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FCPA Issues Can Reduce The Value Of A Merger

Getting transactional lawyers to take the Foreign Corrupt Practices Act seriously can sometimes be an uphill battle.

The recent and ongoing FCPA scrutiny of ABM Industries Inc. should help sell the story.

As noted in this prior post, in December 2011 ABM disclosed in its annual report as follows.  “During October 2011, the Company began an internal investigation into matters relating to compliance with the U.S. Foreign Corrupt Practices Act and the Company’s internal policies in connection with services provided by a foreign entity affiliated with a Linc joint venture partner. Such services commenced prior to the Company’s acquisition of Linc. As a result of the investigation, the Company has caused Linc to terminate its association with the arrangement. In December 2011, the Company contacted the U.S. Department of Justice and the Securities and Exchange Commission to voluntarily disclose the results of its internal investigation to date. The Company cannot reasonably estimate the potential liability, if any, related to these matters. However, based on the facts currently known, the Company does not believe that these matters will have a material adverse effect on its business, financial condition, results of operations or cash flows.”

As suggested by the above disclosure, ABM’s FCPA scrutiny does not involve anything it did, rather it is based on a foreign entity affiliated with a joint venture partner of a company (The Linc Group LLC) ABM merged with December 2010.  As noted in this ABM release, ABM acquired The Linc Group, LLC (“TLG”) for $300 million in cash.

The merger agreement (here) contains a typical target company representation and warranty as follows.

“Section 3.25 Certain Practices. Neither the Company [The Linc Group LLC] nor any Subsidiary (including any of their officers, manager, directors or employees acting on behalf of the Company or any Subsidiary) nor, to the Knowledge of the Company, any other Person acting on behalf of the Company or any Subsidiary, has, directly or indirectly through another Person, made, offered or authorized the use of, or used, any corporate funds or provided anything of value (a) for unlawful payments, contributions, gifts, entertainment or other unlawful expenses relating to political activity, (b) to foreign or domestic government officials or employees in violation of the Foreign Corrupt Practices Act of 1977 and any similar anti-corruption or anti-bribery laws applicable to the Company or any of the Subsidiaries in any jurisdiction other than the United States (collectively, the “FCPA”), or (c) for a bribe, rebate, payoff, influence payment, kickback or other similar payment in violation of any Applicable Law.”

Perhaps FCPA specific due diligence was conducted by ABM prior to closing and the due diligence did not detect the potential FCPA issue or perhaps FCPA specific due diligence was not conducted.

Regardless of the answer, ABM’s FCPA scrutiny, based entirely on the pre-merger conduct of The Linc Group or its affiliates, is reducing the value of the merger.

In its recent quarterly filing (here), ABM disclosed, for the six months ending April 30, 2012, $2.7 million of legal fees and other costs associated with the internal investigation.  Given that ABM’s investigation would appear to be in its infancy, and factoring in potential exposure through an actual enforcement action, it is not hard to imagine that 5% of the merger price could evaporate due to the FCPA issue.  And then of course, there is potential post-enforcement action costs.

For instance, in 2010 Alliance One International resolved an FCPA enforcement action by agreeing to pay $19.5 million in combined DOJ and SEC fines and penalties.  The entire enforcement action was based on the pre-merger conduct of acquired entities.  (See here for the prior post).  Pursuant to a non-prosecution agreement, Alliance One was required to engage a compliance monitor for three years.  In FY 11, the company disclosed $3.4 million in monitor costs.  Earlier this week, in an annual report, the company disclosed an additional $6.1 million in monitor costs.

In short, the FCPA matters, including for transactional attorneys, in the context of M&A.

For previous posts discussing similar merger issues, see here and here.

As readers may know, one of the FCPA reform proposals suggested is in the context of M&A transactions.  The original ABM post from December 2011 linked above, discussed the company’s disclosure in the context of George Terwilliger’s (here – an FCPA practitioner at White & Case and former Deputy Attorney General) period of repose proposal.  The proposal, as Terwilliger explains in this piece “is that US companies, with notice to US enforcement authorities, would have a defined period after an acquisition in which to perform a rigorous FCPA compliance review of the acquired entity. If FCPA compliance issues were uncovered, the acquiring company would remediate them, and disclose both the existence of the problem and its remediation to the government. The acquiring company would be immune from civil or criminal enforcement as to matters uncovered during the review period, which could be on the order of 90 to 120 days.”
As to M&A issues, readers may be interested in this recent publication from Transparency International U.K. titled “Anti-Bribery Due Diligence for Transactions.”  As explained in the publication, the “guidance is intended to provide a practical tool for companies on undertaking anti-bribery due diligence in the course of mergers, acquisitions and investment.”

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