In the context of acquiring a foreign company, successor

Transcription

1 Executive Summary Avoiding the Threat of FCPA Successor Liability In the context of acquiring a foreign company, successor liability presents a significant unknown risk. A post-merger successor can face criminal liability under the anti-bribery provisions of the Foreign Corrupt Practices Act (FCPA). A company seeking to acquire a target that has either an actual history or a significant risk of bribery or corruption must ensure that its intent to comply with the FCPA is absolutely clear. The importance of this intent is made clear in relevant case law and guidance provided by the DOJ. The DOJ guidance provides that, as a matter of principle, a parent company should not be criminally charged for successor liability when it has demonstrated an intent to abide by the law. The authors note that the DOJ has repeatedly demonstrated a willingness to decline prosecution of companies that take meaningful, proactive steps to avoid and prevent FCPA violations. A company can demonstrate its intent to abide in a variety of ways, such as a robust compliance program or its response to misconduct. Further, the DOJ's FCPA Guide provides hypothetical fact scenarios that reveal what it considers punishable conduct as well as what the DOJ expects of a company in such an acquisition. In addition to this guidance, potential acquirers are able to get transaction-specific guidance from the DOJ prior to an acquisition through an Opinion Procedures Release (OPR). However, very few OPRs are released annually. This FCPA caselaw and guidance point to three key steps to avoiding FCPA successor liability. First, a strong compliance program signals to the DOJ a company's intent to abide by the FCPA. Second, acquirers must conduct appropriate due diligence both before and after an acquisition. A company will receive little benefit of the doubt for failing to conduct sufficient due diligence. Third, a company's response to discovering an FCPA violation is of paramount importance in demonstrating a lack of criminal intent. Disclosures of such violations should be made voluntarily and should be reasonably prompt. These are concrete steps a company can take to demonstrate its intent to comply with the law before, during, and after the acquisition process. Read the full article» TransactionAdvisors.com BY WILLIAM E. LAWLER, III, ESQ. William Lawler is a Partner in Vinson & Elkins Washington, D.C. office and Co-head of the firm s Government Investigations and White Collar Practice Group. He represents corporations, organizations, government entities, and individuals in a wide variety of difficult and sensitive matters. BY ANTHONY J. PHILLIPS, ESQ. Anthony Phillips is an Associate in Vinson & Elkins' Houston office. He is a former federal prosecutor and experienced white collar lawyer whose practice focuses on government and internal investigations, compliance counseling, and complex business litigation. Published by Transaction Advisors. Reprinted by permission.

2 WHAT YOU DON T KNOW... : AVOIDING THE THREAT OF FCPA SUCCESSOR LIABILITY By: William E. Lawler, III and Anthony J. Phillips We all worry about the unknown. Whether you are a corporate executive, a board member, or a private equity investor, or a lawyer advising any of the above, perhaps the most significant concern going into any acquisition process is gathering all the facts. Failure to answer all of the unknowns can lead to terrible outcomes, including wildly inappropriate valuations. When acquiring a business with operations outside the United States, there is perhaps no riskier unknown than the threat of FCPA successor liability. The Department of Justice ( DOJ or the Department ) has repeatedly warned that it will hold parent companies liable for criminal violations of the FCPA committed by their subsidiaries, and the DOJ s FCPA enforcement history bears out that warning. In 2009, as successor to the then-insolvent, Latin Node, elandia International Inc. paid a $2 million criminal penalty for FCPA violations committed prior to the acquisition. Unbeknownst to elandia, Latin Node had for years used bribes to acquire and retain business in Honduras and Yemen. elandia discovered the violations shortly after acquiring Latin Node, promptly disclosed the violations to the DOJ, agreed to cooperate with the DOJ, and subsequently fired Latin Node s senior managers. Nevertheless, not only did elandia lose over $20 million in value from its acquisition, but it was also held accountable for the criminal penalty sought by the DOJ for Latin Node s violations. Only four years after elandia paid dearly for Latin Node s FCPA violations, in September 2013, Agilent Technologies, Inc. ( Agilent ) disclosed an internal investigation by outside counsel to determine whether Agilent employees had violated the anti-bribery provisions of the U.S. Foreign Corrupt Practices Act ( FCPA ). As reported in a Form 10-Q filed with the Securities and Exchange Commission ( SEC or the Commission ), Agilent discovered during a routine audit that employees of its Chinese subsidiary did not comply with the company s Standards of Business Conduct and other policies. Noting that the duration, scope, cost, [and] result of its internal investigation were unpredictable, and that the company did not know whether the government [would] commence any legal action, Agilent as parent of the 1

