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Private Company M&A: dealing with bribery - due diligence and deal terms.
Although there have not been any major prosecutions under the Bribery Act 2010 (Bribery Act), anti-bribery and corruption is an increasingly important consideration in any acquisition. Whilst the Bribery Act does not create liability for a buyer (as successor) for the acts of bribery of a target company which take place before closing of the acquisition (in contrast to the position which may arise under the U.S. counterpart to the Bribery Act, the Foreign Corrupt Practices Act (FCPA)), it does create a ‘Corporate Offence’.
Under the Corporate Offence a buyer may in certain circumstances become liable for acts of bribery of a target company which occur after closing if the buyer has failed to prevent the target company from engaging in such acts. The only defence to the Corporate Offence is that the buyer has in place “adequate procedures” to prevent bribery – part of demonstrating adequate procedures will be undertaking proper due diligence on the target company.
Irrespective of whether the buyer is itself liable for acts of bribery by the target company, the buyer will have a number of other concerns if the target company has engaged in bribery including reputational issues and the risk of prosecution and fines for the target company and/or its directors. The proceeds of any bribery may also be subject to anti-money laundering offences and recoverable as the proceeds of crime.
Coupled with this, in October 2012 the Serious Fraud Office made a number of policy changes including on self-reporting of instances of bribery. The earlier policy on self-reporting (which is now superseded) suggested that companies would reduce the likelihood of a criminal prosecution by self-reporting instances of bribery. The net effect of these policy changes and recent announcements by the Director of the SFO is that the SFO has moved away from co-operation with corporates to asserting its role as a prosecutor. This is an unwelcome change for many companies, including those involved in an acquisition where the target company has been involved in bribery.
Due diligence and deal terms
To address the risks associated with bribery, buyers are increasingly:
- Undertaking anti-bribery due diligence
- Including specific warranties as to compliance with the Bribery Act and other anti-corruption laws
- Linking compliance with the Bribery Act and other anti-corruption laws with any consideration payable under the acquisition agreement after completion
U.S. buyers often carry out anti-bribery and corruption due diligence as a standard part of the acquisition process. This is, at least in part, due to the risk of successor liability that US buyers have under the Foreign Corrupt Practices. Increasingly, all buyers are carrying out anti-bribery and corruption due diligence irrespective of the transaction size or location of the target company and its business. In May 2012, Transparency International recognising this trend published guidance setting out 10 good practice principles for anti-bribery due diligence in mergers, acquisitions and investments.
Where it is not possible to carry out such due diligence before closing, buyers typically carry out detailed anti-bribery and corruption due diligence of the target company shortly after closing.
If issues are identified during due diligence, appropriate remedial action needs to be taken by the buyer as soon as possible. If instances of bribery are identified, buyers should consider self-reporting immediately after closing notwithstanding the SFO’s recent change in policy.
No matter how “clean” a target appears after due diligence has been completed, buyers now invariably require sellers to warrant compliance with the Bribery Act and, in many instances, other anti-corruption laws. Frequently, this will also include a warranty as to the “adequate procedures” to prevent bribery of the target company.
Ongoing compliance – linkages to payment
Where there is an earn-out or a deferred payment payable to a seller under an acquisition agreement, and the seller is remaining with the target post-closing, buyers are increasingly linking the right to this payment to compliance with the Bribery Act by the seller and, in some instances, compliance by the target company. Certain buyers are also linking these payments to compliance with other anti-corruption and ethics requirements. These compliance obligations can be extremely onerous particularly where they are linked to general policies of the buyer or activities over which the seller does not have direct control. This can lead to lengthy and sometimes difficult negotiations.
The inclusion of such compliance obligations is particularly common in ‘people’ based businesses and where the target has an international footprint.
Direction of travel
Given the current environment, and the risks associated with non-compliance with anti-bribery and corruption laws, we expect more buyers to undertake detailed due diligence in this area and put in place increasingly detailed compliance provisions in acquisition agreements. For sellers, if the compliance provisions are appropriately negotiated, this should represent a manageable risk if the target has an appropriate culture of compliance supported by appropriate systems, policies and procedures.
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