Page 8 - CCCA61_2008

CCCA61_014.qxd:CCCA_V1No2_Dept-CrossBdr-V1.qxd 02/07/2008 04:40 PM Page 14 Cross Border Watch out for red flags! Keep a close eye on the U.S. Foreign Corrupt Practices Act during mergers and acquisitions. ecent enforcement actions of the several categories of persons, including and were jointly disclosed by the parties to RU.S. Department of Justice domestic or foreign issuers with a reporting the SEC and the DOJ.An amendment to (“DOJ”) and the U.S. Securities and obligation under the Securities Exchange Act the merger agreement stipulated a closing Exchange Commission (“SEC”) high- of 1934 (“Reporting Issuers”),U.S.citizens condition requiring Titan to resolve its light the importance of conducting due or residents, and entities that are organized issues with the DOJ.Ultimately,Lockheed diligence with respect to the target’s or have their principal place of business in terminated the merger agreement and compliance with the U.S. Foreign the United States.The anti-bribery provi- Titan settled with the SEC and the DOJ Corrupt Practices Act (“FCPA”). These sions also apply to any other person while for a total of $28 million. actions clearly demonstrate how FCPA acting in the United States. In the recent FCPA settlements that have liability can carry over to an acquiror In addition, the FCPA includes record- occurred in the context of mergers and subsequent to an acquisition, either for keeping and internal accounting controls acquisitions, the government’s allegations pre-acquisition activities of the target requirements. There is no grace period contained the same three elements:bribery, or post-acquisition activities of the relative to post-acquisition FCPA obliga- improper recordkeeping, and inadequate acquired business. tions of acquirors with respect to an internal controls. In cases involving pre- As a result, acquirors would do well acquired business. Reporting Issuers must acquisition violations, the target, the to conduct appropriate levels of FCPA implement adequate recordkeeping and acquiror, or both voluntarily disclosed the due diligence prior to executing an internal controls functions immediately identified FCPA problems to the SEC and acquisition agreement and prior to clos- upon the closing of a transaction, which the DOJ. Each acquisition included closing ing an acquisition. involves incorporating the acquired conditions in the acquisition agreement as The FCPA prohibits the offer, payment, business into the acquiror’s compliance originally entered or amended with respect promise to pay,or authorization of the pay- scheme. Violations of the FCPA carry to FCPA issues. ment of money or anything of value to any both civil and criminal penalties.Enforce- Where an acquisition finally occurred, foreign official, foreign political party or ment actions can be conducted by the the acquiror entered into a non-prosecution DOJ and the SEC, and they agreement with the DOJ or obtained con- often conduct parallel, coordi- ditional assurances from the DOJ that it did “ It is extremely important to nated investigations. not intend to take an enforcement action against the acquiror, as long as the acquiror Enforcement actions often conduct FCPA-specific due diligence complied with certain undertakings. begin with the discovery of reviews of potential targets Typically, such undertakings included ” and subsequent voluntary dis- government investigations (including dis- operating internationally. potential FCPA violations dur- continuing cooperation with any ongoing ing acquisition due diligence closure by the target to the DOJ imposition of discipline on personnel of official thereof, or foreign political candi- and the SEC.Take, for example, the failed closure of later discovered violations), the date for the purpose of obtaining or retain- acquisition of Titan Corpora-tion by the target involved with past violations, ing business for,or directing business to,any Lockheed Martin. In the course of and integration of the target into the person or for securing any improper bene- Lockheed’s acquisition due diligence, acquiror’s existing compliance scheme. ISTOCKPHOTO fit. These anti-bribery provisions apply to potential FCPA violations came to light The recent FCPA cases demonstrate the 14 CCCA Canadian Corporate Counsel Association SPRING 2008