News & Insights

Inherited Risk: FCPA Successor Liability in M&A Transactions

The question of successor liability under the Foreign Corrupt Practices Act (FCPA) has long been a challenging one for companies considering a merger or acquisition (M&A). If a company discovers FCPA violations during pre-acquisition due diligence, should it proceed? What if wrongdoing is discovered post-acquisition? The acquiring company can be held liable for the target company’s corruption issues, either from before the deal closed or for those continuing to be unaddressed post deal.

Earlier this year, the US Department of Justice (DoJ) issued revisions to its FCPA Corporate Enforcement Policy, which provides guidance on voluntary self-disclosure, cooperation, and remediation in FCPA matters. One of the most significant updates is that the policy now applies in the context of mergers and acquisitions. For acquiring companies, this is welcome news. Here’s why.

What the Revisions Mean for Your Organization

The April 2019 guidance on M&A Due Diligence and Remediation lays out two important points:

  1. The DoJ does not want to discourage M&A activity. Instead, it sees mergers and acquisitions as potentially beneficial, particularly when the acquiring company has a strong compliance program in place that will be implemented at the target company.
  2. Secondly, if the acquiring company uncovers, voluntarily discloses, and takes steps to remediate corruption, the DoJ may decline to take an enforcement action based on the guidelines laid out in the FCPA Corporate Enforcement Policy.

Read the full text of the FCPA Corporate Enforcement Policy here.

Whereas previous guidance created uncertainty, there is now more clarity for companies assessing the dangers of inherited risk in M&A transactions. Companies had advice from the DoJ on successor liability in its Opinion Paper 08-02, known as the “Halliburton Opinion,” and the 2012 “Resource Guide” from the DoJ and SEC. But in a speech in July 2018, Deputy Assistant Attorney General Matthew Miner recognized that these policies left too much concern over what may bring about an enforcement action. He also acknowledged the need to incentivize “companies to invest in effective compliance programs and robust control systems to prevent misconduct.”

Adding M&A to the existing FCPA Corporate Enforcement Policy is a way to change that. According to Miner, “This approach provides companies and their advisors greater certainty when deciding whether to go forward with a foreign acquisition or merger, as well as in determining how to approach wrongdoing discovered subsequent to a deal.”

The policy applies to wrongdoing discovered pre-acquisition, and, importantly, post-acquisition. In some cases, even with thorough due diligence, it is simply not possible to gain access to the information needed to uncover corruption beforehand. M&A transactions in high-risk countries are a prime example. When companies find violations after a deal closes, “we want to reward them accordingly for stepping up, being transparent, and reporting and remediating the problems they inherited,” Miner said.

The bottom line is that companies with strong compliance programs that acquire other entities bring a higher level of due diligence and oversight that can actually reduce bribery, corruption and other fraudulent practices around the globe. Naturally, that is something the DOJ wants to encourage. Is your due diligence program up to par?

Establishing a Due Diligence Process that Stands Up to Scrutiny

Reducing the risk of successor liability requires a due diligence process that can root out corruption. At IntegrityRisk, we help our clients identify potential problems and violations through due diligence programs that are built to align with DoJ standards. When evaluating corporate compliance programs, the DoJ considers three fundamental questions:

  • Is the compliance program designed well?
  • Is it implemented effectively and in good faith?
  • Does it work in practice?

Identifying FCPA issues entails taking full stock of the target company, its employees, and all of the associated third parties. Through our comprehensive, consistent, and highly auditable  research methodologies, we will help you fully understand the background and business practices of all stakeholders and third parties, affiliated individuals, and the risks that they may present to your business.

The moral of the story is, “buyer beware.” As regulators continue to up the ante on what constitutes a successful compliance program, it is important to know where your risks lie in M&A transactions. Proactive due diligence is a necessary step to uncover potential risks, FCPA and otherwise. The more thorough, open, and proactive you are, the less likely you are to experience an enforcement action.

Get in touch to explore how we can help you mitigate the risks of successor liability and more in M&A transactions with our due diligence services.