Earlier this week, the U.S. Department of Justice (DOJ) issued its second public opinion release of the year in response to a question posed regarding the applicability of the U.S. Foreign Corrupt Practices Act (FCPA) to a propounded set of facts. The opinion announced a decision by the DOJ not to take enforcement action against a U.S. issuer who uncovered evidence of potential illicit payments and substantially inadequate records while conducting due diligence on an intended foreign acquisition target. The DOJ affirmed its position taken in prior publicly released guidance by making clear that the U.S. issuer’s acquisition of the foreign company would not expose the issuer to liability for the foreign company’s prior illegal conduct, where the conduct was not actionable under the FCPA at the time the conduct occurred because there was no U.S. jurisdiction over the conduct under the statute.
An acquiring company may find little practical comfort in the conclusion of the opinion release where it intends to acquire 100 percent of the acquisition target. The opinion acknowledged the basic principle of corporate law—that, by acquiring all the outstanding shares of a company, the acquirer may also acquire successor liability over “the acquired entity’s pre-existing criminal and civil liabilities, including, for example, for FCPA violations.”
Under the DOJ’s FCPA enforcement program, issuers and domestic entities may request opinion letters from the U.S. Attorney General regarding “whether certain specified, prospective—not hypothetical—conduct” conforms to the DOJ’s current FCPA enforcement policies. Opinion letters issued by the DOJ do not have any precedential force over future FCPA cases but are intended to serve as general guidance and are released publicly to afford wide availability of that guidance.
The opinion letter released this week concerned a multinational company headquartered in the United States that was in the midst of conducting pre-acquisition due diligence on its target — a foreign corporation with no employees or operations in the United States. The due diligence inquiry turned up more than $100,000 in likely improper payments made to government officials within the foreign target’s country and prevalent inaccuracies and discrepancies in its records. None of the payments were made to or through a U.S. person or issuer. The opinion release also noted that the U.S. acquirer determined that no contracts or assets acquired through bribery would remain in operation following the acquisition from which the U.S. acquirer would receive any financial benefit. Despite the would-be FCPA violations, the DOJ confirmed that the U.S. acquirer would not face successor liability, because the payments had “no discernible jurisdictional nexus to the United States;” therefore, they were not subject to FCPA enforcement.
However, the DOJ’s opinion provided important cautionary guidance regarding successor liability, affirming its previously articulated principle (in guidance issued jointly in November 2013 by the U.S. Securities and Exchange Commission and the DOJ, FCPA — A Resource Guide to the U.S. Foreign Corrupt Practices Act) that, in general, an acquiring company may become liable as a successor for pre-existing FCPA violations committed by an acquired company where those violations were subject to the FCPA’s jurisdiction when committed. Going further, the DOJ opinion also raises the suggestion of liability in more nuanced circumstances, such as when an acquiring company becomes the post-acquisition beneficiary of illegal conduct committed prior to the acquisition, for instance, by passively benefiting from a target company’s pre-existing contract obtained by paying bribes. Of course, although not stated in the opinion release, post-acquisition conduct could also result in culpability for the acquiring company.
The DOJ’s opinion release serves as a reminder to U.S. issuers to conduct careful due diligence, during both the pre- and post-acquisition phases, to determine whether a target or acquired entity was previously subject to the FCPA. Failure to investigate, suspend and address illegal pre-acquisition conduct could still generate successor liability for the issuer if it stands to later benefit from the wrongdoing.
Moreover, through its opinion release, the DOJ reinforced its view of the importance of bringing a new acquisition within the fold of the acquiring company’s effective compliance program. The release noted that, while the foreign target had no written compliance policy or code of conduct and did not demonstrate an awareness of anti-bribery laws, the acquiring company had already taken pre-closing steps to begin to remediate these issues and had set out a schedule for integrating the acquiring company’s compliance, training, accounting, and recordkeeping policies and procedures on the target company.
