DOJ Gets It Right In Recent FCPA Opinion Procedure Release
In this November 2010 post regarding the FCPA guidance, I flagged the below statement as one of the ten most meaningful statements in the Guidance.
“Successor liability does not […] create liability where none existed before. For example, if an issuer were to acquire a foreign company that was not previously subject to the FCPA’s jurisdiction, the mere acquisition of that foreign company would not retroactively create FCPA liability for the acquiring issuer.” (Pg. 28)
I flagged the statement because … well … it was an accurate statement of black-letter law, but one often overlooked when analyzing Foreign Corrupt Practices Act issues in the connection with merger and acquisition activity.
Last Friday, the DOJ released this FCPA opinion release dated November 7th. The Requester was a U.S. issuer in the consumer products industry and contemplating an acquisition of a foreign target. In pertinent part, the opinion release states:
“Requestor is a multinational company headquartered in the United States. Requestor intends to acquire a foreign consumer products company and its wholly owned subsidiary (collectively, the “Target Company”), both of which are incorporated and operate in a foreign country (“Foreign Country”). In the course of its pre-acquisition due diligence of the Target Company, Requestor identified a number of likely improper payments – none of which had a discernible jurisdictional nexus to the United States – by the Target Company to government officials of Foreign Country, as well as substantial weaknesses in accounting and recordkeeping. In light of the bribery and other concerns identified in the due diligence process, Requestor has set forth a plan that includes remedial pre-acquisition measures and detailed post-acquisition integration steps.
Requestor seeks an Opinion as to whether the Department, based on the facts and representations provided by Requestor that the pre-acquisition due diligence process did not bring to light any potentially improper payments that were subject to the jurisdiction of the United States, would presently intend to bring an FCPA enforcement action against Requestor for the Target Company’s pre-acquisition conduct. Requestor does not seek an Opinion from the Department as to Requestor’s criminal liability for any post-acquisition conduct by the Target Company.
Requestor intends to acquire 100% of the Target Company’s shares beginning in 2015. The Target Company’s shares are currently held almost exclusively by another foreign corporation (“Seller”), which is listed on the stock exchange of Foreign Country. Seller is a prominent consumer products manufacturer and distributor in Foreign Country, with more than 5,000 full-time employees and annual gross sales in excess of $100 million. The Target Company represents part of Seller’s consumer products business in Foreign Country and sells its products through several related brands.
Seller and the Target Company largely confine their operations to Foreign Country, have never been issuers of securities in the United States, and have had negligible business contacts, including no direct sale or distribution of their products, in the United States.
In preparing for the acquisition, Requestor undertook due diligence aimed at identifying, among other things, potential legal and compliance concerns at the Target Company. Requestor retained an experienced forensic accounting firm (“the Accounting Firm”) to carry out the due diligence review. This review brought to light evidence of apparent improper payments, as well as substantial accounting weaknesses and poor recordkeeping. On the basis of a risk profile analysis of the Target Company, the Accounting Firm reviewed approximately 1,300 transactions with a total value of approximately $12.9 million. The Accounting Firm identified over $100,000 in transactions that raised compliance issues. The vast majority of these transactions involved payments to government officials related to obtaining permits and licenses. Other transactions involved gifts and cash donations to government officials, charitable contributions and sponsorships, and payments to members of the state-controlled media to minimize negative publicity. None of the payments, gifts, donations, contributions, or sponsorships occurred in the United States and none was made by or through a U.S. person or issuer.
The due diligence showed that the Target Company has significant recordkeeping deficiencies. The vast majority of the cash payments and gifts to government officials and the charitable contributions were not supported by documentary records. Expenses were improperly and inaccurately classified in the Target Company’s books. In fact, the Target Company’s accounting records were so disorganized that the Accounting Firm was unable to physically locate or identify many of the underlying records for the tested transactions. Finally, the Target Company has not developed or implemented a written code of conduct or other compliance policies and procedures, nor have the Target Company’s employees, according to the Accounting Firm, shown adequate understanding or awareness of anti-bribery laws and regulations. In light of the Target Company’s glaring compliance, accounting, and recordkeeping deficiencies, Requestor has taken several pre-closing steps to begin to remediate the Target Company’s weaknesses prior to the planned closing in 2015.
