Successor Liability Under The Foreign Corrupt Practices Act Marsha Z. Gerber Partner, Fulbright & Jaworski LLP Kevin McDonald Asst. General Counsel, Administration, Compliance and Regulatory Affairs, Marathon Oil Elaine L. Lawson Senior Counsel, Fulbright & Jaworski LLP September 19, 2013
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FCPA Background Foreign Corrupt Practices Act, 15 U.S.C., 78dd-1 et seq., 78m Enacted in 1977 following SEC investigation that uncovered that hundreds of U.S. companies made improper payments to foreign officials Two components Anti-bribery provisions that prohibit payments or offers or authorizations of payments of anything of value to foreign officials to obtain business or business advantages Accounting and internal controls provisions that require U.S. public companies to maintain good records and internal controls Civil and criminal liability for companies and individuals Enforced by SEC and DOJ. 4
FCPA Background Successor Liability Is an integral component of corporate law and occurs when a company merges with or acquires another company and the successor company assumes the predecessor company s liabilities. DOJ/SEC Resource Guide to the FCPA. May result in liability to acquiring company, even if target s FCPA violations occurred prior to acquisition and were unknown to acquiring company. Never tested in U.S. courts, since companies almost always settle alleged FCPA violations. Presents one of biggest FCPA risks to companies. 5
FCPA Background 6 Concerns about FCPA successor liability can delay a transaction, increase its costs, and sometimes even kill a deal. Lockheed/Titan Failed Merger (2004) Titan s shareholders approved acquisition by Lockheed. Lockheed s due diligence showed improper payments by Titan s agent in Benin; as well as falsified documents regarding payments in Nepal, Bangladesh, Sri Lanka, France and Japan; payments were improperly recorded in books and records. Lockheed caused Titan to disclose to DOJ and SEC, and agencies launched investigations. Lockheed and Titan amended acquisition agreement to require satisfactory conclusion of investigations. Lockheed ultimately terminated agreement due to FCPA issue. Titan s share price fell. Titan entered into plea agreement, paid over $28 million disgorgement and penalties, and retained independent compliance consultant.
FCPA Background Monsanto/Delta & Pine Completed Acquisition (2007) Monsanto sought to acquire Delta & Pine Land Company. Pre-acquisition due diligence revealed that Delta & Pine s Turkish subsidiary made improper payments to Turkish government officials, first directly, then through agents. Monsanto required Delta & Pine to report to DOJ and SEC. Acquisition proceeded, with post-closing $300,000 SEC settlement by Delta & Pine. Monsanto not charged. SEC noted that Monsanto acquired Delta & Pine prior to settlement, and conduct occurred prior to acquisition. 7
FCPA Background GE/InVision Completed Acquisition (2004) GE and InVision announced a $900 million merger. Pre-acquisition internal investigation of InVision revealed potential improper payments by agents or distributors in Thailand, China and the Philippines. Disclosures made to DOJ and SEC. InVision s stock price fell and shareholder class action filed. InVision settled with DOJ for $800,000 fine, paid $500,000 civil penalty to SEC, disgorged $589,000 profits, and retained independent compliance monitor. Letter agreement between GE and DOJ provided GE would not be prosecuted for InVision s past violations disclosed to DOJ. GE agreed to integrate InVision business into GE s FCPA compliance program, to be evaluated by DOJ-approved independent consultant. 8
Recent Enforcement Examples Pfizer (2012) Pfizer acquired Pharmacia in 2003. Before and after acquisition, Pfizer H.C.P., a wholly-owned subsidiary, allegedly paid more than $2 million in bribes to government officials in Bulgaria, Croatia, Kazakhstan and Russia; the Croatia bribes were paid by entities acquired in Pharmacia acquisition. Pfizer H.C.P entered into deferred prosecution agreement with DOJ and paid $15 million penalty. SEC settled with parent, Pfizer, Inc., for over $26 million in disgorgement and prejudgment interest. Government recognized Pfizer, Inc. s timely voluntary disclosure, thorough internal investigation, and early and extensive remedial measures, but held Pfizer H.C.P. responsible for both pre-acquisition and post-acquisition conduct. 9