As noted in this Akin Gump blog:
The AG Deal Diary team found that “The Structure of Stockholder Litigation: When Do the Merits Matter?” authored by Minor Myers (Assistant Professor at Brooklyn Law School) and Charles Korsmo (Assistant Professor at Case Western Reserve University School of Law) presents an interesting perspective.
The authors analyzed if the merits matter in stockholder litigation challenging mergers, by comparing class actions alleging fiduciary breach and those seeking stockholder appraisal. They found that the merits appear to matter very little in fiduciary duty class action litigation, where deal size is the strongest predictor of litigation. The authors attribute the difference in the incidence and intensity of fiduciary duty litigation (versus appraisal actions) to certain features of the structure of such litigation, such as a class comprised of all shareholders, lead plaintiffs with small holdings and plaintiffs’ attorneys who control the claims.
Yesterday, the SEC’s Office of the Chief Accountant & Corp Fin jointly released Staff Accounting Bulletin #15 to rescind portions of the interpretive guidance included in its SAB Series for what’s known as pushdown accounting. To reflect private sector developments in GAAP, the SAB #115 rescinds SAB Topic 5.J. entitled New Basis of Accounting Required in Certain Circumstances. The new bulletin brings existing guidance into conformity with FASB Update No. 2014-17 – Business Combinations (Topic 805): Pushdown Accounting, a consensus of the FASB Emerging Issues Task Force, which was ratified by the FASB last month and issued yesterday too…
Here’s a set of league tables from FactSet listing the investment banks that most often represent companies against activists, as well as the law firms that most often represent companies. In addition, the top law firms that represent activists are listed…
We have just posted the transcript for our recent webcast: “Anatomy of a Proxy Contest: Process, Tactics & Strategies.”
In a stark reminder that the US antitrust agencies continue to take illegal premerger coordination—commonly known as “gun jumping”—very seriously, two producers of medium density fiberboard agreed to pay nearly $5 million in civil penalties and disgorgement for violations of the Hart-Scott-Rodino Act and Section 1 of the Sherman Act. The two defendants, Flakeboard America Limited and SierraPine, allegedly coordinated on the closure of a SierraPine MDF mill during the Department of Justice’s review of the proposed transaction between the companies. The complaint filed on November 7, 2014 and the DOJ’s accompanying papers are significant for other merging parties because they contain descriptions of pre-closing conduct that the DOJ is likely to view as prohibited and conduct that it is likely to view as permitted.
According to this PwC survey, nearly one-in-three directors say their board has interacted with an activist shareholder (and held extensive board discussions about activism) during the last 12 months – here are other notables:
– Additional 14% of boards have not had activist interactions but have extensively discussed this topic.
– Mega-cap company boards are twice as likely to interact with activists as small-cap company boards.
– 62% want at least some additional boardroom time and focus, and almost one in five want much more time and focus.
– 65% and 46% of directors are at least somewhat concerned with these CEO/median employee pay ratio disclosure and shareholder proposals for proxy access, respectively.
– Directors strongly prefer internal CEO candidates, but only 27% have much confidence in their company’s CEO talent pipeline. And nearly one in five believe their company’s CEO talent pipeline is not adequate.
– Especially over the past year, much of this pressure has emerged from the shareholder activist community
– Self-evaluation has yielded conflicting results. 91% believe their self-evaluation processes are at least somewhat effective while 70% say it is at least somewhat difficult to be frank in their self-evaluations. Further, almost two-thirds of directors believe self-evaluations are at least somewhat a “check the box” exercise.
This November-December Issue of the Deal Lawyers print newsletter includes:
– What’s the Big Deal? Why Some Seemingly Material Acquisition Agreements Might Never See the Light of Day
– The Quest for Universal Ballots: Might Boards Benefit Too?
– Amendment to Delaware’s Statute of Limitations Rules: Drafting Tips
– The Continuing Importance of Process in Entire Fairness Review: In re Nine Systems
– Respecting Boilerplate: Scope and Communications Provisions
If you’re not yet a subscriber, try a 2015 no-risk trial to get a non-blurred version of this issue on a complimentary basis.
