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Friday Roundup

Make your voice heard, scrutiny alerts, “foreign official” fun, and for the reading stack.  It’s all here in the Friday roundup.

Make Your Voice Heard

Yesterday, the U.K. Serious Fraud Office announced a consultation on “a draft Code of Practice setting out their approach to the use of Deferred Prosecution Agreements (DPAs).”  According to the release, the U.K. is seeking “views on eight points covered in the draft Code, including the circumstances when a prosecutor should consider a DPA, the criteria to apply when making this decision, and on the disclosure approach envisaged.”

Make your voice heard, “comments are welcome from interested individuals and organisations” and “the consultation closes on Friday 20 September 2013.”  See here for my previous post urging the U.K. to reject DPAs.

Staying in the U.K. this report states as follows.  “The UK Serious Fraud Office is actively investigating two cases under the Bribery Act, said Kevin Davis, the SFO’s chief investigating officer. He also revealed that a further six cases which might lead to prosecutions were under investigation.”

Scrutiny Alerts

Medtronic

Let’s say law enforcement sets up a sobriety checkpoint on the highway.  A sober driver successfully passes through it.  Would we call this an instance of law enforcement “declining” to prosecute the driver for drunk driver?

Of course not, and the same logic should apply in the FCPA context as well.

In June 2008, Medtronic disclosed as follows.

“On September 25, 2007, the Company received a letter from the SEC requesting  information relating to any potential violations of the U.S. Foreign Corrupt  Practices Act in connection with the sale of medical devices in an unspecified  number of foreign countries, including Greece, Poland and Germany. The letter  notes that the Company is a significant participant in the medical device  industry, and seeks any information concerning certain types of payments made  directly or indirectly to government-employed doctors. A number of competitors  have publicly disclosed receiving similar letters. On November 16, 2007, the  Company received a letter from the Department of Justice requesting any  information provided to the SEC. The Company is cooperating with both requests.”

In June 2009, Medtronic disclosed as follows.

“On September 25, 2007, the Company received a letter from the SEC requesting  information relating to any potential violations of the U.S. Foreign Corrupt  Practices Act in connection with the sale of medical devices in an unspecified  number of foreign countries, including Greece, Poland and Germany. Turkey, Italy  and Malaysia have since been added to the inquiry. The letter notes that the  Company is a significant participant in the medical device industry, and seeks  any information concerning certain types of payments made directly or indirectly  to government-employed doctors. A number of competitors have publicly disclosed  receiving similar letters. On November 16, 2007, the Company received a letter  from the Department of Justice requesting any information provided to the SEC.  Since that time the SEC and Department of Justice have made additional requests  for information from the Company. The Company is cooperating with the requests.”

Earlier this week, Medtronic stated as follows.

“On September 25, 2007 and  November 16, 2007, the Company received letters from the U.S. Securities and  Exchange Commission (SEC) and the U.S. Department of Justice (DOJ),  respectively, requesting information relating to any potential violations of the  U.S. Foreign Corrupt Practices Act in connection with the sale of medical  devices in several non-U.S. countries. A number of competitors have publicly  disclosed receiving similar letters. Subsequently, the SEC and DOJ made  additional requests for information from the Company. In June 2013, the SEC and  the DOJ both informed the Company that they would be closing their  investigations without pursuing any enforcement action or charges against the Company.”

The headline on the FCPA Blog read “Medtronic Wins Double Declination.”  The headline on the Risk & Compliance Blog of the Wall Street Journal read “Medtronic Says SEC, DOJ Declined to Prosecute for FCPA Violations.”

I just don’t understand it at all.  (See here for more).

HLW International / Sweett Group

Architecture firm HLW International LLP and Sweett Group Ltd. (a U.K. based construction company) recently were the subject of a leading Wall Street Journal article titled “Inside U.S. Firm’s Bribery Probe” by Joe Palazzolo and Chris Matthews.  The focus of the article concerns the construction of a hospital in Morocco and the alleged promise by a Sweet executive that HLW would get the design contract if it agreed to pay 3.5% of the contract value to “an official inside the United Arab Emirates President’s personal foundation, which was funding the project.”

