Importance of Risk Management Due Diligence in M&A Transactions
A recent SEC disclosure by Vantage Drilling Company (“Vantage”) underscores the importance of thorough due diligence in the context of corporate mergers and acquisitions. Vantage, an oil and gas contractor based in Houston, acquired some drilling vessels from Hsin-Chi Su, a Chinese corporation that operated the drilling vessels in Brazilian shore and other locations. In the Aug. 4, 2015, Form 10-Q, Vantage disclosed that one of its agents entered into a plea arrangement with the Brazilian authorities in connection with the Petrobras bribery scandal. The disclosure is significant because the alleged bribes occurred before Vantage’s acquisition of the vessel. While Vantage has not been fined or acknowledged any liability, it will be interesting to see if the Department of Justice (“DOJ”) or the SEC finds a violation based on the principles of successor liability.
The DOJ and SEC have stated that buyers are not liable under the principles of successor liability for pre-acquisition conduct of foreign companies occurring before closing. However, even if such companies were not otherwise subject to the FCPA, the DOJ and the SEC have a long history of finding successor liability for FCPA violations for conduct that straddles the acquisition. FCPA – A Resource Guide to the U.S. Foreign Corrupt Practices Act, at 28 (“FCPA Guide"). For instance, in February 2015, Goodyear Tire & Rubber Company (“Goodyear Tire”) agreed to pay a $16 million fine relating to bribes paid by two subsidiary distributors in Africa. In re Goodyear Tire & Rubber Co., Exchange Act Release Order No. 74356 (Feb. 24, 2015). In October 2014, Bio-Rad Laboratories (“Bio-Rad”) agreed to pay a fine of $55 million, partially based on conduct occurring at an indirect subsidiary before and continuing after Bio-Rad acquired it. In re Bio-Rad Laboratories, Inc., Exchange Act Release Order No. 73496 (Nov. 3, 2014).
Both of these fines were mainly based on violations of the “books and records” and “internal controls” provisions, instead of an allegation that the U.S. company made or authorized the inappropriate payments. In Goodyear Tire, the SEC found that when Goodyear Tire acquired its controlling interest in the distributors, it did not “conduct adequate due diligence” and failed to “implement adequate FCPA compliance training and controls.” Similarly, in Bio-Rad, the SEC found that when Bio-Rad acquired the parent organization of the indirect subsidiary, “it did very little due diligence” into the indirect subsidiary. As part of the settlements, in addition to the fines and disgorgements, both Goodyear Tire and Bio-Rad are subject to on-going remedial compliance measures and reporting obligations.
By contrast, in November 2014, the DOJ issued Opinion Procedure Release 14-02 (“Opinion”) in connection with the proposed acquisition by a U.S. corporation of a foreign entity that made inappropriate payments to foreign officials. In the Opinion, the DOJ confirmed that no FCPA violations would be imposed because the acquiring company performed a thorough due diligence on the target company. In that case, the buyer identified certain “red flags” and discovered certain questionable payments during initial due diligence and then undertook a complete forensic accounting of the target company.
As outlined in the Opinion, the DOJ encourages companies engaging in mergers and acquisitions to:
- Conduct thorough risk-based FCPA and anti-corruption due diligence during the pre-closing phase.
- Implement, at the target company, the purchaser’s code of conduct and anti-corruption policies as quickly as practicable.
- Conduct anti-bribery and other relevant training for the acquired entity’s directors and employees, as well as third-party agents and partners, as quickly as possible.
- Conduct a bribery-specific audit of the acquired entity as quickly as practicable.
- Disclose to the applicable agency any corrupt payments discovered during the due diligence process. Opinion p.3 citing FCPA Guide at 29.
These cases emphasize the importance of thorough due diligence as a mandatory pre-requisite during merger and acquisition operations. Companies should take appropriate measures to conduct risk-based due diligence tailored to their acquisitions and give priority to integrating target companies after acquisition with an aim to constantly monitor and report, if necessary, anti-bribery violations.
For further information regarding anti-corruption due diligence during mergers and acquisitions, please contact the professionals identified here.
In This Article
You May Also Like
Enforceability and Interpretation of Force Majeure Clauses in Minnesota: What Practitioners Need to Know Corporate Officers Are Subject to Caremark Claims for Breach of Duty of Oversight