Requestor anticipates completing the full integration of the Target Company into Requestor’s compliance and reporting structure within one year of the closing. Requestor has set forth an integration schedule of the Target Company that encompasses risk mitigation, dissemination and training with regard to compliance procedures and policies, standardization of business relationships with third parties, and formalization of the Target Company’s accounting and recordkeeping in accordance with Requestor’s policies and applicable law.”
Under the heading “Analysis” the opinion release states:
“Based upon all of the facts and circumstances, as represented by Requestor, the Department does not presently intend to take any enforcement action with respect to preacquisition bribery Seller or 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. In a situation such as this, where a purchaser acquires the stock of a seller and integrates the target into its operations, 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.
“Successor liability does not, however, create liability where none existed before. For example, if an issuer were to acquire a foreign company that was not previously subject to the FCPA’s jurisdiction, the mere acquisition of that foreign company would not retroactively create FCPA liability for the acquiring issuer.” FCPA – A Resource Guide to the U.S. Foreign Corrupt Practices Act, at 28 (“FCPA Guide”). This principle, illustrated by hypothetical successor liability “Scenario 1” in the FCPA Guide, squarely addresses the situation at hand. See FCPA Guide, at 31 (“Although DOJ and SEC have jurisdiction over Company A because it is an issuer, neither could pursue Company A for conduct that occurred prior to the acquisition of Foreign Company. As Foreign Company was neither an issuer nor a domestic concern and was not subject to U.S. territorial jurisdiction, DOJ and SEC have no jurisdiction over its pre-acquisition misconduct.”).
Assuming the accuracy of Requestor’s representations, none of the potentially improper pre-acquisition payments by Seller or the Target Company was subject to the jurisdiction of the United States. For example, none of the payments occurred in the United States, and Requestor has not identified participation by any U.S. person or issuer in the payments. Requestor also represents that, based on its due diligence, no contracts or other assets were determined to have been acquired through bribery that would remain in operation and from which Requestor would derive financial benefit following the acquisition. The Department would thus lack jurisdiction under the FCPA to prosecute Requestor (or for that matter, Seller or the Target Company) for improper payments made by Seller or the Target Company prior to the acquisition. See 15 U.S.C. §§ 78dd-1, et seq. (setting forth statutory jurisdictional bases for anti-bribery provisions).
The Department expresses no view as to the adequacy or reasonableness of Requestor’s integration of the Target Company. The circumstances of each corporate merger or acquisition are unique and require specifically tailored due diligence and integration processes. Hence, the exact timeline and appropriateness of particular aspects of Requestor’s integration of the Target Company are not necessarily suitable to other situations.
To be sure, 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 Department any corrupt payments discovered during the due diligence process. See FCPA Guide at 29. Adherence to these elements by Requestor may, among several other factors, determine whether and how the Department would seek to impose post-acquisition successor liability in case of a putative violation.”
In the release, the DOJ got it right.
Not all bribery that allegedly occurs in the world is subject to the DOJ’s jurisdiction and just because a company that is subject to the FCPA acquires a foreign company, such an acquisition does not magically create FCPA liability where there was none before. In layman’s terms, what happened is similar to the following: a foreign person – not subject to U.S. law – was speeding in a foreign country and just because a U.S. company then purchases the car does not create liability under U.S. law for speeding.
The DOJ also got it right as a matter of policy. By its opinion, the contemplated transaction is likely to close whereas a contrary opinion might have caused the Requestor to abandon the transaction. If the transaction indeed closes, a previously compromised foreign company is going to be brought within the corporate family of a U.S. company subject to the FCPA with an existing internal controls system.
On this score, I am reminded of Richard Alderman’s (former Director of the UK Serious Fraud Office) comment “that society benefits if an ethical corporation takes over and sorts out a corporation that has corruption problems.”
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The DOJ’s FCPA Opinion Procedure program is often criticized because of the length of time it takes to obtain an opinion. On this issue, the opinion release highlights the following dates. The request was initially submitted on April 30th, the Requestor provided supplemental information on May 12th, July 30th, and October 9, 2014, and the release was issued on November 7th. Thus, from start to finish, the process took approximately six months.
