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A Look At The Raytheon – United Technologies Merger Through An FCPA Lens

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A few days ago Raytheon Company and United Technologies Corporation announced entry “into an agreement to combine in an all-stock merger of equals.” The merger was unanimously approved by the Boards of Directors of both companies and is expected to close in the first half of 2020.

The aerospace and defense industries have significant points of contact with “foreign officials” in the global marketplace and thus a relatively high degree of FCPA risk. Indeed, United Technologies resolved an approximate $14 million FCPA enforcement action in 2018 regarding conduct in Russia, Azerbaijan, China, Kuwait, South Korea, Pakistan, Thailand, and Indonesia.

This post examines the Foreign Corrupt Practices Act and related provisions of the merger agreement as well as a prior example of how FCPA issues scuttled a defense industry merger.

Raytheon made the following representation and warranty in the merger agreement:

“Foreign Corrupt Practices Act.  Except as, individually or in the aggregate, would not reasonably be expected to be material to Raytheon and its subsidiaries, taken as a whole, (i) since January 1, 2017, none of Raytheon or its subsidiaries, nor, to the knowledge of Raytheon, any director, officer, employee or agent of Raytheon, has directly or indirectly made, offered to make, attempted to make, or accepted any contribution, gift, bribe, rebate, payoff, influence payment, kickback or other payment to or from any person, private or public, regardless of what form, whether in money, property or services, in violation of any Anti-Corruption Laws, (ii) to the knowledge of Raytheon, as of the date of this Agreement, neither Raytheon nor any of its subsidiaries is under internal or Governmental Entity investigation for any material violation of any Anti-Corruption Laws, has received any written notice or other communication from any Governmental Entity regarding a violation of, or failure to comply with, any Anti-Corruption Laws, (iii) Raytheon and its subsidiaries maintain an adequate system or systems of internal controls reasonably designed to ensure compliance with the Anti-Corruption Laws and prevent and detect violations of the Anti-Corruption Laws, and (iv) since January 1, 2017, neither Raytheon nor any of its subsidiaries has made any disclosure (voluntary or otherwise) to any Governmental Entity with respect to any alleged irregularity, misstatement or omission or other potential violation or liability arising under or relating to any Anti-Corruption Laws.”

Likewise, United Technologies made the following representation and warranty:

Foreign Corrupt Practices Act.  Except as, individually or in the aggregate, would not reasonably be expected to be material to UTC RemainCo [a defined term after separation of certain UTC subsidiaries] and its subsidiaries, taken as a whole, (i) since January 1, 2017, none of UTC RemainCo or its subsidiaries, nor, to the knowledge of UTC, any director, officer, employee or agent of UTC RemainCo, has directly or indirectly made, offered to make, attempted to make, or accepted any contribution, gift, bribe, rebate, payoff, influence payment, kickback or other payment to or from any person, private or public, regardless of what form, whether in money, property or services, in violation of any Anti-Corruption Laws, (ii) to the knowledge of UTC, as of the date of this Agreement, neither UTC RemainCo nor any of its subsidiaries is under internal or Governmental Entity investigation for any material violation of any Anti-Corruption Laws, has received any written notice or other communication from any Governmental Entity regarding a violation of, or failure to comply with, any Anti-Corruption Laws, (iii) UTC RemainCo and its subsidiaries maintain an adequate system or systems of internal controls reasonably designed to ensure compliance with the Anti-Corruption Laws and prevent and detect violations of the Anti-Corruption Laws, and (iv) since January 1, 2017, neither UTC RemainCo nor any of its subsidiaries has made any disclosure (voluntary or otherwise) to any Governmental Entity with respect to any alleged irregularity, misstatement or omission or other potential violation or liability arising under or relating to any Anti-Corruption Laws.

The term “Anti-Corruption Laws” is defined in the merger agreement to mean: “the U.S. Foreign Corrupt Practices Act of 1977, as amended, the U.S. Travel Act, the U.K. Bribery Act 2010, the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions or any other Applicable Law relating to anti-corruption or anti-bribery.”

Highlighted next is an example of how FCPA issues scuttled a defense industry merger.

In 2003 Lockheed Martin Corporation and Titan Corporation announced a plan to merge. In announcing the transaction, Lockheed’s Chairman and CEO stated:

“Titan provides additional presence within the U.S. Government customer base and expands our competencies. Titan is an excellent fit with Lockheed Martin, and its acquisition is consistent with our disciplined growth and cash deployment strategies. Titan’s outstanding record of sales growth and the quality of its workforce made this transaction very attractive to us. This workforce, together with our highly skilled people, allows us to provide more cost effective and robust solutions to customers of both companies.”

However, Lockheed soon thereafter announced that it “learned of allegations that improper payments were made, or items of value were provided, by consultants for Titan Corporation or its subsidiaries to foreign officials.”   Lockheed stated:

“The allegations were identified as part of a review conducted with Titan of payments to Titan’s international consultants in connection with the proposed acquisition of Titan.  The alleged payments and provision of items of value, if true, raise questions concerning whether there has been a violation of the FCPA. […] The review is ongoing. Titan is cooperating with this effort, as well as conducting its own review.   Lockheed Martin and Titan have met with the SEC and the DOJ to discuss the allegations of improper payments. […] Closing of the Titan transaction is subject to approval of Titan’s stockholders, the absence of any material adverse change in Titan and other conditions set forth in the merger agreement. […] Lockheed Martin will need to determine whether the conditions to the merger have been satisfied.”

Titan FCPA’s scrutiny, which Lockheed could have inherited upon completion of the merger, resulted in a delay of the shareholder vote to approve the merger as well as an amended merger agreement extending the time period for the merger to occur.  The amended merger agreement provided that “as a condition to the closing of the transaction, Titan must obtain written confirmation that the DOJ considers its investigation of these allegations resolved and does not intend to pursue any claims against Titan, or Titan must have entered into a plea agreement with the DOJ and completed the sentencing process.”

Ultimately, Titan’s unresolved FCPA scrutiny caused Lockheed to abandon the merger because Titan “did not satisfy all the closing conditions.”  Lockheed stated:

“Under the terms of the amended merger agreement, either party could terminate the merger agreement if Titan either (i) had not obtained written confirmation from the DOJ that the investigation of alleged FCPA violations was resolved as to Titan and the Department did not intend to pursue any claims against Titan; or (ii) Titan had not entered into a plea agreement [by a certain date] … Titan did not satisfy either requirement.  […] The corporation declined Titan’s request for a further extension.”

In announcing termination of the merger, a Lockheed spokesperson said that the company “made every possible effort to make this happen, but it just reached a point where we didn’t want the uncertainty surrounding this to continue indefinitely.”

Termination of the merger had several adverse consequences for Titan.  In addition to losing an acquirer, news of the merger termination caused Titan’s shares to fall by approximately 20% and investment analysts downgraded the company’s stock. Titan’s FCPA scrutiny of course did not disappear and the company pleaded guilty in 2005 to FCPA charges for, among other things, making corrupt payments, through an agent, of more than $2 million to the election campaign of Benin’s then-incumbent President.  In resolving its FCPA scrutiny, Titan agreed to pay approximately $28 million in combined fine and penalty amounts, at the time, the largest FCPA settlement in history (see here).

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