3 Chinese subsidiary faced a significant threat of FCPA successor liability. Agilent, like elandia, made a voluntary disclosure to the DOJ and pledged cooperation. Unlike elandia, however, on September 30, 2014, Agilent was able to announce that the DOJ had closed its inquiry into the matter without taking any action against the company. Despite the similarities between the responses of Agilent and elandia, the outcomes of those cases stand in stark contrast to one another. One company emerged relatively unscathed; the other saw its acquisition value plummet and paid a criminal penalty to boot. These highly disparate outcomes leave observers in the dark about the actual threat of criminal prosecution and the true costs associated with FCPA successor liability. A review of criminal successor liability case law, reference to published DOJ guidance, and examination of past FCPA successor liability cases suggest reliable answers to this lingering unknown. SUCCESSOR LIABILITY IN CRIMINAL LAW A LONGSTANDING PRINCIPLE The threat of successor liability is very real in the criminal context. After a merger, for example, successor companies may be punished in the event that pre-merger misconduct by one or more predecessors is discovered. In the seminal U.S. Supreme Court case of United States v. Melrose Distillers, two corporations were each indicted under the Sherman Act for antitrust violations and thereafter merged. Following the merger, the successor company was prosecuted and ultimately convicted for the crimes of its predecessors. The Supreme Court held that, under the relevant state laws, the corporate lives of the two offenders continued for purposes of imposing criminal liability. Several federal circuit courts have used similar reasoning to affirm convictions of postmerger successors under a variety of other federal criminal statutes. The 9 th Circuit in United States v. Polizzi (enforcing Travel Act against surviving or consolidated corporation), the 10 th Circuit in United States v. Mobile Materials (describing the pivotal question as whether there was sufficient vitality to corporate life... to subject the corporation to criminal prosecution ), and the 5 th Circuit in United States v. Alamo Bank (state statutes expressly provided for post- 2

4 merger continuing existence of Bank Secrecy Act violator) all imposed criminal liability on a successor for pre-merger crimes by predecessor companies. A post-merger successor can face criminal liability under the anti-bribery provisions of the FCPA, too. In Alliance One Int l, two predecessor companies merged to form a single successor, Alliance One International, Inc. ( Alliance One ). In addition, the companies also merged certain of their wholly owned subsidiaries as separate successor subsidiaries under the ownership of Alliance One. After discovering that the successor subsidiaries had paid dozens of foreign bribes prior to the creation of Alliance One, the DOJ charged the successors with FCPA violations alleging that they were legally accountable for the criminal acts of [their] predecessor corporation[s]. A stream of guilty pleas followed, and the successor companies admitted that they were responsible for the acts of [their] officers, employees, and predecessor corporation[s] as described. Given the Supreme Court s Melrose Distillers analysis, and the legal theories used to justify successor liability in Sherman Act, Travel Act, Bank Secrecy Act, and other criminal cases, such acceptance of post-merger successor liability in the FCPA context is no great surprise. To a significant extent, however, form matters. One significant difference between civil and criminal law that helps protect companies from criminal successor liability in the acquisition context is the requirement of mens rea or criminal intent. The United States Supreme Court explained in United States v. Gypsum Co., that a criminal defendant s intent to break the law is not subject to a legal presumption. In other words, the government must present evidence to prove that the required level of criminal intent existed at the time of the criminal conduct. The Supreme Court held in United States v. Bestfoods that a parent company could not be held liable for its subsidiary s CERCLA violations unless the parent actively participated in and exercised control over the polluting subsidiary. Although decided under corporate law principles, the Bestfoods case suggests that holding a successor accountable requires proof that they intended the illegal conduct. The same principle has been applied in the FCPA context. In United States v. Kay, the 5 th Circuit held that a conviction under the FCPA requires a jury to find beyond a reasonable doubt that the charged defendant acted corruptly and willfully (i.e., with criminal intent). While 3