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As to background information of the DOJ’s FCPA Opinion Procedure program:
The FCPA, when enacted, directed the DOJ Attorney General to establish a procedure to provide responses to specific inquiries by those subject to the FCPA concerning conformance of their conduct with the DOJ’s “present enforcement policy. Pursuant to the governing regulations of the so-called DOJ Opinion Procedure Release Program, only “specified, prospective—not hypothetical—conduct” is subject to a DOJ opinion. While the DOJ’s opinion has no precedential value, its opinion that contemplated conduct conforms with the FCPA is entitled to a rebuttable presumption should an FCPA enforcement action be brought as a result of the contemplated conduct. Since the program went live in 1980, the DOJ has issued approximately sixty releases on a wide range of issues from charitable contributions to gifts, travel and entertainment, to third parties.
An M&A Case Study
The Foreign Corrupt Practices Act is a niche practice area for sure.
At the same time, FCPA issues intersect with other business law issues such that the FCPA is a fundamental skill set for all business lawyers and advisers, including in the mergers and acquisitions context.
The FCPA enforcement and related actions in connection with the 2010 acquisition of Watts Valve Changsha Co. Ltd. by China Valves Technology, Inc. (“China Valves”) has turned into a full-fledged case study on this issue as a result of the September 29th SEC action against China Valves and various of it executives – an action that has generally flown under the radar screen in the FCPA space.
First, some background.
As highlighted in this post, in October 2011 the SEC issued (here) an administrative cease and desist order against Watts Water Technologies, Inc. (“Watts”) and Lessen Chang concerning violations of the FCPA’s books and records and internal control provisions. The conduct at issue focused on Watts Valve Changsha Co. Ltd. (“CMV”), a wholly-owned Chinese subsidiary operated by Watts and sold in 2010.
Specifically and according to the SEC, “employees of CWV made improper payments to employees of certain [Chinese] design institutes … to influence the design institutes to recommend CWV valve products to [SOEs] and to create design specifications that favored CWV valve products.” The SEC found that “CWV’s improper payments generated profits for Watts of more than $2.7 million.”
Based on the above conduct, Watts agreed to pay approximately $3.8 million ($2.8 million in disgorgement, $820,000 in prejudgment interest and a $200,000 civil monetary penalty). Chang (a U.S. citizen and former interim general manager of CWV) agreed to pay a $25,000 civil monetary penalty.
As indicated above, the FCPA enforcement action against Watts in 2011 was based on the conduct of CMV – an entity Watts had sold prior to the FCPA enforcement action.
The purchaser of CMV was China Valves. More on that below including the recent enforcement action against China Valves and various executives.
Prior to this recent enforcement action however, and as highlighted in this prior post, Watts filed a civil lawsuit against its U.S.-based law firm for legal malpractice claiming that the law firm’s legal services in connection with Watt’s acquisition of CMV was inadequate based on insufficient due diligence. As highlighted in this prior post, the U.S. law firm strenuously denied the allegations, yet the action was reportedly settled and little details disclosed.
The take-away point thus far in the story is that one acquired entity caused FCPA scrutiny for the acquiring company and civil scrutiny for the law firm advising the acquirer.
Fast forward to the recent SEC action against China Valves and certain of its executives (see here for the SEC release and here for the complaint). According to the SEC complaint, China Valves is a Nevada corporation with operations solely in China which became a U.S. issue in December 2007 through a reverse merger.
China Valves purchased CMV from Watts in January 2010 and according to the SEC did so with “full knowledge” of the FCPA issues facing CMV. According to the SEC, when China Valves purchased CMV, China Valves paid “$2.2 million [in] outstanding sales commissions to CMV’s sales force – the very same commissions Watts declined to pay because of suspected FCPA violations.”
The above two allegations, along with several others that do not relate to the SEC, serve as the basis for the SEC’s claim that China Valves and various of its executives engaged in fraud. For instance, the SEC alleged that the Form 8-K China Valves filed with the SEC announcing the acquisition “omitted any mention of the FCPA investigation of CMV, or that the payment of unrecorded liabilities included payment of $2.2 million in sales commissions that were not recorded on CMV’s books and that Watts had determined were not FCPA compliant.”
The SEC’s complaint also contains other similar allegations regarding China Valve’s other SEC filings over a two year period. Specifically , the SEC alleged that these filings contained material false statements and omissions “because a reasonable shareholder would want to know the true nature of the acquisition … about the FCPA Investigation at CMV, and that [China Valves] paid amounts that potentially violated the FCPA.”
In short, the alleged improper conduct at CMV created scrutiny not only for the first acquiring company (Watts) and Watt’s counsel in the form of a malpractice action, but also the second acquiring company (China Valves) and its executives.
