Inheriting bribery: let the buyer beware
June 18, 2014
If you bought a car, would you expect to be inheriting any speeding fines and parking tickets from the previous owner too?
Of course not, but that’s exactly the situation you might find yourself in when buying a business.
The concept of Successor Liability means an acquirer may become responsible for any pre-transaction incidences of bribery or corrupt practices of the target.
This is a prominent feature of the US Foreign Corrupt Practice Act (FCPA), with several high-profile cases of enforcement and aborted deals due to uncertainty around the prospect and impact of regulatory sanction.
Whilst an acquirer may question relevance of the FCPA where there is no apparent US footprint, what’s worth remembering is the US’s ability to claim far reaching jurisdiction. In the past this has captured payments simply because they were denominated in US Dollars or ‘wired’ via US banking systems.
So any business falling subject to the FCPA ought to consider the impact potential bribery and corruption may have on the transaction, not least the value placed on the target and impact on the existing group. Enforcement action could result not only in fines, but extensive reputational and other damage.
Anti-bribery due diligence: protecting value
While indemnities with the vendor could limit financial exposure under the FCPA, they would not protect the acquirer from reputational damage, nor consequential losses (e.g. future tendering debarment). So it’s advisable to avoid enforcement action in the first place through extensive pre-deal due diligence.
Why might this be important?
- Contracts obtained through bribes may be legally unenforceable and revenues obtained illegally may be lost once bribe payments cease under the parent’s more onerous compliance environment.
- A corporate conviction of bribery may lead to debarment from EU public sector tendering.
- If staff critical to the target are lost as a result of conviction or dismissal associated with bribe paying, how might this impact the target’s prospects?
- Timely due diligence facilitates planning for post-deal procedures required to integrate the target into the wider group’s compliance environment. Appropriate procedures greatly reduce the risk of bribery or corrupt practices continuing post-transaction.
How does the UK Bribery Act impact upon Successor Liability?
While the UK Bribery Act does not specifically provide for Successor Liability, nor did the FCPA until the US Department of Justice clarified its own position following several successful enforcement actions.
To this end, acquirers must consider the prospect of the UK Ministry of Justice interpreting its anti-bribery legislation similar to that by the US. They’ll also need to recognise that anti-bribery due diligence procedures must still be considered both to avoid future breaches and better inform indemnities to be sought from the vendor.
In considering bribery or corrupt practices that may continue within the target post-transaction, the acquirer’s senior management ought to also consider the repercussions on them personally. Section 14 of the UK Bribery Act allows for unlimited fines and up to 10 years imprisonment where misconduct is “…committed with the consent or connivance of a senior officer…”. Turning a blind eye is no defence.
Faced with these risks, it really is a case of caveat emptor. Do your homework – don’t become a victim.
If you believe any of these issues affect you, or wish to discuss further, please contact Michael Lowe using the details below.