Anti-bribery due diligence in mergers and acquisitions

Anti-bribery due diligence in mergers and acquisitions
Two years after the Bribery Act 2010 came into force the hysteria surrounding the Act has abated. There are fewer media pundits pronouncing the end of UK plc as we know it and there are fewer newly invented “legal experts” opining on an area they knew little or nothing about but which they saw as a potential earner to fill the gaping hole left by declining litigation and commercial transactions. Of course, this may change when we see the first large prosecution by the Serious Fraud Office (SFO), though that is probably still some way off. The Act has not been in force long and is not retrospective; this means that criminal conduct has to occur, has to be discovered, has to be investigated and, once investigated, for a prosecution to follow, there needs to be sufficient evidence to give rise to a realistic prospect of success and the prosecution needs to be in the public interest. Added to which of course, is the fact that the new director of the SFO, David Green QC, and the judiciary have raised the bar by shutting the door on deals. This means that if and when a case is brought, conviction will have to be as close to a certainty as any criminal process can be. The SFO could not survive another high profile failure. So has the Act, in the absence of a prosecution, had a discernible impact on the way in which UK multinationals conduct their business? And if so, in what way? The answer to the general question, for our clients at least, is no. Most, if not all, were subject to the Foreign Corrupt Practices Act (FCPA) jurisdiction, and therefore had in place extensive “adequate procedures”, albeit by another name. Some sectors such as insurance (see the FSA review) and shipping were notable exceptions, and in some areas such as private banking there was more form than substance. But generally the Act has driven refinement and a degree of greater engagement rather than a revolution in business practices or processes amongst major multinationals. There has been one discernible exception to this general theme, and that relates to mergers and acquisitions where we have seen a great deal more attention being paid to pre-acquisition anti-bribery due diligence. Three recent, but typical cases, make the point. In the first case, we acted for a major resource company that was entering into a joint venture with an offshore entity which had the rights to explore and exploit reserves should they be found. Our client was making capital investment and also bringing considerable expertise and knowledge to bear - they were also going to have significant involvement in the management and control of the joint venture. The joint venture partner was primarily bringing the rights and local knowledge. We were instructed to help our clients understand how the rights had been acquired by the joint venture partners. Was it an open market transaction? Was the bidding process fair and transparent? Did the principals have any experience in this field? Where had they generated the capital to bid for and acquire the rights? Had they actually transferred value for the rights? Were they or their families either directly or indirectly connected to government officials? Our client was clearly concerned by the risk of successor liability pursuant to the FCPA. But it was equally concerned by the Bribery Act and the guidance issued by the Ministry of Justice in relation to the operation of joint ventures. Specifically, they felt that they would be without a defence under the Act should it be discovered that the rights were acquired in breach of the Act and that they had done no due diligence prior to entering into the transaction. Their procedures would be “inadequate”. Happily, in this particular case, we were able to point to an open and transparent process, appropriate skills and resources within the joint venture partners, ownership and management structure and a lack of connection to any foreign government official. The second case involved the prospective sale of an engineering consultancy business which was headquartered in England but which generated significant sales in Russia. It was a private equity funded business and had achieved success in selling services to Russian oil and gas companies. The private equity house was seeking to divest its interest and had agreed outline heads of terms when the prospective acquirer raised the fact that the company had a number of advisory board members, some of whom were minority shareholders who had in the past worked for government agencies which were related to oil and gas companies. Our client had recruited these individuals for their knowledge of regulation and of the market and not to generate specific contracts. In order to proceed the acquirer required comfort that contracts had not been secured through the advisory board members paying bribes to family, friends and former colleagues. The challenge of proving a negative was not straightforward. It involved demonstrating both that the client had a unique skill set which met the requirements of their client and providing detailed and independently researched profiles of each of the advisory board members, providing precise career histories and demonstrating their ability, or more accurately, lack of it, to influence the decision-making processes of the buyers of the services. These reports gave the acquirers sufficient comfort to proceed with the transaction. The third case also involved a private equity funded business which was in the process of preparing itself for a sale. During the presale review the private equity house identified that, prior to the Act coming into force, payments had been made to tax officials to finalise year end accounts which were then consolidated into the holding company’s numbers. While the values were relatively small and had only been made at or around year end, there was clearly a potential issue. In addition to undertaking a forensic accounting review to establish precise values, demonstrating that appropriate tax was in fact paid and conducting a review of email and other communications between the regional management and the tax officers, we were instructed to investigate and produce a report on local market practices. This review demonstrated that the client’s experience was far from unique and many other businesses were subject to the same requests from revenue employees, and had acceded to them. Whilst not a defence, the information allowed the client to quantify the issue and to place it in the context of the market. It also allowed the client to restructure and then re-enforce its policies and procedures to ensure that there was no repetition of the conduct. Again, the private equity client was focused on both the Ministry of Justice’s guidance and on Richard Alderman’s - then the director of the SFO - public announcement that he was prepared to consider giving pre-transaction clearance in appropriate circumstances. Whilst David Green QC has publicly stated that he will not give pre-transaction clearance, he has emphasised the code for prosecution. Specifically, he has said that in circumstances where there is a potential merger or acquisition and where historical conduct which might have breached the then law is discovered, if that conduct has been terminated and there has been a change of management, policies and procedures, it is unlikely that even if the evidential test were met that it would be in the public interest to prosecute the company or its successor. His approach is sensible and it reflects the US’s position. In 2012 the Department of Justice issued its own guidance in which it stated that enforcement action based on successor liability is unlikely unless there are “egregious and sustained violations” and, in so doing, recognised that society benefits when good corporations take over bad ones. The answer then as to why the Act has had an impact in this area is that clients recognise that anti-bribery due diligence has a value in mergers and acquisitions and that conversely, a failure to undertake due diligence, risks them having no section 7 defence and being accused of egregious and sustained conduct if subject to the Department of Justice’s scrutiny. Without wishing to reignite the hysteria which accompanied the enactment of the Act, I think it is right to say that carrying out a merger or acquisition without anti-bribery due diligence may well provide David Green QC with the slam dunk he is looking for and our clients know that. By Bill Waite Group Chief Executive Officer
Published: 8th August 2013