Recent Enforcement Examples Wyeth (2012) Pfizer acquired Wyeth in 2009, while the previous FCPA investigation was pending. Before and after acquisition, Wyeth allegedly paid bribes to foreign officials in China, Indonesia, Pakistan and Saudi Arabia. Following Wyeth acquisition, Pfizer conducted extensive riskbased due diligence, voluntarily disclosed findings to government, fully cooperated, and conducted extensive remedial measures. Based on Pfizer s extensive efforts, DOJ did not pursue criminal charges, and SEC pursued only books and records charges against Wyeth and not Pfizer. Wyeth settled for approximately $18.9 million in disgorgement and prejudgment interest. 10
Recent Enforcement Examples Ball Corporation (2011) Ball acquired Formametal, based in Argentina, then discovered questionable payments to Argentinean customs officials. Ball allegedly took insufficient remedial steps to ensure that illegal payments would not continue. Bribes disguised as customs fees allegedly continued after the acquisition. In addition, after the acquisition, Formametal s President allegedly authorized bribes to avoid paying export tariffs. Ball settled with SEC for $300,000 civil penalty, recognizing Ball s voluntary disclosure, remedial acts and cooperation with investigation. 11
Recent Enforcement Examples Watts Water Technologies (2011) Watts, a U.S. company, acquired Chinese subsidiary that had sales incentive policy allowing sales personnel to pay their commissions to state-owned design institutes, resulting in inaccurate books and records. Post-acquisition, Chinese subsidiary allegedly paid bribes to employees of state-owned design institutes to recommend company s products to Chinese government. Watts became aware of the potential violations by its subsidiary, conducted internal investigation, and later selfreported and publicly disclosed. Watts settled for $2,755,815 disgorgement, civil penalty of $200,000, prejudgment interest of $820,791. Vice-President of subsidiary ordered to pay $25,000 penalty. SEC cited Watts cooperation in investigation. 12
Recent Enforcement Examples Alliance One (2010, 2011) Dimon and Standard merged in May 2005 to form Alliance One International, Inc., a Virginia corporation. Pre-merger, subsidiaries of Dimon and Standard allegedly gave kickbacks to Thailand officials for tobacco business. Payments were booked as commissions. Alliance One International AG, a wholly-owned Swiss subsidiary of Alliance One International, Inc., pleaded guilty to FCPA charges based on pre-merger conduct and fined $5,251,200. Alliance One International Inc. settled with SEC for disgorgement of approximately $10 million; and agreed with DOJ to retain compliance monitor. 13
Recent Enforcement Examples Latin Node (2009) First FCPA enforcement action based entirely on preacquisition conduct unknown to purchaser. DOJ charged Latin Node with making over $1 million in improper payments to officials in Honduras and Yemen over 3 years preceding acquisition by elandia International. After closing, elandia discovered payments and voluntarily disclosed to government. DOJ brought charges against Latin Node despite elandia s voluntary disclosure, substantial assistance, and remedial action. Latin Node (now part of elandia) entered guilty plea and agreed to pay $2 million fine. Penalty born entirely by elandia, as Latin Node s business had been discontinued. 14
Recent Enforcement Examples Halliburton/KBR (2009) KBR (then a Halliburton subsidiary) and its JV partners allegedly paid bribes from 1995 until 2004 to Nigerian officials to obtain business related to natural gas facility. JV allegedly concealed the payments through sham agreements with intermediaries. DOJ and SEC charged Halliburton and KBR s current parent with FCPA violations. KBR settled with DOJ for $402 million and corporate monitor for 3 years; Halliburton will pay most of penalty under indemnity. SEC settlement with Halliburton and current parent includes $177 million disgorgement, also subject to Halliburton indemnity. In addition, Halliburton settled with Nigerian government, and KBR s UK affiliate settled with UK Serious Fraud Office. DOJ charges against individuals resulted in guilty pleas. 15
Recent Guidance Comprehensive FCPA guide published by DOJ and SEC on November 14, 2012 Devotes six pages to successor liability Emphasizes importance of pre-acquisition due diligence and post-acquisition improvement of compliance programs and internal controls to: Help acquirer accurately value target Reduce risk of future bribes Allow potential violations to be handled via negotiation of costs and responsibilities for investigation/remediation. 16
Recent Guidance Comprehensive FCPA guide published by DOJ and SEC on November 14, 2012 Clarifies government s decision-making process: Has declined to take action against acquiring company when it disclosed conduct, remediated, and cooperated. Has taken action against successor company only in limited circumstances, generally involving egregious or sustained violations or where successor participated in or failed to stop conduct after acquisition. More often pursues action only against predecessor company, especially when acquiring company uncovered and timely remedied the violation. 17