This full-fledged M&A case study should put the FCPA on the radar screen for all business lawyers and advisors, including in the merger and acquisitions context.
Friday Roundup
The U.K. SFO flexes its pre-Bribery Act muscle in criminally charging an Alstom subsidiary, other scrutiny alerts and updates, nominate, double standard, quotable, and for the reading stack. It’s all here in the Friday roundup.
Alstom
As has been widely reported (see here and here for instance), the U.K. Serious Fraud Office announced:
“Alstom Network UK Ltd, formerly called Alstom International Ltd, a UK subsidiary of Alstom, has been charged with three offences of corruption contrary to section 1 of the Prevention of Corruption Act 1906, as well as three offences of Conspiracy to Corrupt contrary to section 1 of the Criminal Law Act 1977. The alleged offences are said to have taken place between 1 June 2000 and 30 November 2006 and concern large transport projects in India, Poland and Tunisia.”
According to the release, “the SFO investigation commenced as a result of information provided to the SFO by the Office of the Attorney General in Switzerland concerning the Alstom Group, in particular Alstom Network UK Ltd.”
I inquired with the SFO press office regarding any original source charging documents and was informed as follows. “Beyond our press release today, the nearest date for documents likely to be made available would be the charge sheet at the first court hearing – presently arranged for 9 September, at Westminster Magistrates’ Court.”
As readers likely know, since April 2013 the DOJ has charged four individuals associated with Alstom Power Inc., a subsidiary of Alstom, in connection with an alleged bribery scheme involving the Tarahan coal-fired steam power plant project in Indonesia. (See more below for a recent guilty plea).
As was the case in the U.S. – U.K. enforcement action against BAE (see here for the prior post) there may have been and/or currently is turf war issues between the agencies as to which agency is going to prosecute alleged conduct occurring in various countries.
Speaking of the DOJ action against various individuals associated with Alstom Power, last week, the DOJ announced that William Pomponi, a former vice president of regional sales at Alstom Power, pleaded guilty to a criminal information charging him with conspiracy to violate the FCPA in connection with the awarding of the Tarahan power project in Indonesia.
Assistant Attorney General Leslie R. Caldwell stated:
“The Criminal Division of the Department of Justice will follow evidence of corruption wherever it leads, including into corporate boardrooms and corner offices. As this case demonstrates, we will hold both companies and their executives responsible for criminal conduct.”
As noted in the DOJ release:
“Pomponi is the fourth defendant to plead guilty to charges stemming from this investigation. Frederic Pierucci, the vice president of global boiler sales at Alstom, pleaded guilty on July 29, 2013, to one count of conspiracy to violate the FCPA and one count of violating the FCPA; and, David Rothschild, a former vice president of regional sales at Alstom Power Inc., pleaded guilty to conspiring to violate the FCPA on Nov. 2, 2012. Marubeni Corporation, Alstom’s consortium partner on the Tarahan project, pleaded guilty on March 19, 2014, to one count of conspiracy to violate the FCPA and seven counts of violating the FCPA, and was sentenced to pay a criminal fine of $88 million. FCPA and money laundering charges remain pending against Lawrence Hoskins, the former senior vice president for the Asia region for Alstom, and trial is scheduled for June 2, 2015.”
See here for the original post highlighting the enforcement action against the individuals associated with Alstom and here for the original post regarding the Marubeni enforcement action.
Scrutiny Alerts and Updates
SEC Enforcement Action Against Former Magyar Telekom Executives
From Law360:
“The SEC has slimmed down its FCPA case against three former Magyar Telekom PLC executives, dropping claims they bribed government officials in Montenegro, according to a new complaint … The amended complaint alleged former Magyar CEO Elek Straub and two other former executives, Andras Balogh and Tamas Morvai, authorized bribe payments to government officials in the Republic of Macedonia in exchange for regulations designed to hurt a competitor. The SEC, in its initial complaint in December 2011, had also alleged the defendants engaged in a second bribery scheme in Montenegro. The agency said in a July 14 court filing that it would “continue to pursue the same legal causes of action alleged in its original complaint,” but without the claims related to Montenegro. The SEC previously advised the court and defense attorneys in January 2014 of its intention to narrow the suit.”
Interesting, isn’t it, what happens when the SEC is put to its burden of proof.
