Among the risks inherent in a merger or an acquisition, few bring the financial and reputational consequences of the U.S. Foreign Corrupt Practices Act (“FCPA”).
The FCPA prohibits the offer, promise, authorization, or payment of money or anything of value, either directly or indirectly, to a foreign official, private individual, or entity, to obtain or retain government business. Enacted in 1977 in response to incidents of American companies bribing foreign officials to obtain lucrative government contracts, its enforcement is now among the most prominent white collar enforcement tools used by the U.S. Department of Justice (“DOJ”) and the U.S. Securities and Exchange Commission (“SEC”). Companies that operate globally, particularly in emerging or politically unstable markets, and that also have operational activities in the U.S., should include the FCPA among their highest legal risks.
Take for instance these notable enforcement actions:
What You Need to Know
The FCPA presents a unique challenge in the merger and acquisition context. The legal principle that “when a company merges with or acquires another company, the successor company assumes the predecessor company’s liabilities” has been termed by the DOJ and the SEC as an “integral component of corporate law.” This is particularly impactful in the FCPA context where FCPA related internal investigations can cost a company several million dollars, take years to resolve, and result in fines and penalties in the hundreds of millions of dollars. Contracts and lines of business the target company obtained illegally may be lost and profit resulting from the misconduct may need to be disgorged or factor into fines and penalties required to be paid. In extreme cases, if the value of a target company is based on business later learned to have been obtained through bribes, the true value of the target company will be impacted. For example, following one prominent FCPA enforcement action, a merger agreement was terminated as a result of conduct at the target company uncovered by the acquiring company that resulted in an FCPA enforcement action against the target company.
While a company with a well-functioning compliance program will regularly conduct anti-corruption risk assessments and audits, among other practices, to prevent and detect potential anti-corruption misconduct, are often limited or prohibited from conducting the same of the company they have targeted to merge with or acquire. And yet, as noted above, the acquiring company can be held criminally liable and subject to fines and penalties as a result of this misconduct. Particularly, if the conduct continues following the merger or acquisition.
Tips For Navigating FCPA Risks in Mergers and Acquisitions
Recognizing the challenges companies face, DOJ and the SEC included a discussion on its expectations for companies proceeding with a merger or acquisition. In their 2020 Resource Guide, the DOJ and SEC advise that “more often [they] have pursued enforcement actions against the predecessor company (rather than the acquiring company), particularly when the acquiring company uncovered and timely remedied the violations or when the government’s investigation of the predecessor company preceded the acquisition.” Prior FCPA enforcement actions suggest that, assuming an acquiring company itself has not engaged in conduct that violates the FCPA, acquiring companies can avoid FCPA liability if they (1) ensure prior misconduct at the target company ends before the merger or acquisition closes so that the successor company does not continue the corrupt activity, (2) remediate the prior misconduct as quickly as possible and practical, (3) disclose any misconduct found to DOJ and the SEC, and (4) in a timely and good faith manner integrate its compliance program into the target company’s operations.
Top 5 Recommendations for Putting This into Action
The Bottom Line
With the many facets of risk to consider during a merger and acquisition, it may benefit a company to engage the support of compliance or FCPA-specific subject matter experts to help conduct due diligence. The cost of not doing so can be significant.
 U.S. Department of Justice and U.S. Securities and Exchange Commission, A Resource Guide to the U.S. Foreign Corrupt Practices Act, Second Edition (2020) p. 29.
 U.S. Department of Justice and U.S. Securities and Exchange Commission, A Resource Guide to the U.S. Foreign Corrupt Practices Act, Second Edition (2020) p. 30.