5 elandia s disastrous purchase of Latin Node suggests that FCPA successor liability is a threat in the acquisition context, too, the intent element is certainly more complicated after an asset purchase or similar transaction where the wrongdoer does not survive the acquisition and the successor played no role in the misconduct. Given the lessons of Gypsum Co. and Bestfoods, it is hard to imagine that the government could prove an acquirer intended the pre-acquisition misconduct of its target. As the disparate elandia and Agilent outcomes suggest, the government has incredible discretion when enforcing the FCPA. The risk of DOJ enforcement in a given case is difficult to predict. Fortunately, as we explore next, the government has provided useful guidance to companies trying to minimize the risks associated with FCPA successor liability. DOJ GUIDANCE ABOUT CRIMINAL SUCCESSOR LIABILITY A company seeking to acquire a target that has either an actual history or a significant risk of bribery or corruption must ensure that its intent to comply with the FCPA is absolutely clear. As well as anyone, the Department of Justice understands the legal importance of intent. To that end, the DOJ has provided three sources of guidance for acquirers seeking to avoid FCPA successor liability: DOJ Principles of Prosecution First, the Department has summarized its policies regarding the unique issues involved in criminal prosecution of corporations in the UNITED STATES ATTORNEYS MANUAL, Chapter , titled, Principles of Federal Prosecution of Business Organizations ( DOJ Principles ). As noted in Section , the DOJ Principles direct federal prosecutors to ensure that the general purposes of the criminal law... are adequately met, taking into account the special nature of the corporate person. While not legally binding, the DOJ Principles present important issues the Department expects prosecutors to consider before charging a corporation. The importance of a corporation s intent is made clear throughout the DOJ Principles. Section counsels that it may not be appropriate to impose liability upon a corporation, particularly one with a robust compliance program in place, under a strict respondeat superior theory. Section states that it is entirely proper in many investigations for a prosecutor 4

6 to consider the corporation s pre-indictment conduct, e.g., voluntary disclosure, cooperation, remediation, or restitution, adding in Section , [a] corporation s response to misconduct says much about its willingness to ensure that such misconduct does not recur. In other words, as a matter of principle, it is inappropriate to charge a parent company criminally that has demonstrated an intent through its robust compliance program, its pre-indictment conduct, or its response to misconduct to abide by the law. Put yet another way, successor liability is not strict liability, and a company s proactive efforts to comply with the law should be considered when a crime is suspected. DOJ/SEC FCPA Guide Second, the DOJ provides FCPA-specific guidance in FCPA: A RESOURCE GUIDE TO THE U.S. FOREIGN CORRUPT PRACTICES ACT (the FCPA Guide ). In a chapter devoted to the FCPA s criminal anti-bribery provisions, the FCPA Guide explains the DOJ s interpretation of the law, its enforcement-related policies, and its views regarding successor liability specifically. To illustrate these interpretations, policies, and views, the FCPA Guide includes several hypothetical fact scenarios that reveal not only what the DOJ considers punishable conduct, but also what the Department expects to see from a company trying to avoid and prevent buying a violation. By these hypothetical examples, the Department shows potential acquirers how to avoid criminal liability for past misconduct by a target company. In a sense, the FCPA Guide highlights the DOJ Principles in action. Consistently, the scenarios provide examples of fact patterns where the DOJ declines prosecution because of meaningful pre- or post-acquisition actions by an acquiring company. In Scenario 1, Company A considers acquiring a foreign company not previously subject to the FCPA but, during preacquisition due diligence, learns of potentially improper payments in connection with a government contract. After the discovery, Company A discloses its findings to the DOJ, suspends and terminates the responsible employees, ensures the payments have stopped, and integrates the target into its own compliance program. In addition, Company A requires its target s third-party distributors and other agents to sign anti-corruption certifications, complete training, and sign new contracts incorporating FCPA representations and warranties and audit rights. The Guide points out that, while Company A could not have been prosecuted for the 5

