Why should a company engage in pre-acquisition due diligence in the mergers and acquisition context? Certainly compliance with anti-corruption laws such as the FCPA or UK Bribery Act is a good starting point. However there are other reasons that were laid by Transparency International (TI) in, a White Paper entitled “Anti-Bribery Guidance for Transactions.” The TI White Paper suggests that there are greater forces driving compliance than simply compliance with anti-corruption and anti-bribery laws such as the Foreign Corrupt Practices Act (FCPA) and UK Bribery Act. A company engaging in an international acquisition should also strive to avoid the potential financial and reputational damage that may arise from investing in or purchasing a company associated with bribery or corruption.
Some of the specific consequences where investments are made in a company which has a history of bribery or corruption include.
- Both the target company and the acquiring company may place themselves (and their respective Boards of Directors) at risk of criminal or civil fines and penalties.
- The market value of the target company may be overstated and hence damage the overall financial position of an acquiring company. Conversely, such conduct may diminish the asset value and returns for a target company.
- The business instability brought by such conduct. This can include aborted business deals where both sides work long and hard only to have the transaction fall apart near the end of the process.
- The acquired business may not simply be dysfunctional but acquiring such a business may also introduce a culture into the acquiring company which will negatively impact it and bring about employee de-motivation.
- Even if there are no individual criminal actions brought against target or acquiring company employees, there can be a long period of disruption due to lengthy and costly investigations and the attendant reputational damage.
There are several positive benefits from appropriate due diligence, including:
- Management quality indicator which will assess the positive qualities of the target company, including the quality of the target’s management and its overall systems, including books and records. The evidence from due diligence of anti-corruption and anti-bribery programs is an indicator of overall management quality.
- The mitigation benefits available if a bribery incident is discovered. Under the UK Bribery Act, if a company has “Adequate Procedures” it may have a defense to a claim of violation of the Act. Under the FCPA, evidence of a best practices compliance program can be used in mitigation of any alleged violation of the FCPA.
- The reputational gain which an acquiring company may be able to gain with regulators or investors if it can show integrity and responsibility during the due diligence process.
- Lastly an acquiring company can go a long way in meeting investor expectations in Environmental, Social and Governance (ESG) risks, which can include corruption and bribery, during M&A transactions.
To begin the process, the following should be actively explored:
- Has bribery taken place historically?
- Is it possible or likely that bribery is currently taking place?
- If so, how widespread is it likely to be?
- Does the target have in place an adequate anti-bribery program to prevent bribery?
- What would the likely impact be if bribery, historical or current, were discovered after the transaction had completed?
Financial, legal or reputational risk can have a significant impact the valuation or a transaction or its desirability. The following potential impacts for a purchaser or investor of anti-corruption or anti-bribery risks during due diligence can be laid out visually in chart format, which is a useful way to think through and present your analysis.
|Legal Risk||Financial Risk||Reputational Risk|
|Current bribery and/or corruption in target company discovered during transaction||High||High||Medium|
|Current bribery and/or corruption in acquired company discovered in post-transaction||High||High||High|
|Historical bribery and/or corruption discovered during transaction||High to low depending on jurisdiction||High to low depending on jurisdiction||Low to medium|
|Historical bribery and/or corruption in acquired company discovered post-transaction||High to medium depending on jurisdiction||High to medium depending on jurisdiction||High to medium|
These factors provide the compliance practitioner strong ammunition when confronted with a management which fails to understand the need for a robust due diligence in a mergers and acquisition transaction. By not focusing on the regulatory aspects of M&A transactions but more on the market reasons for engaging in the appropriate due diligence, you can emphasize the business reasons for compliance.
Three Key Takeaways
- There are numerous legal and business reason to engage in anti-corruption due diligence in the M&A space.
- ESG can present significant corruption risks in emerging markets.
- Present your analysis in high, medium and low risk formats.
There are multiple reasons to engage in pre-acquistion due diligence; including legal, compliance and business concerns.Click to tweet
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 email@example.com or check out www.volkovlaw.com.