November 21, 2014

DOJ Clarifies Successor Liability for Foreign Acquisitions

Here’s news from this blog by Akin Gump’s Nicole Sprinzen & Jennifer Hildebrand (there’s memos posted on this development in our “FCPA” Practice Area):

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.