Right after I read Keith Bishop’s blog about how Senator Blumenthal has written a letter to the SEC asking the agency to investigate fee-shifting bylaws – specifically Alibaba’s bylaws – I read this note from “The Activist Investor”:
We heard of an interesting new innovation in corporate bylaws this week. As we noted earlier, the bylaws constitutes a sort of contract among shareholders, executives, and directors. We noted two new ways that bylaws can limit how shareholders sue a company. This most recent innovation requires a shareholder to obtain approval from a minimum number of other shareholders to sue the company. Last month, Imperial Holdings amended its bylaws to require consent from shareholders holding at least 3% of the outstanding shares for such a lawsuit.
Some notable aspects, then:
– The requirement pertains only to derivative lawsuits
– The company BoD approved the amendment without a shareholder vote, so we don’t know what investors think of this
– The person behind the innovation is Phil Goldstein, BoD Chair and a significant investor at Imperial, but also a prominent activist investor with a speciality in closed-end funds
– Imperial is domiciled in Florida, not a hotbed for corporate law, so we’ll need to see what Delaware legislators and courts think of this.
On the one hand, in the news release Phil mentions the morass of expensive derivative lawsuits that benefit mostly attorneys, and certainly not most aggrieved investors. We deplore this as much as anyone. On the other hand, we have a thoughtful, outspoken activist investor who seemingly allows a BoD to limit shareholder rights, worse yet without a shareholder vote.
On second thought, it does show that we investors can think and act reasonably. The bylaw amendment doesn’t preclude derivative lawsuits, but only demands that enough shareholders agree they will benefit. Have to say we like this.
Here’s a speech recently delivered by Delaware Chief Justice Leo Strine at a recent ABA meeting. The speech addresses conducting an M&A process in a manner that would promote making better decisions; reduce conflicts of interests and addresses those that exist more effectively; and accurately records what happened so that advisors and their clients will be able to recount events in approximately the same way. Here’s an excerpt:
The Power Of Red-Lining
One of the most powerful error-preventing tools in modern technology is the ability to generate drafts that can be accurately compared with their predecessors. No responsible transactional attorney fails to obtain a redline, blackline, compare rite or what you wish to call it when she receives a draft back from her negotiating adversary. But this standard practice is not used in a sensible way by the advisors of boards of directors. And this standard practice would be helpful as to materials that are core evidence in every M & A litigation: the presentations made to the directors by the financial advisors.
Changes made to board books that make the deal look fairer are often viewed with suspicion by plaintiffs’ lawyers. They will argue that the changes, rather than being a principled application of corporate valuation theory to updated facts, are an attempt by the financial advisor to justify a suboptimal economic result, such as an auction process that has yielded a price less than was initially hoped. When the changes are shown to directors in cross-examination and the directors cannot identify why the changes were made, the directors are embarrassed and fumble through the moment. When the senior banker himself is less than certain about the why, as is not infrequently the case, particularly when a junior banker made the change, only one side of the v. benefits— and it’s not the one where the defendants’ names reside.
The deployment of a redline version minimizes this risk. Producing a redline will help the banking team itself focus on the changes being proposed and make sure they are correct, including making sure that it made the change (e.g., cost of debt) in all valuation methods to which it is applicable.
An accomplished corporate lawyer indicated to me the following after reading a draft of this essay: “Far too often the bankers go through their books too quickly. Perhaps someone has told them they have 30 minutes. Perhaps they want to catch the 5 o’clock plane. Whatever the reason, they go through the books so quickly that, as to any given slide, if someone stopped and gave the directors a short quiz about the most important information reflected in that slide, far too many of the directors would fail or receive a gentleman’s C. It seems to me that bankers literally should stop after discussing key slides and ask ‘does everyone get that?’ ‘Everyone understand why we’ve narrowed the focus to these 3 potential bidders and excluded those 3?’ ‘If not, please speak up and we’ll do a better job of explaining.’ I think this approach would really help lots of boards. I can tell you from first-hand experience, it is very difficult to teach a director something she never knew when preparing her for her deposition. It is so much easier to remind her of something she once understood.”