Today, I begin a one month series on how to have a more effective compliance program involving business ventures. This will include the role of compliance in mergers and acquisitions, the role of compliance in joint venture agreement, distributorship, franchises as well as other forms of business relationships.
The 2012 FCPA Guidance makes clear that one of the ten hallmarks of an effective compliance program is around mergers and acquisitions (M&A), in both the pre-and post-acquisition context. A company that does not perform adequate due diligence prior to a merger or acquisition may face both legal and business risks. Perhaps, most commonly, inadequate due diligence can allow a course of bribery to continue – with all the attendant harms to a business’s profitability and reputation, as well as potential civil and criminal liability. In contrast, companies that conduct effective due diligence on their acquisition targets are able to evaluate more accurately each target’s value and negotiate for the costs of the bribery to be borne by the target. But, equally important is that if a company engages in the suggested actions, they will go a long way towards insulating, or at least lessening, the risk of FCPA liability going forward.
Nat Edmonds, in an interview in the Wall Street Journal (WSJ) entitled, “Former Justice Official: How to Buy Corrupt Companies” said “I think most companies and their outside counsel believe any potential corruption problem should stop a deal from occurring. Companies would be surprised to learn that neither the Securities and Exchanges Commission nor the DOJ takes that position. In many ways the SEC and DOJ encourage good companies with strong compliance programs to buy the companies engaged in improper conduct in order to help implement strong compliance in companies that have engaged in wrongful conduct. What companies must do and what outside counsel should advise them to do is to have a realistic perspective of what effect that corruption or potential improper payment has on the value of the deal itself. Because of the concern that any corruption would stop the deal or implicate the buyers, many times companies don’t look as thoroughly as they should at potential corruption. There is often concern that if you start to look for something you may find a problem and it could slow down or stop the whole deal.”
The 2012 FCPA Guidance was the first time that many compliance practitioners focused on the pre-acquisition phase of a transaction as part of a compliance regime. The DOJ and the SEC made clear the importance of this step. In addition to the above language, they cited to another example in the section on Declinations where the “DOJ and SEC declined to take enforcement action against a U.S. publicly held consumer products company in connection with its acquisition of a foreign company.” This action was based upon the following, “The company identified the potential improper payments to local government officials as part of its pre-acquisition due diligence and the company promptly developed a comprehensive plan to investigate, correct, and remediate any FCPA issues after acquisition.”
In a hypothetical, the 2012 FCPA Guidance provided some specific steps a company had taken in the pre-acquisition phase. These steps included, “(1) having its legal, accounting, and compliance departments review Foreign Company’s sales and financial data, its customer contracts, and its third-party and distributor agreements; (2) performing a risk-based analysis of Foreign Company’s customer base; (3) performing an audit of selected transactions engaged in by Foreign Company; and (4) engaging in discussions with Foreign Company’s general counsel, vice president of sales, and head of internal audit regarding all corruption risks, compliance efforts, and any other corruption-related issues that have surfaced at Foreign Company over the past ten years.”
The DOJ Evaluation of Corporate Compliance Programs also had some specific questions around M&A. Under Prong 11. Mergers and Acquisitions (M&A), the following topics were listed, including some specific questions. Under Due Diligence Process, the following questions were posed, Was the misconduct or the risk of misconduct identified during due diligence? Who conducted the risk review for the acquired/merged entities and how was it done? What has been the M&A due diligence process generally? Under the topic, Integration in the M&A Process, the following query was posed, How has the compliance function been integrated into the merger, acquisition, and integration process? Finally, under the line area of interesting, Process Connecting Due Diligence to Implementation, the following queries were posed, What has been the company’s process for tracking and remediating misconduct or misconduct risks identified during the due diligence process? What has been the company’s process for implementing compliance policies and procedures at new entities?
One of the key themes this month will be the integrated nature of compliance and business ventures. Whether the compliance work is seen in the mergers and acquisition context, joint venture context or one of the myriad of other business relationships of the current business world, there is an approach that a Chief Compliance Officer (CCO) or compliance professional should take to assess the risk, monitor the risk and then manage the risk with continued monitoring with a feedback of data and information into your risk management strategy.
Three Key Takeaways
- We will consider the role of compliance in a wide variety of business relationships, including mergers and acquisitions, joint venture agreements, distributorships, franchises as well as other forms of business relationships.
- Compliance for mergers and acquisitions should be seen as a unidimensional continuum.
- The Evaluation focuses on what data did your risk monitoring system turn up and how did you utilize it going forward.
You must perform both pre and post-acquisition actions in M&A around compliance.
This month’s podcast series is sponsored by Michael Volkov and The Volkov Law Group. The Volkov Law Group is a premier law firm specializing in corporate ethics and compliance, internal investigations and white collar defense. For more information and to discuss practical solutions to compliance and enforcement issues, email Michael Volkov at firstname.lastname@example.org or check out www.volkovlaw.com.