7 target s pre-acquisition misconduct because the target was not subject to the FCPA, it was important that Company A identified and stopped the corrupt activity, thereby preventing any post-acquisition misconduct which may have violated the FCPA. In Scenario 4, a similar fact pattern is described, except the target company was also subject to the FCPA when the misconduct occurred. Company A requires its target to disclose the improper payments before completing the transaction, and Company A again stops the misconduct and takes meaningful steps to integrate the target and its employees into Company A s compliance program. Not only does the FCPA Guide indicate that Company A would not be prosecuted, but it also suggests that the DOJ might not prosecute the previous misconduct of the target either because to do so could impose reputational damage and additional costs on Company A. By taking action to discover, report, and prevent FCPA offenses, Company A protected itself and possibly its investment from criminal prosecution. In short, a company may be rewarded for its proactive efforts to avoid and prevent FCPA violations. The Guide presents fair warnings, too. In Scenario 2, Company A fails to perform adequate due diligence before acquiring a foreign target with a history of misconduct, so the misconduct continues for two years after the transaction. The Guide warns that the DOJ would likely charge Company A under the FCPA, though not under a successor liability theory. The Guide indicates that Company A is liable as a principal because it failed to identify or stop the misconduct after taking control of the foreign target. Failing to act decisively to prevent FCPA violations through adequate due diligence is akin to willful blindness, which is routinely considered in criminal cases as evidence of corrupt intent. In this scenario, Company A s lack of action could be interpreted as corrupt intent, and Company A was held responsible for the postacquisition bribe payments by its target. The Guide also provides examples of likely declinations where an acquirer acts proactively to prevent FCPA violations through meaningful post-acquisition due diligence. In Scenario 3, Company A has only a limited ability to conduct pre-acquisition due diligence of its foreign target due to the requirements of local law. So, finding no red flags based on the due diligence it can conduct, Company A completes the transaction. After taking control of the foreign target, Company A conducts extensive due diligence and uncovers a number of bribe 6

8 payments to foreign officials. With the right response disclosure to the DOJ, stopping the bribes, taking remedial actions against those involved in the corruption, and incorporating the target into its compliance program Company A avoids prosecution. In Scenario 5, Company A is able to perform extensive pre-acquisition due diligence, but it doesn t discover the bribery until after the transaction is completed. Nevertheless, Company A takes action. It stops the illegal payments, discloses the misconduct, integrates the target and its employees into Company A s compliance program, and requires all third-party distributors and other agents to sign anti-corruption certifications, complete training, and sign new contracts incorporating FCPA representations and warranties and audit rights. While stressing that the liability for the corruption has not been eliminated, the FCPA Guide notes that a decision to prosecute the target or, in unusual circumstances, Company A will depend on application of the DOJ Principles. This scenario again emphasizes that by proactively demonstrating its intent to avoid and prevent criminal violations an acquirer can protect itself from FCPA prosecution. Scenario 6 in the FCPA Guide highlights what analysis of past cases makes abundantly clear: Merger does not eliminate FCPA successor liability. Company A and Company B, both having paid previously undiscovered foreign bribes, merge to form Company C. As in the example of Alliance One Int l, the successor company gets prosecuted for the crimes of its predecessor. However, like in the Melrose Distillers line of cases, this is successor liability only in a formal sense. Criminal prosecution of Company C actually targets Companies A and B, who continue to exist in the form of their successor. The fact scenarios in the FCPA Guide, while presented as hypotheticals, are situations routinely faced by acquiring companies in the real world. DOJ Opinion Procedure Releases Finally, in addition to the DOJ Principles and the FCPA Guide, there is a feature of the FCPA that allows potential acquirers to get transaction-specific guidance from the DOJ prior to an acquisition: the Opinion Procedures Release. An Opinion Procedures Release, or OPR, allows companies to learn whether certain specified, prospective not hypothetical conduct conforms with the Department s present enforcement policy regarding the anti-bribery 7