Recent Guidance Provides Two Practical Tips to Reduce FCPA Risk in Mergers and Acquisitions. DOJ/SEC Tip #1: Seek an opinion from DOJ, as in Opinion Release 08-02; however, DOJ admits that opinion may contain more stringent requirements than necessary. In Op. Rel. 08-02, Halliburton sought DOJ opinion because local law limited time and extent of pre-acquisition due diligence regarding target U.K. public company and confidentiality agreement restricted Halliburton s ability to discuss any FCPA issues with government. DOJ stated it did not intend to take action regarding acquisition, pre-closing acts of target, or post-closing, terminated acts of target disclosed within 180 days of closing, if Halliburton: Disclosed immediately following closing any FCPA issues discovered pre-closing; Created post-acquisition due diligence plan; Hired outside counsel and forensic accountants to conduct post-acquisition review; Reported to government 90, 120, and 180 days post-acquisition regarding high, medium, and low risk topics; Remediated any issues found within one year of closing; Terminated some agents and signed new contracts with others; Trained all target employees on FCPA within 90 days; and Maintained target as wholly-owned subsidiary until investigation complete. 18
Recent Guidance Provides Two Practical Tips to Reduce FCPA Risk in Mergers and Acquisitions. DOJ/SEC Tip #2: Conduct risk-based due diligence and disclosure, involving the following steps: Conduct thorough risk-based due diligence. Ensure acquiring company s code of conduct and compliance policies apply as quickly as practicable. Train directors, officers and employees of acquired company, and when appropriate, train agents and business partners. Conduct FCPA-specific audit of acquired company as soon as practicable. Disclose any corrupt payments discovered. 19
Recent Guidance Hypotheticals Where Acquired Company Not Previously Subject to FCPA Successor company acquires foreign company after extensive due diligence, including (1) reviewing sales/financial data, contracts, thirdparty agreements; (2) risk-based analysis of customers; (3) auditing selected transactions; (4) discussing risks with target s executives; (5) discovering and disclosing to DOJ/SEC potentially improper payments; (6) terminating responsible employees and agents; (7) ensuring violations have stopped, and (8) integrating target and its agents/distributors into successor s robust compliance program. DOJ/SEC could not prosecute successor company. No jurisdiction over target, and no violation by successor. 20
Recent Guidance Hypotheticals Where Acquired Company Not Previously Subject to FCPA Successor company performs only minimal pre-acquisition due diligence, does not translate compliance policies into local language or train target s personnel or agents. After acquisition, long-running bribery scheme is discovered and allowed to continue. DOJ/SEC have prosecuted companies like Company A, but because of its own conduct, not successor liability. Successor company unable to perform adequate pre-acquisition diligence due to local law, finds no red flags although target operates in high risk countries and industries, discovers bribes post-acquisition and discloses to DOJ/SEC, immediately stops illegal payments and takes remedial action. DOJ/SEC have declined to prosecute successor companies in similar circumstances. 21
Recent Guidance Hypotheticals Where Both Acquired Company and Successor Already Subject to FCPA Successor company acquires several of target company s business lines after extensive due diligence, including (1) reviewing sales/financial data, contracts, third-party agreements; (2) risk-based analysis of customers; (3) auditing selected transactions; (4) discussing risks with target s executives; (5) discovering and requiring target to disclose to DOJ/SEC potentially improper payments; (6) terminating responsible employees and agents; (7) ensuring violations have stopped, and (8) integrating new business lines their agents/distributors into successor s robust compliance program. DOJ/SEC have declined to prosecute successor companies in similar circumstances, although target might be prosecuted. 22
