The FCPA and Mergers and Acquisitions

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In a webinar on December 2, 2010, Michael Volkov, partner in the law firm of Mayer Brown and Ryan Morgan, Sales and Alliance Director of World Compliance, discussed the implications of the Foreign Corrupt Practices Act (FCPA) to mergers and acquisition.

They advise that businesses which seek to minimize their FCPA liability risks should pay careful attention to the potential exposure created by merger and acquisition activity. This is due to the fact that unwary companies can “purchase” FCPA liabilities by failing to conduct appropriate due diligence of their intended transaction partner. On the other hand, companies alert to those risks have been able to avoid successor liability altogether or, more frequently, obtain assurance about the scope of potential FCPA liability before the transaction is complete. Indeed, successor liability may attach in a stock transfer or merger because the assets and liabilities of the target company generally transfer to the acquiring company after closing; or the liability may attach in an asset purchase depending on the extent of the purchase and whether the target business is continuing or if the purchase agreement specifies which assets and liabilities transfer.

There are several recent examples where companies, which acquired targets, sustained large FCPA fines for the FCPA violations the acquired companies had engaged in prior to the acquisition. These include the Alliance One matter resolved this past summer with a $4.2 million fine for pre-acquisition conduct and $10 million in profit disgorgement. There was also the $240 million fine levied against Saipem for conduct of an acquired subsidiary of ENI, Snamprogetti, where the conduct at issue occurred over 2 years prior to the acquisition. One of the strongest examples is that of eLandia International Inc., which acquired Latin Node Inc., in 2007. Thereafter, it discovered potential FCPA violations, which it self-reported to the DOJ. As reported in the FCPA Blog, in addition to a $2 million fine, eLandia also disclosed that its purchase price for Latin Node “was approximately $20.6 million in excess of the fair value of the net assets” mostly due to the cost of the FCPA investigation, the resulting fines and penalties to which it may be subject, the termination of Latin Node’s senior management and the resultant loss of business. eLandia eventually wrote off the entire investment by placing Latin Node into bankruptcy and shuttering the acquisition.

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Published In: International Trade Updates, Securities Updates, Mergers & Acquisitions Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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