9 provisions of the Foreign Corrupt Practices Act. By submitting its particular facts for consideration by the DOJ prior to a transaction, an acquirer can respond appropriately and avoid criminal liability. There is some question as to whether the OPR mechanism is actually a practical resource in the real world. The process seems to be only rarely used. Despite all of the FCPA questions that companies have, very few OPR s are issued each year. The most ever issued in a single year was four and in some years, none are issued at all. The regulatory provisions regarding the DOJ s obligation to respond to requests, and regarding the timeline of such responses, do not seem to be rigorously observed. Nonetheless, over the forty-year history of the FCPA, four OPRs, including one issued on November 7, 2014, have addressed FCPA successor liability specifically. In OPR 03-01, the DOJ signaled that there would be no criminal enforcement where an acquirer discovered misconduct during pre-acquisition due diligence and encouraged its target to take appropriate remedial measures, including disclosure to the government and the investing public, instructions to stop all prohibited conduct, and action against the employees responsible for the misconduct. Similarly, in OPR 04-02, the DOJ said it would not bring an enforcement action against an acquirer whose robust pre-acquisition due diligence ferreted out misconduct resulting in two pre-acquisition guilty pleas by its target. Citing promised precautions to avoid future FCPA violations, the DOJ declined to take action against the acquirer or its recently acquired subsidiaries. In OPR 08-02, an acquirer was prevented by applicable foreign laws from performing adequate due diligence on its target company. Based on promises by the acquirer to conduct extensive post-acquisition due diligence in a timely manner, the DOJ gave the acquirer a 180-day window to identify, stop, and disclose any misconduct safe from the threat of prosecution. In each of those three instances, where companies used the OPR process to signal proactively their intent to comply with the FCPA, the DOJ signaled that it would not bring an FCPA enforcement action on a successor liability theory. 8

10 The most recent OPR to address FCPA successor liability, OPR 14-02, involved the acquisition by Requestor of 100% of Target s shares. During pre-acquisition due diligence, Requestor discovered that Target a foreign company outside the jurisdiction of the FCPA had a significant history of improper payments to government officials, questionable charitable contributions and sponsorships, and improper payments to state-controlled media. In its analysis of the facts presented by Requestor, the DOJ noted that Scenario 1 in the FCPA Guide squarely addresse[d] the situation and that the Department would lack jurisdiction to prosecute Requestor for the pre-acquisition misconduct. However, the OPR encouraged companies engaging in mergers and acquisitions to take proactive steps, consistent with the FCPA Guide, to avoid and prevent FCPA successor liability. CRIMINAL SUCCESSOR LIABILITY IN PAST FCPA CASES The DOJ has repeatedly demonstrated a willingness to decline prosecution of companies in past cases that took meaningful, proactive steps to avoid and prevent FCPA violations. In 2004, the DOJ entered into a non-prosecution agreement with General Electric ( GE ), who at the time sought to merge with InVision. Prior to the merger, GE discovered that InVision was responsible for bribes of foreign officials in Thailand, China and the Philippines. Although InVision had to pay an $800,000 penalty to the DOJ and submit to corporate monitoring, both GE and InVision escaped prosecution because the companies disclosed the misconduct and promised full and truthful cooperation with any ongoing investigation. GE also agreed to maintain InVision as a separate entity punishable in the event their non-prosecution agreement was breached and to retain a consultant to evaluate the integration of InVision into GE s FCPA compliance program. Importantly, GE was able to complete its merger with InVision without subjecting itself to FCPA successor liability. The Pfizer case provides yet another example of a deferred prosecution for a proactive parent despite misconduct by its subsidiary. After discovering that its wholly owned subsidiary, Pfizer H.C.P., had paid bribes in Bulgaria, Croatia, Kazakhstan, and Russia, Pfizer voluntarily disclosed its discovery to the DOJ and conducted a thorough internal investigation. Notwithstanding Pfizer s liability as the parent of Pfizer H.C.P., the company was spared from FCPA liability. Citing Pfizer s early and extensive remedial efforts, including establishment of 9