Charitable donations have been the focus of prior FCPA enforcement actions against Eli Lilly and Schering-Plough as well as the focus of Wynn Resort’s current FCPA scrutiny.

“Foreign Official” Fun

In the Carson “foreign official” challenge, Judge Selna concluded, in denying the defendants’ motion to dismiss (see here),  that “the question of
whether state-owned companies qualify as instrumentalities under the FCPA is a  question of fact.” Judge Selna stated that “several factors bear on the  question of whether a business entity constitutes a government instrumentality”  including the following.

  • The foreign state’s characterization of the  entity and its employees;
  • The foreign state’s degree of control over  the entity;
  • The purpose of the entity’s activities;
  • The  entity’s obligations and privileges under the foreign state’s law, including  whether the entity exercises exclusive or controlling power to administer its  designated functions;
  • The circumstances surrounding the entity’s  creation; and
  • The foreign state’s extent of ownership of the entity,  including the level of financial support by the state (e.g., subsidies,  special tax treatment, and loans).

According to Judge Selna, the above “factors are not exclusive, and no single factor is dispositive.”

According to this recent article in the Wall Street Journal:

“Companies listed on China’s stock exchanges received 85.68 billion yuan ($13.83 billion) in government subsidies last year, up 23% from a year earlier, while corporate profits rose less than 1%, according to a Chinese data provider. The subsidies were equivalent to more than 4% of the companies’ total profits last year, up from around 3% between 2009 and 2011. The subsidies—largely from local authorities but also from the national government—took the form of cheap land, tax rebates, support for loan repayments and straight-up cash. There were a range of reasons, including research and development and support for government environment priorities.”

Reading Stack

The Seventh Edition of the FCPA Handbook from O’Melveny & Myers.

A focus on Southeast Asia in the always informative FCPA Update from Debevoise & Plimpton.

A  mini-roundup of Canada’s recent amendments to its Corruption of Foreign Public Officials Act here (Osler), here (Dentons), and here (Fasken Martineau).

*****

A good weekend to all.

Diving Into A Merger Agreement

It’s an occupational hazard.  Reading the news with FCPA goggles on that is.

Thus my FCPA sensors went off upon recently reading that Medtronic entered into a merger agreement with China Kanghui Holdings whereby Medtronic will acquire Kanghui.  (See here for the company’s release).  The release notes that China is one of the fastest growing medical device markets, that Medtronic desires to establish a more direct local presence in China, and that Kanghui has a vast China distribution network.

That’s enough FCPA risk to keep most practitioners up at night.

I couldn’t help myself so I dived into Medtronic’s SEC filings to see how, from a contractual standpoint, the company is seeking to manage this risk.

This post sets forth the relevant portions of the Medtronic – Kanghui Holders merger agreement.

Some posts on FCPA Professor are spicier than others and this post is admittedly bland, but it sheds a light on an important topic and demonstrates how the Foreign Corrupt Practices Act impacts many areas of law including transactional work.

Section 4.24 of the merger agreement is titled Compliance with Anti-Corruption and Certain Other Applicable Laws and states, in relevent part, as follows.

“(a) Neither the Company [Kanghui] nor any of its Subsidiaries is subject to any pending or, to the knowledge of the Company, threatened, investigation by the SFDA [State Food and Drug Administration in the PRC] or any other Governmental Authorities in the PRC or elsewhere pursuant to anti-corruption laws with respect to corrupt practices in the procurement by government entities, hospitals and other healthcare providers of pharmaceutical products and services, including acceptance of kickbacks or other illegal gains and benefits or other applicable anti-corruption laws.

