Don t Buy An Enforcement Action: Regulatory Pre-Transactional Due Diligence

Transcription

1 Don t Buy An Enforcement Action: Regulatory Pre-Transactional Due Diligence Identifying and Mitigating Compliance Risks April 26, 2017 New York Panelists: Stephen C. King, Senior Vice President, Counsel, Investigations, MasterCard William Devaney, Partner, Baker McKenzie New York Thomas Firestone, Partner, Baker McKenzie Washington DC

2 Agenda 3:40 pm - 3:45 pm: Introduction 3:45 pm - 4:00 pm: DOJ / SEC Enforcement and Expectations 4:00 pm - 4:05 pm: The View from Other Regulators 4:05 pm - 4:15 pm: Pre-Transactional Regulatory Diligence, Key Steps 4:15 pm - 4:25 pm: Post-Acquisition Integration 4:25 pm - 4:30 pm: Q&A 2015 Baker & McKenzie LLP 2

3 Why Should I Care? Importance of Compliance Awareness M&A risk What can non-compliance cost you in a share or asset acquisition? You may inherit liabilities Historic breaches of law and regulations pre-acquisition Post-acquisition, continuing conduct triggers new compliance breaches Potential infringement of accounting rules arising from consolidation of target based on inaccurate recording You may face extensive clean-up costs Possible impact on share price and reputation You may lose business due to: Target s business model is unsustainable Loss of customer base Exclusion from future procurement contracts JV risk: special challenges 3

4 Why Should I Care? Successor Liability Scenarios Non-compliant practices in the Target s past, though no longer ongoing post acquisition Did the target fall under US jurisdiction pre-acquisition? Non-compliant practices in the Target s past from which the Target continues to benefit (e.g., contracts secured through payment of bribes continue to run) Target acquired and pattern of non-compliant activity continues 4

5 M&A Due Diligence: Regulatory Perspective

6 US FCPA DOJ/SEC Resource Guide Successor companies assume the liabilities of the predecessor company. There is no retroactive liability where the predecessor was not subject to FCPA. DOJ and SEC therefore encourage pre-acquisition due diligence and compliance programs / internal controls post acquisition for a variety of reasons. First, due diligence helps an acquiring company to accurately value the target company and negotiate cost of bribery to be borne by the target. Second, due diligence reduces the risk that the acquired company will continue to pay bribes. Third, the consequences of potential violations uncovered through due diligence can be handled by the parties in an orderly and efficient manner through negotiation ( ) and remediation. Finally, comprehensive due diligence demonstrates a genuine commitment to uncovering and preventing FCPA violations. This is taken into account when evaluating enforcement action. 6

7 US FCPA DoJ Opinion 08/02, 13 June 2008 (Halliburton) Unique circumstances: Limited pre-acquisition due diligence and remediation due to insufficient time and inadequate access Sought non-enforcement commitment from the DOJ with aggressive schedule for a post-acquisition corruption risk audit and disclosures to the government, with specific timetables for the review Halliburton s timetabled post-closing plan included: Presentation of comprehensive, risk-based FCPA and anti-corruption due diligence work plan to DOJ Retaining of external counsel and third-party consultants, including forensic accountants Reporting results to DOJ of high, medium and lowest risk due diligence and periodic progress reports thereafter Ongoing agents and third parties to sign new contracts with FCPA provisions and ABC reps and warranties with Halliburton. Remedial action to be taken in to relation to agents or employees involved in FCPA/corruption issues Implementation of Halliburton s Code of Conduct and ABC Policy throughout Target and associated training for all personnel 7

8 US FCPA DoJ Opinion 14/02, 7 November 2014 Requestor planned to acquire a foreign company riddled with suspected illegal payments to foreign officials and inadequate accounting practices. DOJ confirmed would not take action because the Target had never been subject to U.S. criminal jurisdiction Reminder that DOJ and SEC expect companies to do everything possible in terms of due diligence prior to the acquisition or, to the extent pre-acquisition due diligence is not possible, to undertake a thorough compliance review promptly following the acquisition DOJ appears to take a pragmatic stance when dealing with companies that adopt a careful and reasonable approach to pre-acquisition diligence, post-acquisition integration and cooperation with the government Requestor said it had a post-acquisition plan to shut down all of the Target's business that was tainted by suspected illegal payments. The plan included imposing a strict compliance regime on the Target, widespread changes to the accounting practices, training for directors, employees, and thirdparty agents, and a full-blown compliance audit soon after the close of the acquisition, with remedial action to follow 8