11 a robust compliance program, the DOJ did not prosecute Pfizer. Pfizer H.C.P. was required to pay a $15 million penalty for its previous misconduct, but it avoided prosecution as well. These examples suggest that proactive efforts to comply with the FCPA can leave the innocent acquirer in a much stronger position. The proactive approach worked for Agilent, too. The company walked away from the misconduct of its Chinese subsidiary, seemingly without a scratch, after making proactive efforts to demonstrate its intent to comply with the FCPA. AVOIDING CRIMINAL FCPA SUCCESSOR LIABILITY To be sure, avoiding prosecution based on FCPA successor liability is never guaranteed. elandia s efforts to comply with the FCPA appeared to meet the DOJ s expectations, including prompt and voluntary disclosure, cooperation with the government, and termination of senior executives involved in the bribery. However, those same executives provided evidence in the course of pleading guilty that elandia, too, may have been criminally responsible. Specifically, both Latin Node s former chief executive officer and its vice president of business development admitted to government allegations that the bribery conspiracy continued in the months after elandia s acquisition. While the government s motives in prosecuting Latin Node and penalizing elandia may never be publicly disclosed, it seems clear that elandia was not proactive enough. To avoid FCPA successor liability, a company s intent to comply with the FCPA must be clear and demonstrable. Criminal successor liability case law, the DOJ s Principles and Guide, and lessons from past cases all counsel acquirers towards three key steps to avoiding FCPA successor liability: First, a strong compliance program signals to the DOJ a company s intent to abide by the FCPA. Investing in a compliance program before misconduct arises, including by ensuring that current employees and employees of newly acquired subsidiaries receive proper FCPA compliance training, is critical to demonstrating intent to comply with the law and prevent criminal misconduct. Not only should a company develop and implement a program among its own employees and subsidiaries, but it should also insist that its third-party distributors and other agents sign anti-corruption certifications, complete training, and sign contracts that incorporate FCPA compliance representations and warranties and audit rights. 10

12 Second, acquirers must conduct appropriate due diligence both before and after an acquisition. Robust due diligence is particularly important in the merger or consolidation context, where the continuing existence of a predecessor company within the surviving successor will almost certainly mean prosecution or penalty for pre-merger misconduct. The case law, the FCPA Guide, and the DOJ s FCPA enforcement history suggest that a company will receive little benefit of the doubt for failing to conduct sufficient due diligence. Third, a company s response to discovering an FCPA violation is of paramount importance in demonstrating a lack of criminal intent. Disclosure of such violations should be made voluntarily and should be reasonably prompt, after an opportunity to conduct some internal investigation. A company should thereafter cooperate fully with any government investigation. In addition, a company should be prepared to take meaningful and lasting steps to remediate the violation. Ultimately, a company s response should demonstrate its intent to comply with the FCPA and its willingness to ensure that misconduct does not recur. It remains difficult to determine whether the threat of FCPA successor liability is a risk in any particular case, and potential acquirers must remain vigilant. Fortunately, there are concrete steps a company can take to demonstrate its intent to comply with the law before, during, and after the acquisition process. A commitment to compliance, conducting robust due diligence before and after any acquisition, and taking steps to prevent misconduct are proactive ways that companies can protect themselves from the threat of criminal liability, proceeding confidently and without fear of the unknown. This article is intended for educational and informational purposes only and does not constitute legal advice or services. These materials represent the views of and summaries by the author. They do not necessarily reflect the opinions or views of Vinson & Elkins LLP or of any of its other attorneys or clients. William E. Lawler, III is a partner in Vinson & Elkins Washington, D.C. office and co-head of the firm s Government Investigations and White Collar Practice Group. Bill represents corporations, organizations, government entities, and individuals in a wide variety of difficult and sensitive matters. He represents clients in federal and state courts, as well as before regulatory agencies and Congress. Bill's experience includes Foreign Corrupt Practices Act, criminal antitrust, health care fraud, public corruption, campaign finance, and other white collar crime issues. He frequently advises corporate boards, audit committees, and management on compliance, risk mitigation, and investigative matters. 11

13 Anthony J. Phillips is an associate in Vinson & Elkins Houston office. Tony is an experienced trial lawyer whose practice focuses on complex business litigation, compliance, and government investigations. He also conducts internal investigations and provides compliance advice for clients facing potential liabilities; represents companies and individuals in criminal and government enforcement matters before federal and state law-enforcement authorities; and advises clients regarding regulatory agency enforcement. 12