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DOJ Reiterates Position on FCPA Successor Liability for Foreign Acquisitions

Friday, December 05, 2014
Sandler, Travis & Rosenberg Trade Report

The Department of Justice issued recently an opinion release reiterating its position that the principle of successor liability under the Foreign Corrupt Practices Act does not create liability where none previously existed. The release, which cites a section of the DOJ’s FCPA resource guide, responds to an inquiry by a U.S.-based multinational company preparing to acquire a foreign consumer products business.

According to the opinion release, the target company largely confines its operations to the country in which it is incorporated, has never been an issuer of securities in the U.S. and has had negligible business contacts, including no direct sale or distribution of its products, in the U.S. A due diligence review conducted by an experienced forensic accounting firm retained by the U.S. company identified more than $100,000 in transactions by the target company that raised compliance issues, mostly payments to government officials related to obtaining permits and licenses but also including gifts and cash donations to government officials, charitable contributions and sponsorships, and payments to members of the state-controlled media to minimize negative publicity. However, none of these transactions occurred in the U.S. and none was made by or through a U.S. person or issuer. The review also showed that the target company could not produce many of the underlying records for the tested transactions and had not developed or implemented a written code of conduct or other compliance policies and procedures, nor had its employees shown adequate understanding or awareness of anti-bribery laws and regulations. The U.S. company has taken several steps to begin to remediate these “glaring compliance, accounting and recordkeeping deficiencies” prior to the planned closing of the sale in 2015 and has also set forth a plan to fully integrate the target company into its compliance and reporting structure within a year of the acquisition.

In light of these facts and circumstances, the DOJ states that it does not presently intend to take any enforcement action with respect to pre-acquisition bribery the target company may have committed. It is “a basic principle of corporate law that a company assumes certain liabilities when merging with or acquiring another company,” the opinion states, and such successor liability “may be conferred upon the purchaser for the acquired entity’s pre-existing criminal and civil liabilities, including, for example, for FCPA violations of the target.” However, successor liability does not create liability where none existed before, and in this case none of the potentially improper pre-acquisition payments by the target company was subject to U.S. jurisdiction; i.e., none of them occurred in the U.S., no participation by any U.S. person or issuer in the payments has been identified, and no contracts or other assets were determined to have been acquired through bribery that would remain in operation and from which the U.S. company would derive financial benefit following the acquisition.

The DOJ emphasizes that this opinion release has no binding application to any party that did not join in the request and can be relied on by the requesting company only to the extent that the facts and circumstances were accurately and completely disclosed. Instead, the department encourages companies engaging in mergers and acquisitions to (1) conduct thorough risk-based FCPA and anti-corruption due diligence, (2) implement the acquiring company’s code of conduct and anti-corruption policies as quickly as practicable, (3) conduct FCPA and other relevant training for the acquired entity’s directors and employees as well as third-party agents and partners, (4) conduct an FCPA-specific audit of the acquired entity as quickly as practicable, and (5) disclose to the DOJ any corrupt payments discovered during the due diligence process. Adhering to these elements may determine whether and how the DOJ would seek to impose post-acquisition successor liability in case of a putative violation.

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