9 Transparency International Investment Risk Anti-bribery due diligence should be applied to all investments but on a risk-based approach, with the level of due diligence being proportionate to the investment and the perceived likelihood of risk of bribery In many cases the necessary information for due diligence may not be accessible, such as in acquisition of public companies, hostile take-overs, auctions or minority investments. This does not obviate the need for anti-bribery due diligence, but has an effect on the timing i.e., it may need to be undertaken post-closure. A good practice approach characterises ethical and responsible businesses, but is also the most effective means for companies to manage bribery risks across multiple jurisdictions and in a changing legal and enforcement environment. Guidance on Anti-Bribery Due Diligence for Transactions 9

10 Transparency International Six Stage Model Due Diligence Process 1. Initiating the process 2. Initial screening 3. Detailed analysis 4. Decision 5. Post acquisition due diligence 6. Post acquisition integration and monitoring 10

11 Case Study Halliburton/KBR (2009) The Facts Dresser Industries, Inc. merged into Halliburton in September Two subsidiaries of each company were combined to form Kellogg Brown & Root LLC ( KBR ). KBR was spun off into a separate public company by Halliburton in KBR admitted paying Nigerian officials at least $182 million in bribes for contracts awarded between 1995 and The contracts were worth more than $6 billion to the consortium awarded them. The Fine KBR pleaded guilty and agreed to a fine of $402 million to settle the DOJ criminal charges. KBR and Halliburton agreed to a further $177 million to settle the SEC s civil charges. The SEC complaint states that after the Dresser acquisition, Halliburton's due diligence didn't detect any bribe payments and failed "to devise and maintain adequate internal controls to govern the use of foreign sales agents and failed to maintain and enforce the internal controls it had. Under their agreement for KBR's spin off, Halliburton was obliged to pay most of KBR's fines and other penalties for the FCPA violations. 11

12 Case Study General Electric Company (2010) The Facts The Fine GE and four subsidiaries paid kickbacks totaling $3.6 million from 2000 to 2003 under the United Nations oil for food program relating to the sale of medical and water purification equipment to the Iraqi government. GE acquired two of the subsidiaries, Amersham plc and Ionics Inc., in 2004 and At the time of the violations Ionics, Inc., and Amersham plc were subject to the SEC s jurisdiction because they were a publically listed company in the US and listed ADRs on the NYSE respectively. GE acquired the liabilities of both, along with the assets, in the 2004 and 2005 acquisitions. GE agreed to pay the SEC penalties of $23.4 million GE, Ionics Inc. and Amersham plc all failed to maintain adequate systems of internal controls to detect and prevent the payments The SEC said that in settling the case, it "considered remedial acts promptly undertaken by GE and the cooperation the company afforded the Commission staff in its investigation. 12

13 Case Study Goodyear (2015) The Facts Goodyear acquired a majority stake in Treadsetters (a tire company) in Treadsetters found to have paid bribes to government and private sector workers in exchange for sales in Kenya and Angola. Goodyear made a voluntary disclosure to the US regulators. The Fine Goodyear was sanctioned $16.2 million by the SEC. Goodyear did not detect or prevent the improper payments due to inadequate due diligence when it acquired Treadsetters and failure to implement adequate FCPA compliance training and controls after the acquisition. Goodyear also found to have violated books and records rules when officials of Treadsetters falsely recorded USD 3.2 million in bribes as legitimate expenses over a four year period. SEC took into account that Goodyear had engaged in early and substantial co-operation with enforcement officials and tried to institute remedial measures. 13

14 Case Study Zimmer Biomet (2015) The Facts The Fine Zimmer acquired Biomet in June 2015 and changed the name of the company to Zimmer Biomet. Biomet had entered into a DPA with the DOJ (including the appointment of an independent monitor) in 2012 relating to corruption at Biomet s subsidiaries in Brazil and other countries. Despite the DPA, Biomet s subsidiary in Mexico paid bribes to customs officials through an agent and continued to use a Brazilin distributor that had previously paid bribes to win business for Biomet. The independent monitor was unable to certify the compliance programme complied with the requirements of the 2012 DPA. In January 2017 Zimmer Biomet agreed to pay $30.5 million to the DOJ and SEC for the repeat violations of the FCPA and entered into another DPA with the DOJ. JERDS, an indirect subsidiary, pleaded guilty to a books and records violation. The DPA stated that Zimmer Holdings, Inc. acquired Biomet, Inc. and thus knowingly assumed the rights and the obligations of Biomet under the 2012 DPA. Zimmer Biomet was given credit for full cooperation and providing information about individuals involved. 14

15 M&A Due Diligence: Key Stages

16 Enhanced Diligence How Should Buyers Approach Compliance Issues? Compliance should be a prominent area of focus at all phases of a corporate transaction Contractual protection? Due diligence Preliminary risk analysis Risk-appropriate extension of due diligence Further detailed due diligence? Contract drafting & negotiation Consider risk-based behavioural warranties and specific indemnities Structural protection? Crystallize deal structure Consider carve outs and conditions precedent Reporting obligations? Obligations Options Post-closing Compliance audit Clean up Post-closing integration Consider pursuing contractual remedies as appropriate Consider internal amnesty 16

