Earlier this week, the DOJ released Foreign Corrupt Practices Act Opinion Procedure Release 14-01 . It is the DOJ’s first Opinion Procedure Release of 2014 and only the second such release since October 2012. This post provides a summary of Release 14-01.
The Requestor (an issuer) was a financial services company and investment bank that was the majority shareholder of a foreign financial services company (“Foreign Company A”) and had contracted to purchase the remaining minority interest in Foreign Company A from a foreign businessman (“Foreign Shareholder”).
It would appear that the Requestor grew skittish about this mundane, routine transaction for two reasons.
First, approximately 4.5 years after Requestor purchased a majority interest in Foreign Company A (a company founded and owned by Foreign Shareholder), the Foreign Shareholder “was appointed to serve as a high-level official at Foreign Country’s central monetary and banking agency” (“Foreign Agency”).
Second, although the original agreement between the Requestor and the Foreign Shareholder contained a formula for the purchase price of Foreign Shareholder’s shares (the formula was based on a multiple of Foreign Company A’s average net income for the two years preceding the buyout), the parties “agreed not to use the valuation formula” set forth in the original agreement. According to the release, because Foreign Company A experienced yearly operating losses from 2008 to 2011 (an event the Requestor attributed to the 2008 global financial crisis) the original formula dictated that Foreign Shareholder’s shares “had no value.”
According to the release, “Requestor contends that any attempt to enforce the [original] Agreement as written would likely have led to litigation or Foreign Shareholder selling the Shares to a third party” – an event Requestor explained would carry substantial risks to Foreign Company A’s operations and profitability.
According to the release, the Requestor and Foreign Shareholder thus agreed “that they would instead ask an accounting firm to make an independent and binding determination of the Share’s value” and according to the release “a leading, highly regarded, global accounting firm” was engaged to do that.
Against this backdrop, the Requestor sought “an opinion that the DOJ will not initiate any enforcement action if Requestor consummates the purchase of the Shares for the appraised value.” As noted in the Release, the Requestor made several representations and warranties relating to the purchase of the Shares, including the following:
“Foreign Shareholder has represented and warranted that, since his appointment at Foreign Agency, he has recused himself from, and has not influenced or sought to influence, any decisions by Foreign Agency, Foreign Country’s government, or any third party with respect to the Recusal Entities ([the Requestor, Foreign Company A, or their affiliates]). Foreign Shareholder also has recused himself from, and has not influenced or sought to influence, any supervisory or regulatory matters with respect to any of the Recusal Entities. Foreign Shareholder will continue to so recuse himself until after completion of the buyout of the Shares.”
“Requestor obtained a representation from Foreign Shareholder that he has disclosed his ownership interest and the proposed sale of the Shares in Foreign Company A to the relevant government authorities of Foreign Country and the relevant department at Foreign Agency, and the relevant government authorities have informed him that they approve or do not object to the sale of the Shares.”
In the “Analysis” section of the Release, the DOJ stated:
“Based upon all of the facts and circumstances, as represented by the Requestor, the Department does not presently intend to take any enforcement action with respect to the proposed buyout arrangement described in the Request.”
In pertinent part, the DOJ opined as follows.
“[T]he FCPA does not per se prohibit business relationships with, or payments to, foreign officials.” Opinion Release 2010-03, at 3 (Sept. 1, 2010). Where such an arrangement exists, “the Department typically looks to determine whether there are any indicia of corrupt intent, whether the arrangement is transparent to the foreign government and the general public, whether the arrangement is in conformity with local law, and whether there are safeguards to prevent the foreign official from improperly using his or her position to steer business to or otherwise assist the company, for example through a policy of recusal.” Id.
With respect to indicia of corrupt intent, the proffered purpose of the payment is to sever the parties’ existing financial relationship, which began before the Foreign Shareholder held an official position. Doing so would also avoid what would otherwise be an ongoing conflict of interest. The decision by the parties to employ an alternative valuation formula appears reasonable given the facts presently known. Requestor has represented that unforeseen market circumstances, as well as legitimate business considerations, prompted and justified the renegotiation of the buyout formula contained in the [original] Agreement. […] [A]ttempting to hold Foreign Shareholder to the terms of the [original] Agreement and pay little or nothing for the Shares presents commercial and legal risks to Requestor. Foreign Shareholder could institute litigation, and Requestor would face litigation costs and bear the risk of having to pay an even greater amount to Foreign Shareholder. Alternatively, Foreign Shareholder is not obligated to sell the Shares back to the Subsidiary and could sell them to a third party, potentially resulting in an undesirable or disadvantageous partnership.”
[R]equestor’s decision to engage the Firm to serve as the independent and binding arbiter of the value of the Shares provides additional assurance that the payment reflects the fair market value of the Shares, rather than an attempt to overpay Foreign Shareholder for a corrupt purpose.
Accordingly, because the facts, representations, and warranties described in the Request demonstrate at present that the only purpose of the payment to Foreign Shareholder is consideration for the Shares, the Department does not presently intend to take any enforcement action. The Department notes, however, this Opinion does not foreclose future enforcement action should facts indicative of corrupt intent (such as an implied understanding that Foreign Shareholder would direct business to Requestor or inflated earnings projections being used to induce Foreign Shareholder to act on Requestor’s behalf) later become known.”
One frequent criticism of DOJ FCPA releases – including as noted in the OECD’s 2010 Report  – is that it simply takes too long for the Requestor to receive an answer.
On this issue, the following is relevant to Release 14-01. The Requestor submitted the request on July 8, 2013. On July 25, 2013 the DOJ sent Requestor a letter seeking additional information. According to the DOJ, on September 19, 2013 the Requestor provided a partial response which was accompanied by significant backup documentation. According to the DOJ, thereafter the DOJ and counsel for the Requestor had several follow up discussions to clarify certain issues. On February 13, 2014, the Requestor provided a final submission that addressed the last outstanding issues raised by the DOJ. On March 17, 2014 the DOJ issued the release.
In short, from start to finish the process took approximately 8 months.