In this second edition of October HorrorFest 2020 celebration we consider the first Hammer film version of Frankenstein – The Curse of Frankenstein which was released in 1957. As Universal Studios had the copyright to the make-up for their Frankenstein, The Monster, played by Christopher Lee looked very different. But the biggest difference was in Dr. Frankenstein, played by Peter Cushing, who was not a tortured soul or even a Mad Scientist but clearly evil. The movie opens with Dr. Frankenstein confessing to a Priest on the day of his execution. He tells the story of his creation of The Monster, including the number of murders performed by or caused by Dr. Frankenstein in his quest. It is quite clear that this Dr. Frankenstein has zero moral compass. The other big change in the Hammer version is the use of color. I grew up with Technicolor and still enjoy it. Seeing the background in color, The Monster and all the associated gore, was actually very cool from the visual perspective.
I wanted to use this Hammer movie, The Curse of Frankenstein, as an introduction into safe harbor for mergers and acquisition (M&A) under the Foreign Corrupt Practices Act (FCPA). White collar defense practitioners have long called for a specific safe harbor for companies in the M&A context where they meet the criteria set out by the Department of Justice (DOJ). This clarion call was answered when, in July 2018, the DOJ announced a revision to the FCPA Corporation Enforcement Policy, specifically around M&A. The new language read:
M&A Due Diligence and Remediation: The Department recognizes the potential benefits of corporate mergers and acquisitions, particularly when the acquiring entity has a robust compliance program in place and implements that program as quickly as practicable at the merged or acquired entity. Accordingly, where a company undertakes a merger or acquisition, uncovers misconduct through thorough and timely due diligence or, in appropriate instances, through post-acquisition audits or compliance integration efforts, and voluntarily self-discloses the misconduct and otherwise takes action consistent with this Policy (including, among other requirements, the timely implementation of an effective compliance program at the merged or acquired entity), there will be a presumption of a declination in accordance with and subject to the other requirements of this Policy.
In announcing the change, then Deputy Assistant Attorney General Matthew Miner, said that while the 2012 FCPA Resource Guide did provide some guidance on what may constitute a safe harbor; that word ‘may’ was a “sticking point for corporate management when deciding whether and how to proceed with a potential merger or acquisition. There is a big difference between a theoretical outcome and one that is concrete and presumptively available.”
The DOJ recognized the benefits when companies with robust ethical and compliance cultures and equally robust compliance programs “enter high-risk markets or, in appropriate cases, take over otherwise problematic companies.” Obviously, the DOJ wanted to encourage that type of behavior, stating “one area where we would like to do better is with regard to mergers and acquisitions, particularly when such activity relates to high-risk industries and market.”
There were several positive aspects as not “only can the acquiring company help to uncover wrongdoing, but more importantly the acquiring company is in a position to right the ship by applying strong compliance practices to the acquired company.” The DOJ clearly wanted to encourage and reward that type of corporate behavior, adding “when an acquiring company conducts robust due diligence that unearths wrongdoing, reports that conduct to the Department, and engages in remedial measures, including extending already robust compliance to the acquired company, it frees up resources for the Department that may have otherwise been expended investigating the acquired company. These resources can then be directed to other cases, not only in the FCPA context, but also to other areas such as opioid enforcement, human trafficking, and crimes impacting vulnerable victims, like children and the elderly.”
Miner further expanded on these concepts he articulated when he stated, “We felt this clarification was needed because the Department’s guidance regarding mergers and acquisitions that was announced in the 2012 FCPA Guide and elsewhere was not updated or otherwise incorporated into the FCPA Corporate Enforcement Policy. The clarification was intended to be just that – a clarification that the new Policy also applied to misconduct detected through M&A activity and due diligence.”
He went on to provide a hypothetical example of why the DOJ viewed this policy change as so useful. It involved “a large pharmacy is in the process of expansion through the purchase of smaller and independent pharmacies.” As this speech was given at the height of the opioid crisis, that was the type of illegal conduct referred to by Miner but Illegal FCPA conduct is just as applicable. He stated, “If an acquiring pharmacy company uncovers evidence of improper conduct such as this while undergoing due diligence, either pre or post acquisition, we want to encourage that company to come forward and voluntarily report the misconduct. In such a situation, we would, of course, continue to look to hold the individuals responsible for the misconduct to account, but we also want to foster good corporate decision-making and compliance. Our approach to corporate enforcement is one way that we can encourage this type of good corporate behavior.”
Moreover, the DOJ recognized “that there are many benefits when law-abiding companies with robust compliance programs are the ones to take over otherwise problematic companies. Not only can the acquiring company help to uncover wrongdoing, but more importantly, the acquiring company is in a position to right the ship by applying strong compliance practices to the acquired company. When an acquiring company conducts robust due diligence that unearths wrongdoing, reports that conduct to the Department, and engages in remedial measures, including extending already robust compliance to the acquired company, it frees up resources for the Department that may have otherwise been expended investigating the acquired company. Most importantly, it stops the misconduct.”
All of this was made clear in the 2020 Update to the Evaluation of Corporate Compliance Programs, which stated, “A well-designed compliance program should include comprehensive due diligence of any acquisition targets…Pre-M&A due diligence, where possible, enables the acquiring company to evaluate more accurately each target’s value and negotiate for the costs of any corruption or misconduct to be borne by the target.” The change in the FCPA Corporate Enforcement Policy to include a safe harbor for acquiring entities was one of the most welcome changes from the corporate compliance perspective. The 2020 Update to the Evaluation of Corporate Compliance Programs and FCPA Resource Guide, 2nd edition, lay out a clear road map on how to avoid FCPA liability. You should work to take advantage of it.
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© Thomas R. Fox, 2020