Anti-Corruption Diligence in the M&A Context

by Skadden, Arps, Slate, Meagher & Flom LLP
Contact

Skadden, Arps, Slate, Meagher & Flom LLP

A successful merger or acquisition requires careful consideration of many components and diligence in a number of specialties. Corruption issues, generally, and the global reach of the Foreign Corrupt Practices Act and the U.K. Bribery Act 2010, specifically, can present unique challenges to the structure of a deal and a party’s approach to diligence. The requirements of anti-corruption deal diligence should be considered at the presigning stage, in connection with the deal structure and after closing. Additionally, less-common approaches to limiting corruption risk can be employed when issues arise.

Before Signing

No predetermined blueprint for anti-corruption deal diligence exists. Current diligence request lists and past approaches are useful but must be adjusted to encompass potential issues for the specific transaction. An acquirer should tailor diligence to the potential target company or investment opportunity, its contact with government officials abroad (including employees of state-owned or controlled enterprises), and the contemplated deal structure. In doing so, it should consider the size of the proposed transaction and whether time and information constraints prior to signing a deal may restrict the scope of diligence. A best practice for acquirers and their advisers is to prioritize regions and topics, including:

  • anti-corruption certifications;
  • geographic risk;
  • sector risk (e.g., targets operating in the oil and gas or pharmaceutical industries);
  • regulatory risks (e.g., jurisdictional nexus of the investment);
  • business model and operating risks;
  • financial and ledger analysis; and
  • recruitment risks (e.g., concern that target has hired high-risk individuals or their relations).

In considering the scope of diligence, the amount of information made available for review will depend somewhat on whether the target company is a private or public company. More information may be provided to the acquirer in a private deal, whereas a deal involving a public target may require the counterparty to exhaust publicly available information as well as implement more rigorous post-closing diligence in the integration process.

During the Structuring of a Deal

A deal’s structure and the terms of the acquisition agreement may be crafted or modified to offer the acquirer increased protection from corruption-related liability. While not a substitute for adequate due diligence in mitigating corruption risks, representations and warranties in the contract may be used in conjunction with disclosure schedule requirements as a means to gather information prior to signing. Parties also can use closing conditions and indemnification provisions to allocate corruption risk at and after closing. In more extreme cases or where risks are isolated in jurisdictions or businesses that are less significant to the overall transaction, it may be feasible (and preferable) to structure the deal to exclude high-risk regions or business units entirely.

Insurance

Insurance products may help as well. Representation and warranty insurance offers a useful layer of protection but has certain limitations. Anti-corruption-related coverage for the breach of a target company’s representation regarding compliance may need to be negotiated specifically with the insurer, which will conduct its own deal diligence prior to underwriting a policy. Even if such coverage is included, a typical buyer-side limit of coverage of 10 percent of the purchase price may not fully address the costs associated with a compliance problem. Further, insurance does not cover the diminution of value of the acquired company that may result from the discovery of large-scale corruption issues.

Investigation insurance may protect against costs of investigations by the Securities and Exchange Commission, Department of Justice or other relevant enforcement authorities but typically will not cover liability fines and penalties. Finally, consider that policy limits may be inadequate given fees associated with large-scale, multijurisdictional anti-corruption investigations.

Phased Investment

One novel approach to managing anti-corruption risk is a phased or staged investment in a target company. An acquirer that is not comfortable with a target’s corruption risk may consider an initial, limited investment, which should be well below the threshold at which regulators will impute control. The acquirer can invest further if the target company meets compliance benchmarks. For instance, the acquirer can increase its investment in years two through five if the target meets detailed anti-corruption compliance metrics.

One novel approach to managing anti-corruption risk is a phased or staged investment in a target company.

Additionally, the acquirer may consider negotiating an exit option for breach of compliance covenants. Where specific individuals within the target entity may have a unique heightened corruption risk, side-letters may be negotiated to memorialize personal compliance commitments. Arrangements of this nature are uncommon, but the investor may be able to balance the burden and demonstrate genuine interest in the ultimate investment by assuming the cost for some of the compliance enhancements.

Post-Closing

After closing a deal, an acquirer should assume that any prior corrupt practices and related violations of the target company will become the acquirer’s responsibility. Regulators rarely take enforcement action for preclosing activities unless they have continued post-closing; however, it is in the acquirer’s interest to promptly remediate any known issues and to implement its anti-corruption compliance regimen at the acquired entity as soon as possible. Appropriate post-closing diligence and integration will be beneficial to limiting potential liability for preclosing wrongful conduct. Major corruption issues should be identified, considered with appropriate counsel, remediated and reported to enforcement authorities as appropriate.

Integral in this diligence and integration process is a holistic approach that establishes and regularly reinforces the tone at the top and includes visits to the field for diligence reviews and substantive training seminars. An effective compliance program starts at the corporate office and should be communicated regularly in a meaningful manner to an entire organization, wherever in the world it operates.

Download pdf

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.

© Skadden, Arps, Slate, Meagher & Flom LLP | Attorney Advertising

Written by:

Skadden, Arps, Slate, Meagher & Flom LLP
Contact
more
less

Skadden, Arps, Slate, Meagher & Flom LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.