Corporate Compliance Global Mergers & Acquisition
B LE CONFIDENTIAL 2011 Baker & McKenzie. All rights reserved. ROU Global Corporate Compliance
CONFIDENTIAL 2011 Baker & McKenzie. All rights reserved. CONFIDENTIAL 2011 Baker & McKenzie. All rights reserved. Costly Lessons in M&A Compliance It s rather unusual to find a smoking gun. Andrew Martin, Singapore partner In emerging markets, doing business like everyone else can get you into trouble Baker & McKenzie
CONFIDENTIAL 2011 Baker & McKenzie. All rights reserved. London Bangkok Ho Chi Minh City Manila Singapore GLOBAL OFFICES ENGAGED YEAR WE ENTERED SINGAPORE 6 1981 Jakarta Emerging markets now account for one-third of the world s M&A activity, according to Thomson Reuters. And for good reason. Mergers and acquisitions are one of the quickest ways for companies to lower manufacturing costs, access growing consumer markets, tap new talent pools and acquire new products and technology. Yet with all the upside of doing deals in emerging markets, the question remains: what about corporate compliance? When one company buys another, it not only acquires its assets but often assumes its liabilities. That can create compliance problems for buyers in high-risk jurisdictions, such as a prominent private equity fund our firm recently advised during its acquisition of a high-end company that distributes luxury products throughout Asia. While conducting routine M&A due diligence, the Baker & McKenzie team uncovered damaging information about the target company that cast serious doubt on the future of the deal. The document stated outright that it was company policy to follow local customs, which meant importing products illegally and under-declaring the value of imported goods, as was common practice in certain Asian countries. It s rather unusual to find a smoking gun, says Singapore partner Andrew Martin, who led the Baker & McKenzie team. But in this case there was a document stating, We conduct our business in accordance with Asian market practice. Buying a company engaged in practices such as bribery, smuggling and tax evasion can be particularly troublesome for private equity funds, which typically buy companies with the intention of selling them later for a profit. With FCPA and local prosecutions rising steadily around the world, acquiring a company at risk of being investigated could hinder the private equity fund s ability to sell it in the future defeating the purpose of the purchase. Since the UK Bribery took effect in July 2011, buyers face even more exposure. As Asia becomes the place to do business, dealing with corruption issues is becoming a more important aspect of buying and selling companies, particularly when there s a UK or U.S. connection, Martin says. It s also important to be mindful of the constantly developing local anti-corruption laws and their enforcement. With the private equity fund still eager to acquire the target company, Baker & McKenzie mobilized its global network of compliance lawyers to investigate the potential compliance issues and suggest steps to address them. One thing our lawyers know from years of handling these cross-border deals is that when compliance issues arise, they are rarely confined to one country. Clients need to consider whether to review all branches of a target company s operations to determine the scope of the problem and if necessary, adopt a multijurisdictional approach to investigating the allegations. With longstanding offices in all nine Asian countries where the target company has subsidiaries and the support of experienced compliance lawyers in our London office, Martin was able to call upon colleagues to develop an effective course of action for the client on short notice. Baker & McKenzie Global Corporate Compliance
CONFIDENTIAL 2011 Baker & McKenzie. All rights reserved. One of the first things our lawyers realized was that the private equity fund could potentially violate UK anti-money laundering laws simply by closing the deal. Under the UK s Proceeds of Crime Act, a buyer that pays a seller to acquire a company engaged in unlawful conduct can be charged with money laundering for enabling the seller to turn that unlawful conduct into cash, thereby reaping the benefits of the unlawful conduct. The target company s potentially illegal practices also threatened to expose the private equity buyer to liability under the UK Bribery Act. Once it owned the UK company that was the parent of the target group, the private equity fund could be could be at risk of prosecution for any continuing bribes paid by employees of the Asian subsidiaries. To overcome these challenges, the Baker & McKenzie team advised the private equity fund to adopt a multi-pronged approach, adding sweeping indemnity clauses to the purchase document and filing a confidential report with the UK anti-money laundering agency to avert potential money laundering charges. Our lawyers also advised the client to excise two of the Asian subsidiaries from its purchase in which bribery of customs officials was so systemic and central to business operations that remediation wasn t feasible. Because of these protective measures, the private equity fund was comfortable enough to proceed with the transaction. Going forward, the client was confident it could run the target company in compliance with applicable anti-corruption laws and ultimately realize the benefits of its investment. For foreign investors and multinationals doing deals in emerging markets, that kind of assurance can make all the difference. Baker & McKenzie
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