Protecting Against Bribery Risk in Business Transactions Developing an Effective Due Diligence Strategy in Mergers and Acquisitions, Financings, Joint Ventures and Private Equity Investments John W. Boscariol McCarthy Tétrault LLP November 13, 2017
Today s Focus brief overview of anti-corruption enforcement environment impact of anti-corruption compliance on inherent value of your organization mergers and acquisitions initial public offerings private equity investment and acquisition debt financing transactions commercial bank lending joint ventures how to mitigate risk 2
Why Does Anti-Corruption Compliance Matter? consequences of non-compliance with anti-bribery requirements significant hard costs of non-compliance criminal penalties significant monetary fines forfeit proceeds imprisonment operational costs internal investigation executive and employee resources external legal counsel, forensic investigators and other experts probation costs 3
Why Does Anti-Corruption Compliance Matter? hard costs can be eclipsed by reputational costs impact on share price intrinsic value of company as M&A target goodwill and reputation attractiveness to potential business partners possible debarment Public Works and Government Services Canada, Export Development Canada, World Bank, United Nations, Government of Quebec multi-million dollar class actions and shareholder derivative claims US experience now being followed in Canada 4
The Canadian Anti-Corruption Enforcement Environment Canada s historically weak enforcement record Hydro Kleen - guilty plea January 10, 2005 $25,000 fine, less than the amount of the bribe pressure from OECD Working Group on Bribery, Transparency International and others Canada last among the G7 ratified the United Nations Convention against Corruption on October 2, 2007 RCMP international anti-corruption unit established in 2008 with offices in Calgary and Ottawa 5
The Canadian Anti-Corruption Enforcement Environment and now Niko Resources - guilty plea June 24, 2011 $9.5 million fine plus three-year probation/monitoring Griffiths Energy guilty plea January 25, 2013 $10.35 million fine Nazir Karigar (Cryptometrics) convicted August 15, 2013 May 23, 2014 - sentenced to three years in jail July 6, 2017 - appeal dismissed by Ontario Court of Appeal 6
The Canadian Anti-Corruption Enforcement Environment 10+ ongoing RCMP investigations of potential CFPOA violations Blackfire Exploration - RCMP raided Calgary offices July 20, 2011 SNC-Lavalin - RCMP raided offices September 4, 2011 and April 12, 2012 (activities in Bangladesh, Libya, Algeria) CFPOA charges laid against seven individuals so far (all but two have been dropped or dismissed) February 19, 2015 charges laid against SNC-Lavalin for bribe to Libyan officials of $47.6 million in violation of CFPOA para 3(1)(b) defrauding Libyan government of $129.8 million in violation of Criminal Code section 380 7
The Canadian Anti-Corruption Enforcement Environment Nordion voluntary disclosure and declination Other Canadian firms announcing internal investigations and declinations e.g., MagIndustries November 2016 - President of Canadian General Aircraft charged with conspiracy to bribe Thai public officials in proposed deal involving a commercial passenger jet 8
Lessons from Enforcement Experience to Date business as usual or that s how it s done here is not acceptable to the Courts Canadian authorities following U.S. precedent on sentencing, terms of probation, and required compliance measures benefits of voluntary disclosure (Griffiths) and cooperation with authorities (Griffiths and Niko) guidance on what Canadian companies are expected to have in compliance programs (Niko) 9
Lessons from Enforcement Experience to Date cost and exposure penalty and probation financial Niko shares lost 4% of market value when plea announced SNC-Lavalin Griffiths terminated Initial Public Offering operational internal investigation, resources and other costs Griffiths - $5 million internal investigation costs alone Nordion - in excess of $20 million impact on contract with foreign govt/soe and broader debarment concerns (Integrity Regime) reputational impact 10
M&A and Anti-Corruption Precedent and Policy issues identified during M&A transactions are a common manner for corrupt practices to be brought to the attention of regulators cautionary tales and example under FCPA: Titan InVision Latin Node enforcement actions against private equity firms result: increased M&A risk and due diligence costs but fulsome due diligence does strongly mitigate risk 11
Resource Guide to the US FCPA (2012) A company that does not perform adequate FCPA due diligence prior to a merger or acquisition may face both legal and business risks.perhaps most commonly, inadequate due diligence can allow a course of bribery to continue with all the attendant harms to a business s profitability and reputation, as well as potential civil and criminal liability. In contrast, companies that conduct effective FCPA due diligence on their acquisition targets are able to evaluate more accurately each target s value and negotiate for the costs of the bribery to be borne by the target. 12
Resource Guide to the US FCPA (2012) In addition, such actions demonstrate to DOJ and SEC a company s commitment to compliance and are taken into account when evaluating any potential enforcement action. For example, DOJ and SEC declined to take enforcement action against an acquiring issuer when the issuer, among other things, uncovered the corruption at the company being acquired as part of due diligence, ensured that the corruption was voluntarily disclosed to the government, cooperated with the investigation, and incorporated the acquired company into its compliance program and internal controls. 13
