The Halliburton opinion will have serious implications for FCPA liability and due dilligence during M&A transactions
Until recently, understanding a company’s accountability for Foreign Corrupt Practices Act (FCPA) violations made by a third party it is looking to acquire has been tough. Last month, Corporate Secretary and Foley held a webcast to help shed light on the topic by examining the FCPA issues raised in the Department of Justice’s (DoJ) Halliburton opinion, released in June 2008.
David Simon, partner in Foley’s white collar defense and corporate compliance practice, and David Snively, senior vice president, secretary and general counsel at Monsanto, laid out best practices in discussing Halliburton’s proposed acquisition of a British-based oilfield with potential FCPA violations. In this scenario, challenges didn’t involve just the activities the target company was engaged in, but the high-risk FCPA regions in which it operated.
The outcome of the June opinion on Halliburton was a charged meeting with the DoJ. The department made a number of demands, the first of which being that Halliburton report back on information disclosed during its negotiations. Although the deal never went through, Simon said the opinion did reveal the DoJ’s position that ‘successor liability [for FCPA violations] can be managed by post-closing due diligence.’
Always be closing
‘It was very clear that the government viewed the negotiations with Halliburton as a constructive measure that would improve negotiations,’ continued Snively. Simon added, ‘The government agreed not to initiate any enforcement action based on the plan proposed to them by Halliburton.’ Although the plan made it clear that you could proceed without criminal prosecution, Snively explained, ‘This was not a get-out-of-jail-free card, but it was one condition that the government tried to calibrate to a highly ethical company.’
Snively dealt with a similar situation at Monsanto, which worked with the DoJ to have a post-close code of conduct in place. ‘We didn’t lose any time,’ he said, coining a governance mantra: ‘Good governance, post-close.’
‘That post-closing plan’s really pretty important,’ agreed Simon, indicating that agreements can involve creating new contracts with third parties and revising codes of conduct and training procedures.
Look before you leap
A bulletproof post-closing agreement doesn’t excuse companies from performing due diligence before entering into mergers. Companies are expected to do everything they can pre-closing. Referencing a recent Deloitte white paper (see ‘Getting background’,), Simon said, when it comes to global expansion, be sure to look before you leap; 67 percent of US public companies surveyed frequently conduct background checks when considering a merger with an international corporation, and 57 percent restructure agreements following those checks. ‘We’re one of the companies that always does the checks,’ said Snively, mentioning that Monsanto has restructured agreements as a result.
Simon went on to explain that ‘the first step in developing a due diligence approach is to think about the target’s risk profile.’ He suggested that companies commission a report, consult embassies and consider whether the target’s industry is heavily regulated. Speaking from his own experience at Monsanto, Snively added that using outside counsel ‘goes a long way with credibility.’ Given the FCPA issues embedded in a potential target company’s transactions, he advised companies to ‘make sure to get a separate section for an FCPA evaluation.’
As for best practices to come out of the Halliburton opinion, Simon said, the DoJ appears to want companies to commission reports from investigative firms, solicit business consultants ‘in country’, research names of people at the target, meet with US embassy representatives and hire outside counsel to conduct due diligence. The due diligence report’s wording is also important, noted Snively, as countries can react in different ways, especially as the ‘increasing internationalization of anti-corruption efforts’ is creating a new level of risk. This also makes it all the more necessary to keep tabs on third parties.
The reward for abiding by this lengthy list of criteria: a sharp drop in the likelihood that your company will meet with enforcement action.
Watching the detectives
Just getting information from companies can pose a substantial hurdle. For instance, regarding Halliburton, under UK law its target was not allowed to provide complete information. ‘It certainly appears as though there were FCPA issues in the limited information [made available],’ observed Snively. ‘Data privacy laws in foreign countries are real obstacles to getting this kind of information.’ This is particularly relevant when trying to uncover political content.
‘You might find it difficult to get the due diligence the DoJ expects to see,’ commented Simon. It’s in these situations that an advisory request can be necessary, but more guidance may be needed. If Halliburton is a guide, Simon said, more understanding on the matter should be forthcoming.
Another hurdle presented by the FCPA: is compliance monitors. ‘In our situation we were allowed to come with a recommendation on who our monitor should be,’ said Snively, citing international experience and no relationship with the company as necessary requirements. ‘The optimal process is to have the company work with the government. As this person will spend three years with the company, this relationship is very important.’ As Simon warned, many companies don’t have that option.
Yet overall, the benefits of the Halliburton opinion in clarifying the DoJ’s stance on FCPA violations in M&A transactions are loud and clear. According to Snively, the Halliburton opinion yielded one especially optimistic tone: ‘The government actually does listen to companies. And I think Halliburton really shows how far the government was willing to go with issuing this kind of guidance.’ But in any scenario, there are always blind spots, and having a crackerjack team can help keep those at a minimum. As Snively noted, ‘This is not an area for amateurs and you need to have expert counsel.’