17 Enhanced Diligence Is the Proposed Acquisition or JV Increasing your Compliance Exposure? Elements of a targeted approach Undertake preliminary risk analysis/assessment to frame the due diligence process: Tailored checklist of compliance questions Look for red flags Review financial due diligence reports New operations in emerging markets may be areas of greatest risk Understand the risk better; what is the Target s actual risk exposure, compliance position and corporate culture Management interviews with targeted questions around business operations Where risk appears to be high consult or employ forensic accountants to help identify patterns of conduct 17

18 Enhanced Diligence Preliminary Risk Assessment Initial desktop review Purpose To assess the extent of target s vulnerability, e.g., to corruption: Identify potential red flags and enable a buyer to tailor its diligence accordingly Note, other risks may arise such as antitrust, export controls, sanctions, customs, excise, tax etc. Key considerations Business location/markets Ownership and equity interests Touch points with government officials/public sector Industry sector Reliance on critical permits Customer profiles Sales processes/use of intermediaries Adverse press/media 18

19 Transparency International Corruption Perceptions Index

20 Enhanced Diligence Some Compliance Red Flags Corruption (1) Country/industry has reputation for corruption Lots of cash transactions (when other means available e.g., wire transfer) and poor controls or documentation Target/business partner/intermediary has ties to government officials Public official recommends business partner/intermediary Business partner insists on anonymity Business partner lacks resources to perform services Excessive compensation to business partner 20

21 Enhanced Diligence Some Compliance Red Flags Corruption (2) Unusual methods of payment (e.g., proceeds directed to third country); lack of transparency Business partner invoices lack detail or description does not match services Business partner refuses to sign compliance clauses Business partner avoids written communication Use of service providers located outside the territory in which the services are to be rendered and/or payments made offshore Use of service providers, e.g., sub-contractors where little or no evidence of services actually provided or levels of fee/commission seem high for services provided 21

22 Enhanced Diligence Some Compliance Red Flags Sanctions/Money Laundering Sanctions: Any link to a territory subject to extensive sanctions programs (notably Cuba, Iran, Sudan, North Korea, Syria, Myanmar and Russia) Involvement in sectors that have an enhanced level of exposure to export controls and/or sanctions (notably, the military, nuclear, oil and gas, energy, mining and ITC sectors) Money Laundering: Shielding of beneficial owners Does business with shell companies Numerous cash transactions just under the legal threshold for reporting Financial activity that does not match business operations 22

23 Enhanced Diligence Some Compliance Red Flags Anti-Trust Participation in trade associations or other industry bodies Other meetings or exchanges with competitors Existence of regulatory or other market factors that are imposing pricing pressure, and discussion of same with competitors Market dominance Any contractual clauses in agreements with competitors that relate to sharing territory, customers, exchange of confidential information and limitation of supply Any limitation on a distributor, reseller or licensee relating to the price at which it can sell, to whom it can sell and where it can sell (including online) the company s products 23

24 Enhanced Diligence Understanding the Target s Corporate Culture Avoid compliance surprises Investigate whether the target company or JV partner has A compliance program (addressing anti-bribery and corruption laws, international trade compliance and other corporate compliance risks) A culture of compliance - leadership, training, awareness A control environment - need to check for evidence of follow-up in relation to reported breaches Any investigations or remediation currently underway If there are compliance issues which warrant attention and remediation, the acquirer should have a clear Day 1 compliance program with a firm timetable for specific remedial measures An acquirer should correct any books and records entries of the Target it learns or knows to be inaccurate 24

25 Post-Acquisition: Further Diligence and Integration

26 Post Acquisition Diligence and Integration Depending on the extent of the pre-acquisition exercise this could range from a full-blown risk assessment with anticipated remedial steps and investigation to integration of two well established compliance programs. Approach is similar to a pre-transaction diligence. Assess risks Promulgation of due diligence questionnaire to senior and operational management. Review of documents including policies, procedures, controls, contracts, payments, licences and communications surrounding high risk transactions. Focus on: Third-party interactions with the government either in sales or operationally License, permits, authorizations, Customs, tax Site visits and interviews with executives and employees. Forensic review of transactions and cash flow. 26

27 Post Acquisition Diligence and Integration Remediate any control weaknesses discovered. Policies, procedures, accounting controls, training, contractual provisions, etc. Investigate any potential regulatory, criminal or ethical violations. Fold target into compliance program, including harmonising policies and procedures, training, contractual provisions and accounting controls. If violations of the law are discovered, consider disclosure. 27

28 Questions

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