A company that does not perform adequate FCPA 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.” While most compliance practitioners have been long aware of the requirement in the post-acquisition context, the 2012 FCPA Guidance focused many compliance practitioners for the need to engage in robust pre-acquisition due diligence.
Under Prong 11. Mergers and Acquisitions; there were a series of queries which tied together how pre-acquisition due diligence and post-acquisition integration. Due Diligence Process – 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?
The pre-acquisition process was then tied to post-acquisition with the following: Process Connecting Due Diligence to Implementation – 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?
The 2012 FCPA Guidance emphasized the pre-acquisition phase and the Evaluation took a deeper dive into the need for the compliance component of your mergers and acquisition regime to begin with a preliminary pre-acquisition assessment of risk. Such an early assessment will inform the transaction research and evaluation phases. This could include an objective view of the risks faced and the level of risk exposure, such as best/worst case scenarios. A pre-acquisition risk assessment could also be used as a “lens through which to view the feasibility of the business strategy” and help to value the potential target.
The next step is to develop the risk assessment as a base document. From this document, you should be able to prepare a focused series of queries and requests to be obtained from the target company. Thereafter, company management can use this pre-acquisition risk assessment to attain what might be required in the way of integration, post-acquisition. It would also help to inform how the corporate and business functions may be affected. It should also assist in planning for timing and anticipation of the overall expenses involved in post-acquisition integration. These costs are not insignificant and they should be thoroughly evaluated in the decision-making calculus.
There are multiple red flags which could be raised in this process, which would warrant further investigation. They include if the target has ineffective compliance program elements in their compliance program or if there were frequent breach of policies and procedures. Obviously, a target which is in financial difficulty would bear closer scrutiny from the compliance perspective. Structurally, if the company did not have a formal ethics and compliance committee at the senior management or Board of Directors level, this could present issues. From the CCO perspective, if the position did not have Board access, CEO access or if there were not regular reports to the Board, it could present an issue for compliance. Conversely if there were frequent requests to waive policies, management over-ride of compliance controls or no consistent consequence management for violations; it could present clear red flags for further investigation.
Three Key Takeaways
- The results of your pre-acquisition due diligence will inform your post-acquisition integration and remediation going forward.
- Periodically review your M&A due diligence protocol.
- If red flags appear in pre-acquisition due diligence, they should be cleared.
The 2012 FCPA Guidance and 2017 Evaluation focused compliance practitioners on engaging in robust pre-acquisition due diligence.Click to tweet
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