M&A Anti-Corruption Risk Assessment and Due Diligence anti-corruption risk mitigation in the M&A context is rooted in the proper due diligence of target entity risk assessment is the first step in this process key risk factors to be assessed include: nature of the foreign jurisdictions in which it operates nature of target s industry sectors target s reliance on government concessions, licenses, leases and/or permits target s reliance on government contracts, revenues or sales provisions in foreign government/soe contracts regarding bribery and exposure to broader debarment concerns 14
M&A Anti-Corruption Risk Assessment and Due Diligence (cont d) key risk factors (cont d): frequency of target s claimed discounts and rebates degree and frequency of target s interaction with state-owned entities target s reliance on third party agents, including brokers and consultants degree of government regulation, oversight and inspection of target s industry and operations target s sophistication and general compliance culture 15
M&A Anti-Corruption Risk Assessment and Due Diligence key risk factors (cont d): target s anti-corruption policies and procedures and the history of its training and enforcement in respect of same degree of target s oversight of its subsidiaries target history of past anti-corruption violations 16
M&A Anti-Corruption Due Diligence: Where to Look and What to Look For example of initial due diligence request: a list of the countries target operates in or sells to and the nature of its presence and operations for each (sales, plant, branch, subsidiary, etc.) a description of target s use of any third party agents or consultants in its operations and in any dealings with government (with copies of agent/consultant agreements) a copy of target s compliance manual, policies and procedures for anti-corruption laws detailed corporate and managerial organizational chart 17
M&A Anti-Corruption Due Diligence: Where to Look and What to Look For example of initial due diligence request (cont d): a list of governments and government-owned or controlled enterprises target does business with (including as customer, supplier, creditor, etc.) and copies of all contracts a list/description of the government permits and licences they require for their operations by country as well as any concessions, production sharing agreements, etc. a description of any internal or external investigation, voluntary disclosure, laying of charges, or prosecution or any other legal proceeding in the last 5 years involving the target related to anti-corruption compliance 18
M&A Anti-Corruption Due Diligence: Drilling Deeper full records of all due diligence and/or audits conducted by target in respect of third party agents and other business partners full financial records of target relating to third party agents, business development, travel and entertainment, petty cash accounts and charitable donations anti-corruption questionnaire focusing on key government touch-points and personnel onsite visits interviews/remote interviews background checks using third party diligence agents agent and consultant interviews 19
Deal Agreements and Anti-Corruption Risk ensure appropriate representations, warranties and indemnities consider obligated parties and appropriate survival periods consider disclosure issues ensure appropriate due diligence out rights ensure appropriate material adverse change clause (MAC) ensure termination rights, break fees and related triggers appropriately account for anti-corruption risk other relevant terms and conditions 20
Proceeding to Acquire: Risk Mitigation Strategies some circumstances will inevitably be difficult: Halliburton and DOJ Opinion Procedure 2008-02 consider using leverage to force target to immediately implement and enforce anti-corruption policies and procedures (i.e., day zero compliance) devise a corrective program for concerning governance structures or operational organization or management consider requiring that target self-report to regulators pre-acquisition (contrast with U.S., i.e. no DPAs, NPAs in Canada so far) ensure that the acquisition itself is not a violation of anti-corruption law 21
M&A vs. Asset Acquisition share acquisitions and ensuing liability asset acquisitions and the doctrine of successor liability the doctrine of successor liability in the civil context Central Sun the doctrine of successor liability in the criminal context Sigma Aldrich concerns regarding coming into possession of proceeds all or part of which were obtained or derived director or indirectly from a CFPOA violation (Criminal Code, Section 354) 22
M&A vs. Joint Venture JVs involve anti-corruption risk in respect of: acts of the JV partner as agent acts of the JV itself as agent keep in mind doctrine of willful blindness deliberately failing to inquire when you know there is reason for inquiry diligence a potential JV partner similarly to an acquisition target or third party agent build appropriate protections into the joint venture agreement, i.e. anti-corruption representations, warranties, covenants, indemnities, audit rights and termination rights pay attention to the JV management and governance structure 23
John W. Boscariol McCarthy Tétrault LLP International Trade and Investment Law www.mccarthy.ca Direct Line: 416-601-7835 E-mail: jboscariol@mccarthy.ca LinkedIn: www.linkedin.com/in/johnboscarioltradelaw Twitter: www.twitter.com/tradelawyer 24