(b) Within the preceding five calendar years, neither the Company, any of its Subsidiaries or any of their respective officers or directors, nor, to the knowledge of the Company, any of their respective employees, agents or other representatives or to the actual knowledge of the Company (without any obligation of inquiry or investigation) any of their respective distributors, in each case in connection with the activities and affairs relating to the Company or any of its Subsidiaries and in each case in violation of Applicable Law, either directly or indirectly: (i) has used or is using any funds for any illegal contribution, gift, entertainment or other unlawful expense relating to political activity; (ii) has used or is using any funds for any direct or indirect unlawful payment to any foreign or domestic Government Official [defined in the merger agreement to mean “any officer, employee or other individual acting in an official capacity for a Governmental Authority or agency or instrumentality thereof (including any state-owned or controlled enterprise or a state-owned or controlled public hospital] or political party or official thereof or any candidate for any political office; (iii) has violated or is violating any provision of, or any rule or regulation issued under, any Applicable Law with the effect of prohibiting corruption or bribery, including, to the extent applicable, (a) the US Foreign Corrupt Practices Act of 1977, 15 U.S.C. §§ 78dd-1, et seq. (the “FCPA”), (b) the US Travel Act, 18 U.S.C. § 1952, (c) any Applicable Law enacted in any applicable jurisdiction in connection with, or arising under, the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions, or (d) any other law, rule, regulation, or other legally binding measure of any foreign or domestic jurisdiction of similar effect or that relates to bribery or corruption (collectively, “Anti-Bribery Laws”); (iv) has failed to maintain in all material respects complete and accurate books and records as required by applicable Anti-Bribery Laws; (v) has established or maintained, or is maintaining, any unlawful fund of corporate monies or other properties; (vi) has made, offered to make, promised to make, ratified or authorized the payment or giving, directly or indirectly, of any unlawful bribe, rebate, payoff, influence payment, kickback or other unlawful payment, gift or anything of value to a foreign or domestic Government Official or political party or official thereof or any candidate for any political office to secure or attempt to secure any improper business advantage (within the meaning of such term under any applicable Anti-Bribery Law) or to obtain or retain business; or (vii) has otherwise taken any action that has caused, or would reasonably be expected to cause the Company or any of its Subsidiaries to be in violation in any material respect of any applicable Anti-Bribery Law. The Company and its Subsidiaries have conducted their businesses in compliance with the FCPA and other applicable Anti-Bribery Laws in all material respects and have instituted and maintain policies and effective disclosure controls and procedures and an internal accounting system designed to ensure, and which are reasonably expected to continue to ensure, continued compliance therewith and that violations of the FCPA and PRC and other applicable Anti-Bribery Laws will be prevented, detected and deterred.

(c) Neither the Company nor any of its Subsidiaries nor any of their respective officers or directors, nor, to the knowledge of the Company, any of their respective employees, agents or other representatives has, in connection with the activities and affairs of the Company or any of its Subsidiaries within the preceding five calendar years, violated any applicable Anti-Bribery Law, or otherwise caused the Company or any of its Subsidiaries to be in violation of any applicable Anti-Bribery Law.

(d) None of the Company nor any of its Subsidiaries (nor any of their respective directors, officers, executives, employees, agents or other representatives), is party to or otherwise subject to the terms of any corporate integrity agreement, non-prosecution agreement, deferred prosecution agreement or any other arrangement similar to any of the foregoing arising from or otherwise relating to any such Proceeding.

(e) Since August 10, 2010, all imports, exports, re-exports, sales or transfers of products, services or Intellectual Property or related technical information of the Company and its Subsidiaries have been effected in all material respects in accordance with all applicable anti-corruption, export control, trade sanctions, anti-terrorism and anti-boycott Applicable Laws. All products shipped by the Company and its Subsidiaries have been accurately marked, labeled and transported in all material respects in accordance with such Applicable Laws.

[…..]

(g) No Governmental Authority has, to the Company’s knowledge, initiated, threatened to initiate, conducted, or concluded a material investigation or other proceeding against the Company or any of its Subsidiaries, or any of their respective Affiliates, directors, officers, employees, agents or other representatives, of alleged violations by the Company or any of its Subsidiaries, or any of their respective Affiliates, of any Applicable Laws referenced in Section 4.24.”

*****

As to its own FCPA scrutiny, Medtronic stated as follows in its most recent quarterly filing.

“On September 25, 2007 and November 16, 2007, the Company received letters from the U.S. Securities and Exchange Commission (SEC) and the U.S. Department of Justice (DOJ), respectively, requesting information relating to any potential violations of the U.S. Foreign Corrupt Practices Act in connection with the sale of medical devices in several non-U.S. countries. A number of competitors have publicly disclosed receiving similar letters. Subsequently, the SEC and DOJ have made additional requests for information from the Company. The Company is fully cooperating with these requests.”

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