Eddie Van Halen died yesterday. He is the first rocker, more or less, of my generation to die after the age of 60. He was also one of the greatest guitarists ever. Indeed, I would rank him as the best guitarist of his generation; that is, after the Clapton/Townsend/Hendrix generation. Rolling Stone in its Top 100 Guitarist list ranked him No. 8 of all time. Van Halen exploded on the scene in 1978 with their self-titled album Van Halen. They even called it “arguably the most perfect debut by any group in rock history”. Van Halen ruled the rock world from that album debut until the mid 1990s, even with the loss of its original leader singer, David Lee Roth, who was replaced by Sammy Hagar.

Eddie Van Halen developed a unique style of two-handed playing. According to his New York Times obituary, he “was most widely revered by his peers for perfecting the technique of two-handed tapping on the guitar neck. That approach allowed him to add new textures, and percussive possibilities, to his instrument, while also making its six strings sound as expressive as a piano’s 88 keys or as changeable as a synthesizer.” When it came to solos, he structured them in roughly “the way Macy’s choreographs its Independence Day fireworks shows: shooting off rockets of sound that seemed to explode in a shower of light and color. His outpouring of riffs, runs and solos was hyperactive and athletic, joyous and wry, making deeper or darker emotions feel irrelevant.” I can only add that he could seriously rock, which is about the best compliment I have for a guitarist. (Check out my top 5 set list at the conclusion of this blog.)

Eddie Van Halen and his guitar work seemed like a good way to introduce the continuing imbroglio of US companies around Foreign Corrupt Practices Enforcement (FCPA) enforcement actions involving joint ventures (JVs). JVs continue to plague many US companies up to this day. In many ways, JVs present more difficult issues for the compliance practitioner than mergers and acquisitions (M&A) because of the control issues present in JVs with foreign governments or state-owned enterprises ownership.

In a 2014 Virginia Law & Business Review article, entitled “Traversing the Minefield: Joint Ventures and the Foreign Corrupt Practices Act”, Daniel Grimm explained that JVs can provide a variety of benefits to a company desiring to enter an international market. Some of the benefits can include: satisfying a local content or partner requirement, a method of international expansion under “which outside investors benefit from the knowledge of local firms while retaining “some operational and strategic control” over the enterprise;” all with a lower overall cost for both resources and integration than required through a traditional corporate merger. Yet these same benefits can also bring greater FCPA risks.

Mike Volkov, in a 2014 article entitled “Digging Down on Joint Ventures and FCPA Compliance”, noted that when you create a JV, there are a number of difficult issues to analyze. Initially, is the requirement of adequate due diligence. This is more difficult than in a traditional merger. Next is the set of governance issues surrounding control of the JV. If your JV partner is a state-owned enterprise, the issues become even more complex. The interactions between the company and the state-owned enterprise within the JV itself should be regulated so that they are not perceived as intended to improperly influence the state-owned enterprise, “either directly or in other areas of interaction.” Even if the JV involves a private, as opposed to state-owned partner, the compliance issue then becomes the controlling the actions of the JV salespeople, JV staff responsible for regulatory interactions, and JV-retained third-party agents and distributors.

A new JV creates a new set of risks for the company subject to the FCPA. In the JV context, the company has, by definition, less control. As a result, these issues need to be addressed in the formation of the JV. The issue becomes even more difficult when the company entering the JV has less than 50 percent control. Grimm noted, “An issuer with a minority stake in another entity is required to “proceed in good faith to use its influence, to the extent reasonable under the issuer’s circumstances,” to cause the entity to comply with the books and records and internal controls provisions of the FCPA. Relevant circumstances include “the relative degree of the issuer’s ownership” and “the laws and practices governing the business operations of the country” in which the entity is located.”

In addition to the traditional direct liability, JVs can be a source of vicarious liability. Grimm noted, “A business entity may, depending on the circumstances, be held vicariously liable for FCPA violations committed by a joint venture, a joint venture partner, or an agent acting on behalf of a joint venture. Vicarious liability traditionally applies in situations where a business entity authorized, directed, or controlled acts that violate the FCPA’s anti-bribery provisions.” It could also violate the accounting provisions around keeping accurate books and records and effective internal controls. This was the situation involving 2016 enforcement action involving Anheuser-Busch InBev in India, where the company paid $6 million to settle charges that it violated the FCPA and impeded a whistleblower who reported the misconduct.

There are other risks that a company must seek to avoid. These include the transfer of things of value to a state-owned enterprise for benefits of someone outside the JV. A company must avoid payments for which there is no legitimate business purpose to the state-owned enterprise in the JV itself; as they will be deemed to be illegal benefits to the state-owned enterprise outside the JV. In this case, the JV becomes a vehicle by which to disguise bribery payments for benefits to those outside the JV.

Any company which operates a JV with foreign governments or state-owned enterprises holds the same FCPA risk as the JV partner itself; the risks become apparent relating to the operation of the JV itself. This means that if the JV interacts with foreign government officials or employee of a state-owned enterprise and leverages its state-owned enterprise relationships for an improper benefit either contracts and/or regulatory licenses, permits or customs approvals; it could well be subject to FCPA scrutiny. Unfortunately, it is often difficult to regulate JV interactions with foreign government officials, particularly when your partner is a state-owned enterprise, or where your company is relying on the local company for its local contacts and expertise for business development and/or regulatory knowledge and experience in the country where the JV operates.

The bottom line is JVs present a unique set of FCPA risks for the compliance practitioner. You will need to incorporate risk management techniques in all phases of the JV relations; pre-formation, the JV agreement and in operations after the JV has begun operation. The compliance obligations and compliance process are ongoing.

Tom’s Top Five Van Halen set list (all from YouTube):

You Really Got Me

Running with the Devil

Pretty Woman

Eruption

Best of Both Worlds

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