of the SFO elaborated on the point:

“Another issue raised with us concerns due diligence either before or after acquisitions. I was told some time ago that there was considerable demand from those involved in mergers and acquisitions for some form of advance guidance on the SFO’s position if corruption issues were discovered in the target company. It was for this reason that in our Guide on self reporting that was published in July 2009 we included a paragraph about a rulings process for just that type of situation. It has hardly every been used. I think that is also the experience of the DOJ’s rulings process where there have been very few requests for rulings.

This may be for a number of reasons. One of them is that companies prefer to come and talk to us informally before they make the acquisition in order to get a feel for the SFO’s response. We would welcome that.

What happens in practice though, it seems to me is that the acquiring company decides to take the commercial risk of making the acquisition without getting a view from the SFO. What we encourage companies to do in those circumstances is to come to us as soon as they can after the acquisition in order to talk to us about the issues that they are finding. Our position is that as a matter of policy it is beneficial overall if good ethical companies take over companies with a poor record for ethics and governance and bring them up to a much higher level. This is something that we would want to see and I do not want the SFO to do anything that stands in the way of that.

We would therefore be sympathetic if a company came to us and said that it had recently taken over another company and that there were a number of issues concerning corruption that had been identified. In those circumstances I can see little benefit in an SFO investigation at the corporate level (although those involved in the corruption in the acquired company might receive different treatment from us). What is important is that the acquiring company gets on and sorts out the problems that it has inherited. This is something that I would want to see. I would want the company to tell us about what it has found and about how it is proposing to deal with this. I would want to be satisfied that this is a genuine commitment and I would like to be kept informed from time to time about progress. In these circumstances I would want to let the company get on and do whatever was needed in these circumstances.” [our emphasis]

Then the SFO Director went on to deliver the sting in the tail.  With a passing comment that the SFO has not seen much liaison in the context of M&A he said:

“There is some evidence that companies are open to this, although I have to say that it is not a regular feature of our work yet. The risk for the company in not telling us is that we pick up information about bribes in the target company and we start an investigation particularly with our international partners. Perhaps the first you hear about it is when we turn up at the front door with a warrant. All of this is avoidable through sensible and prudent management with good advice from international lawyers who are used to dealing with the SFO in these matters and know what we would do.”

Good advice with a sting in the tail on the lack of reporting.  If the US is a guide it is likely that M&A activity will drive Bribery Act enforcement.

On the US experience, it is also worth adding that if this approach is undertaken then it will be necessary to consider the likely approach of other regulators.

For example, the US DOJ stance, like many things, is similar but different.  The SFO will expect that any approach to it on such matters is co-ordinated with approaches to other relevant regulators with which the SFO is used to collaborating.

Image © Crown Copyright 2011

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