Recent Guidance Hypotheticals Where Both Acquired Company and Successor Already Subject to FCPA Successor company conducts the same type of extensive due diligence, but does not uncover bribery until post-acquisition. Successor then ensures violations have stopped, and integrates target and its agents/distributors into successor s robust compliance program. DOJ/SEC are unlikely to prosecute successor absent unusual circumstances, provided target still exists in a separate form that can be prosecuted. Company A merges with Company B forming Company C. Premerger due diligence reveals bribes by both companies. Bribery was extensive and known by high-level management. DOJ/SEC have prosecuted companies like Company C on the basis of successor liability, and a monitor may be required. 23
Trends Emphasis on Due Diligence FCPA settlements and opinion releases, as well as tips and hypotheticals provided in new Guidance, emphasize importance of pre- and post-acquisition due diligence. U.S. and U.K. officials often collaborate in enforcement efforts, as many companies are subject to both FCPA and U.K. Bribery Act. U.K. Bribery Act does not provide for successor liability regarding target s historic conduct, but rather limits acquiring company s liability to date of closing and after. However, to date there is little indication that U.S. enforcement agencies will relinquish the successor liability theory. 24
Trends Emphasis on Due Diligence Companies are increasingly devoting resources to FCPA due diligence in connection with mergers and acquisitions where target has international operations. Depending upon target s risk profile, a separate team of outside FCPA legal and accounting professionals may conduct due diligence on parallel track with business diligence team. 25
Trends Emphasis on Compliance Program Some have advocated for so-called compliance program defense. U.K. Bribery Act has affirmative defense for adequate procedures. It appears unlikely that U.S. is ready to adopt such a defense. However, U.S. government has provided incentives for companies to establish robust compliance program. Morgan Stanley (2012) Morgan Stanley managing director pleaded guilty in connection with enforcement actions by DOJ and SEC relating to transactions with a Shanghai local government official. DOJ and SEC settled with managing director and did not bring action against the company based upon its robust compliance program. First time DOJ and SEC publicly declined to bring action against employer based upon actions of employee who sought to evade internal controls. 26
Trends Potential for Private Litigation Shareholder derivative claims Shareholder suits are common against directors and officers for breach of duties in connection with mergers and acquisitions. Shareholders may also sue directors and officers for failing to conduct proper due diligence to discover FCPA violations that create risk of successor liability. 27
Recommendations It is often challenging to conduct pre-acquisition due diligence of a target company. Target is unrelated and beyond the company s control, and sometimes beyond its expertise. Due to timing constraints and confidentiality concerns, it is often not possible to obtain all relevant documents or interview all key personnel, especially if target is public company. 28
Recommendations To extent reasonably possible, conduct risk-based due diligence as outlined in DOJ/SEC guidance, documenting steps taken. Considerations include: Risk profile of countries of target s operation Target s business with foreign government officials Target s use of third-party agents/consultants/distributors State of target s books and records, internal controls, policies and procedures Based upon risk profile of target, timing considerations and access to target s data and employees, due diligence may include: Review of target s documents relevant to above considerations Targeted forensic review of books and records Interviews of persons most likely to know of FCPA violations, including Chief Compliance Officer, General Counsel, accounting and sales department employees, and third-party agents 29
Recommendations If due diligence is very limited, consider seeking opinion from DOJ, but be aware of possible onerous and costly requirements. Include FCPA representations and warranties from target in agreement (e.g., no employee or owner is foreign official, there have been no known or suspected violations). Consider including indemnification provision in agreement in case violation is found post-closing. Potential fines may be allocated in agreement. Price adjustments may be negotiated. Promptly after closing, eliminate any deficiencies in target s internal controls and assimilate target into acquiring company s robust compliance program. Take appropriate steps for any identified violations, including considering voluntary disclosure. 30
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