Kowalewski Pleads Guilty
The DOJ announced:
“Bernd Kowalewski, the former President and CEO of BizJet, pleaded guilty … to conspiracy to violate the Foreign Corrupt Practices Act (FCPA) and a substantive violation of the FCPA in connection with a scheme to pay bribes to officials in Mexico and Panama in exchange for those officials’ assistance in securing contracts for BizJet to perform aircraft maintenance, repair and overhaul services.”
Assistant Attorney General Leslie Caldwell stated:
“The former CEO of BizJet, Bernd Kowalewski, has become the third and most senior Bizjet executive to plead guilty to bribing officials in Mexico and Panama to get contracts for aircraft services. While Kowalewski and his fellow executives referred to the corrupt payments as ‘commissions’ and ‘incentives,’ they were bribes, plain and simple. Though he was living abroad when the charges were unsealed, the reach of the law extends beyond U.S. borders, resulting in Kowalewski’s arrest in Amsterdam and his appearance in court today in the United States. Today’s guilty plea is an example of our continued determination to hold corporate executives responsible for criminal wrongdoing whenever the evidence allows.”
U.S. Attorney Danny Williams (N.D. Okla.) stated:
“I commend the investigators and prosecutors who worked together across borders and jurisdictions to vigorously enforce the Foreign Corrupt Practices Act. Partnership is a necessity in all investigations. By forging and strengthening international partnerships to combat bribery, the Department of Justice is advancing its efforts to prevent crime and to protect citizens.”
See here and here for posts regarding the 2012 DOJ enforcement action against BizJet and here and here for the 2013 DOJ enforcement action against Kowalewski and others associated with BizJet.
Cilins Sentenced
As noted in this prior post, in April 2013 the DOJ announced (here) that “Frederic Cilins a French citizen, has been arrested and accused of attempting to obstruct an ongoing investigation into whether a mining company paid bribes to win lucrative mining rights in the Republic of Guinea.” The Criminal Complaint charged Cilins with one count of tampering with a witness, victim, or informant; one count of obstruction of a criminal investigation; and one count of destruction, alteration, and falsification of records in a federal investigation. Cilins was linked to Guernsey-based BSG Resources Ltd and in March 2014 the DOJ announced that Cilins pleaded guilty “to obstructing a federal criminal investigation into whether a mining company paid bribes to win lucrative mining rights in the Republic of Guinea.” (See this prior post).
Last week, the DOJ announced that Cilins was sentenced to 24 months in prison. In the DOJ release, U.S. Attorney Preet Bharara said:
“Frederic Cilins went to great lengths to thwart a Manhattan federal grand jury’s investigation into an alleged bribery scheme in the Republic of Guinea. In an effort to prevent the federal authorities from learning the truth, Cilins paid a witness for her silence and to destroy key documents. Today, Cilins learned that no one can manipulate justice.”
Assistant Attorney General Leslie Caldwell said:
“Cilins offered to bribe a witness in an FCPA investigation to stop the witness from talking to the FBI. Today’s sentence holds Cilins accountable for his effort to undermine the integrity of our justice system, and sends a message that those who interfere with federal investigations will be prosecuted and sent to prison.”
FBI Assistant Director-in-Charge George Venizelos said:
“Cilins obstructed the efforts of the FBI during the course of this investigation. His guilty plea and sentence demonstrate our shared commitment with the U.S. Attorney’s Office to hold accountable those who seek to interfere with the administration of justice. This case should be a reminder to all those who try to circumvent the efforts of a law enforcement investigation: the original crime and the cover-up both lend themselves to prosecution.”
According to the release, Cilins was also ordered to pay a fine of $75,000 and to forfeit $20,000.
