10x EBITDA - less the corruption discount?

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10x EBITDA - less the corruption discount?

New DoJ ruling affirms the principle that sucsessor liability does not create liability where none existed before

Successor liability in M&A transactions

The latest Department of Justice (DoJ) opinion release (OPR 2014-02) affirmed the principle - if affirmation were necessary - that US legal theory of successor liability does not create liability where none existed before. So far so good. It also highlights the fact that if an acquirer which itself was subject to the FCPA acquired and integrated that business it would become liable if the acquired asset continued paying bribes from the date of acquisition. Again no surprises.

If there is no integration the position is theoretically less clear but it would be a brave Counsel who advised the acquirer that it is possible to ring fence exposure.

Whilst we continue to wait for the first Bribery Act prosecutions we can only speculate what the position may be under English law. It would be prudent to assume that any continued course of criminal conduct post acquisition, with or without integration, would create exposure for the acquirer whether that be under the Bribery Act or money laundering laws. So how do acquirers protect themselves against the downside risk of criminal liability and all that flows from that?

OPR2014-02 gives one answer - the facts of the case present a best case scenario for an acquirer who has identified a corruption issue:

  • a previous business relationship with the acquisition target
  • open access to books and records, the ability to ask questions and seek clarification
  • the right to conduct an extensive forensic accounting exercise and, on the basis of a formal review, seek a DoJ opinion - a course of action not available under English law
  • no competition for the deal
  • a material but not large business with revenues of $100m and all its operations in one country

But what if you have a perfect storm? A critical strategic buy of a multinational business, massive competition for the asset, limited disclosure through a controlled document room, no right to ask for further and better particulars or no time to review any results, no fact base or time in which to seek the warm blanket of a DoJ opinion and limited representations and warranties. The purist would say walk away. But that is a legal viewpoint and ignores the fact that businesses have to make difficult judgments - they have to take risks.

So what things that may make a difference to doing the deal?

First, undertake a targeted and as exhaustive an external due diligence program as one can manage in the time frame available. Identify where the risks are objectively the largest and focus on these. Interrogate the public record, but also ask questions - human intelligence is often critical in providing context and texture. Don't just focus on the obvious revenue generating contracts - look at the operational risks too. What are the business structures and how is the business managed. Are there critical dependencies e.g. water permits without which the factories cannot produce?

Second, start planning for the future. If you can't do proper due diligence upfront, make sure once you have acquired the asset you do a proper review afterwards and, if you find a problem, remediate. The DoJ are sympathetic to this position and no doubt the SFO would be too. There is no value in prosecuting a business which is doing the right thing.

Third, if you think there might be an issue but you still want to go ahead, price in a corruption discount. Remediation even at its simplest is expensive. Finally, if external due diligence throws up major concerns, walk away. Dealing with major corruption investigations sucks the life blood out of corporations.

 

Bill Waite
Author: Bill Waite
25th November 2014
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