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.
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.