GSK
From Reuters:
“GlaxoSmithKline faces new allegations of corruption, this time in Syria, where the drugmaker and its distributor have been accused of paying bribes to secure business, according to a whistleblower’s email reviewed by Reuters. Britain’s biggest drugmaker said on Thursday it was investigating the latest claims dating back to 2010, which were laid out in the email received by the company on July 18. The allegations relate to its former consumer healthcare operations in Syria, which were closed down in 2012 due to the worsening civil war in the country. […] GSK has been rocked by corruption allegations since last July, when Chinese authorities accused it of funneling up to 3 billion yuan ($480 million) to doctors and officials to encourage them to use its medicines. The former British boss of the drugmaker’s China business was accused in May of being behind those bribes. Since then, smaller-scale bribery claims have surfaced in other countries and GSK is now investigating possible staff misconduct in Poland, Iraq, Jordan and Lebanon. Syria is the sixth country to be added to the list. The allegations there center on the company’s consumer business, including its popular painkiller Panadol and oral care products. Although rules governing the promotion of non-prescription products are not as strict as for prescription medicines, the email from a person familiar with GSK’s Syrian operations said alleged bribes in the form of cash, speakers’ fees, trips and free samples were in breach of corruption laws. The detailed 5,000-word document, addressed to Chief Executive Andrew Witty and Judy Lewent, chair of GSK’s audit committee, said incentives were paid to doctors, dentists, pharmacists and government officials to win tenders and to obtain improper business advantages.”
Separately, this Reuters article states that the U.K. SFO “is working with authorities in China in a first for such Anglo-Chinese cooperation as it carries out its own investigation into alleged corruption at GSK.” The article quotes SFO Director David Green as follows: “Certainly, so far as I am aware it is the first time we have had cooperation with the Chinese on an SFO case.”
Separately, in the U.S. this Wall Street Journal article states:
“Federal Bureau of Investigation agents have been interviewing current and former GSK employees in connection with bribery allegations made against the drug maker in China, according to a person familiar with the matter, as fresh claims of corruption surfaced against Glaxo’s operations in Syria. The interviews have taken place in Washington, D.C., in the past few months and are part of a Justice Department investigation into GSK’s activities in China, the person added. The U.S. Securities and Exchange Commission also is investigating the company’s business in China, according to people familiar with the matter.”
Key Energy Services
The company stated as follows in its Second Quarter 2014 Update and Earnings Release.
“Pre-tax expenses of approximately $5 million were incurred in connection with the previously disclosed Foreign Corrupt Practices Act investigations.”
Nominate
If FCPA Professor adds value to your practice or business or otherwise enlightens your day and causes you to contemplate the issues in a more sophisticated way, please consider nominating FCPA Professor for the ABA Journal’s Blawg 100 list (see here).
Double Standard
Beginning in 2009, I began writing about the “double standard” and how – despite the similarities between the FCPA and 18 USC 201 (the domestic bribery statute) – a U.S. company’s interaction with a “foreign official” is subject to more scrutiny and different standards than interaction with a U.S. official. Since 2009, approximately 30 posts have appeared under the “double standard” subject matter tag.
Against this backdrop, I was happy to see another individual tackle the same general topic. See here from the Global AntiCorruption Blog – “Is U.S. Campaign Finance Law More Permissive of Corruption Than the FCPA?”
Quotable
In this Corporate Crime Reporter interview, former U.S. Attorney Neil MacBride (E.D. Va.) says the following regarding the use of non-prosecution and deferred prosecution agreements: “The Department now has the ability to reach more ambiguous conduct where it might be more difficult to prove a criminal conviction in court.”
Wait a minute!
If the conduct is ambiguous and the DOJ would have a difficult time to prove a criminal conviction in court, there should be no non-prosecution or deferred prosecution agreement. Period. End of story. The rule of law commands such a result.
Reading Stack
Over at the FCPA Compliance & Ethics blog, Tom Fox recently published a three-part series on M&A issues and the FCPA. See Part I, Part II, and Part III.
Sherman & Sterling’s mid-year FCPA Digest, including its “Trends and Patterns” is here. Among the trends and patterns:
“Recent paper victories by the SEC could be perceived as setbacks in the Commission’s actions against
individual defendants; andThe SEC has continued its practice of pursuing its theory of strict liability against a parent corporation
for the acts of its corporate subsidiaries.”
Kudos to Sherman & Sterling for adopting the “core” approach to keeping FCPA statistics. (See here for the prior post regarding my suggested “core” approach). The Digest states:
“We count all actions against a corporate “family” as one action. Thus, if the DOJ charges a subsidiary and the SEC charges a parent issuer, that counts as one action. In addition, we count as a “case” both filed enforcement actions (pleas, deferred prosecution agreements, and complaints) and other resolutions such as non-prosecution agreements that include enforcement-type aspects, such as financial penalties, tolling of the statute of limitations, and compliance requirements.”
The most recent edition of Miller & Chevalier’s FCPA Update is here. Debevoise & Plimpton’s always informative FCPA Update is here and Mayer Brown’s FCPA mid-year update is here.
Warning, the enforcement statistics cited in certain of the above updates will cause confusion because they do not adopt the “core” approach.
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A good weekend to all.
A Reminder That The FCPA Has Long Tentacles
The FCPA has long tentacles as FCPA scrutiny and enforcement can impact a wide range of business activities.
Such as merger and acquisition activity.
Two recent developments serve as a reminder.
As noted here, Zimmer Holdings Inc. agreed to acquire Biomet Inc. in a cash and stock transaction valued at approximately $13.35 billion.
In March 2012 Biomet resolved a $22.8 million Foreign Corrupt Practices Act enforcement action ($17.3 million via a DOJ deferred prosecution agreement and $5.5 million via a settled SEC civil complaint). The DPA had a three year term and, as is common, contained the following clause:
“Sale or Merger: Biomet agrees that in the event it sells, merges, or transfers all or substantially all of its business operations as they exist as of the date of this Agreement, whether such sale is structured as a stock or asset sale, merger, or transfer, it shall include in any contract for sale, merger, or transfer a provision binding the purchaser, or any successor in interest thereto, to the obligations described in this Agreement.”
The Zimmer – Biomet merger highlights how FCPA compliance obligations of a target company can be inherited by the acquiring company.
News of General Electric’s possible purchase of Alstom’s energy business highlights how FCPA scrutiny of a target company can be, depending on how the transaction is structured, inherited by the acquiring company.
Alstom has been under FCPA (and related) scrutiny for several years. Among other things, former Alstom employees and business partners have resolved FCPA enforcement actions concerning the Tarahan power plant project in Indonesia (see here and here for prior posts). Documents filed in connection with the individual enforcement actions suggest that the following Alstom projects are also under scrutiny: (i) “projects in Indonesia other than the Tarahan Project, including intended payments to government officials in connection with the Labuan Angin and the Maura Tawar projects;” (ii) “projects in India, including intended payments to government officials in connection with the Sipat, Barh I, and Barh II projects;” and (iii) the following projects in China – “Baima PRC Project,” “Qilu, Maoming, Guangzhou, Wuhan, Jin Men,Yueyang.”
In short, Alstom’s FCPA scrutiny is well known. Thus, a potential GE – Alstom transaction would not seem to implicate many of the thorny due diligence issues discussed in certain FCPA Opinion Procedure Releases or certain hypotheticals discussed in the FCPA Guidance.
In any event, the FCPA Guidance states:
“Companies acquire a host of liabilities when they merge with or acquire another company, including those arising
out of contracts, torts, regulations, and statutes. As a general legal matter, when a company merges with or acquires another company, the successor company assumes the predecessor company’s liabilities Successor liability is an integral component of corporate law and, among other things, prevents companies from avoiding liability by reorganizing. Successor liability applies to all kinds of civil and criminal liabilities, and FCPA violations are no exception. Whether successor liability applies to a particular corporate transaction depends on the facts and the applicable state, federal, and foreign law.”
As referenced in the FCPA Guidance “whether successor liability applies to a particular corporate transaction depends on the facts and the applicable state, federal, and foreign law.”
Here it is important to recognize the following black-letter legal principles.
In a stock purchase agreement, the acquiring company will ordinarily inherit the target company’s pre-acquisition legal liability. In an asset purchase agreement, the acquiring company ordinarily (subject to certain limited exceptions) does not inherit pre-acquisition legal liability of the seller.
In this area, as in others, the free-for-all nature of FCPA enforcement is apparent.
In “The Federal Common Law of Successor Liability and the Foreign Corrupt Practices Act” forthcoming in the William & Mary Business Law Review, Taylor Phillips (Bass Berry) writes:
“Although successor liability is a key aspect of the government’s FCPA enforcement policy, the Department of Justice and the Securities and Exchange Commission have not distinguished clearly between the contexts of mergers, stock purchases, and asset acquisitions. As demonstrated by this article, asset purchases should be recognized as an acquisition structure that minimizes the risk of FCPA liability. That is because the law that should be applicable to such transactions is not a relatively broad federal common law of successor liability. Instead, it is state common law, which traditionally concedes only very narrow exceptions to the general rule of successor nonliability. Furthermore, given the remedial foundations of most successor liability doctrines, it is not obvious that traditional state common law encompasses punitive — much less criminal — successor liability theories.”
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.”
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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.”