perform the way the corporation intended. All the corporation needed was a more detailed statement giving stockholders guidance on what was specifi-cally required for notice of director nominations.
Conclusion
The bottom line with respect to these cases is that the Delaware Court of Chancery wiII enforce ad-vance bylaw provisions if they are clear and specifi-cally describe what, when, and how to give advance notice. However, where the Court is forced to inter-pret a provision it finds ambiguous, it wiII resolve doubt in favor of the stockholders' electoral rights.
The overall focus seems to be on fairness to stock-holders, given the importance of stockholders' rights to nominate and elect directors. And that fair-ness may come in the form of a detailed bylaw giving stockholders guidance on what, when and how to give notice, thus prevailing over a neglectful or tacti-cal stockholder who fails to even try to comply.With advance notice bylaws, specific beats general, and substance beats form.
NOTES 1. 924 A.2d228,240 (Del.Ch.2007). 2. /d. at 234. 3. /d. at 234-35. 4. /d. at 235. 5. /d. 6. /d. at 239-40. 7. /d. at 240. 8. /d. 9. /d. 1O./d. at 240. 11./d. 12./d. at 239. 13.2008Wl 660556(Del.Ch.March 13,2008). 14./d. at *3. 15./d. at *1. 16./d. at *3. 17./d. at *5. 18./d. 19./d. 20./d. 21./d. at *5. 22./d. 23./d.Thatsentenceprovidedthat: "Notwithstanding
the foregoing, suchnotice must also complywith any applicablefederal securitieslawsestablishing the circumstancesunder which the Corporation
is required to include the proposal in its proxy statement or form of proxy."/d. at *2.
24./d. at *5.
25.C.A. No. 3516-CC,Trans. Op. (Del. Ch. Apr. 4, 2008). 26./d. at 3-4. 27./d. 28./d. at 3. 29./d. at 5-7. 30.2008 WL1724244(Del.Ch.Apr.14,2008). 31./d. at *6-7. 32./d. at *5.
33./d. at *3. However, the Court found that
comparing the previous bylaws to the current bylaws was not of great assistance due to the wide range of changes that had been made to the bylawsover the years. /d. at *6 n.37.
34./d. at *5-6. 35./d. at *7. 36./d. at *6.
The Foreign Corrupt
Practices Act:
A Picklein M&A
Transactions
BY SOREN LINDSTROM AND CURTIS
RIDDLE
Soren Lindstrom is a partner and Curtis Riddle is an as-sociate in the corporate department of the Dallas office of Baker Botts LLP.Contact: soren.lindstrom@bakerbotts. com or curtis.ridd/[email protected].
The Foreign Corrupt Practices Act (FCPA) was enacted in 1977 and then lived in near-hibernation over the next 25 years. That has changed dramati-cally.Since 2002, the FCPA'slife has been marked by a sharp increase in enforcement efforts by the De-partment of Justice (DO]) and the Securities and Exchange Commission (SEC). The once seldom-used law now has its own bar association that, by all accounts, is thriving.
Since violations of the FCPA are punishable by steep civil and/or criminal penalties and can result in severe harm to the reputation of a business, the FCPA poses crucial challenges for U.S. companies
6
in merger and acquisition transactions, in particu-lar when the target is foreign or has substantial for-eign operations. The principal FCPA challenges in a M&A context include:
How does a buyer conduct its due diligence to get comfortable that the seller has not violated the FCPA?
What should a buyer do if FCPA violations are uncovered during due diligence?
What should a buyer do to ensure that no viola-tions by the target occur post-closing?
Because most business combination transactions are competitive, typically a target would not subject itself to "forensic" type due diligence by a potential buyer. However, while not entirely avoidable, the at-tendant risks can be lessened by the use of best prac-tices in transactional due diligence as well as the im-plementation of effectiveFCPA policies, procedures and training following a transaction. In the vein of reducing FCPA related risks both pre- and post-transaction, this article will discuss some common FCPA warning signs, offer practical suggestions on due diligence and negotiating the merger/purchase agreement and, finally, offer suggestions for post-closing policies that a buyer should consider imple-menting in order to avoid problems going forward.
BriefFCPABackground
The overarching purpose of the FCPA is to pro-hibit bribery of foreign officials. The FCPAhas three provisions that all work together with the goal of accomplishing this purpose. The "anti-bribery" pro-vision, as its name indicates, outlaws and punishes the act of providing anything of value to a foreign official with the intent to influence the placement or retention of business. The "books-and-records" and "internal controls" provisions are aimed at pre-venting bribery and corruption by requiring that the company keep accurate books and records and es-tablish a policy of internal controls designed to pre-vent and detect illegal payments. FCPA violations are punishable by steep civil and/or criminal penal-ties. For companies that rely heavily on U.S.Govern-ment contracts, a far greater penalty may loom, as violations of the FCPA can potentially result in de-barment or loss of the ability to contract with the Federal Government. This potential catastrophic penalty and its chilling effects were best illustrated
by the widely publicized failed acquisition of Titan Corp. by Lockheed Martin. Upon discovering Ti-tan's potential FCPA violations, Lockheed Martin backed out of the deal rather than proceeding and risking potential successor liability.
Titan/Lockheed Martin is not an isolated case, as the FCPA has played a role in other major M&A transactions, including: Cardinal Health Inc.'s ac-quisition of Syncor International Corp. and General Electric's acquisitions of InVision Technologies and Vetco Gray. Cardinal did eventually acquire Syncor, but only after Syncor paid a $500,000 civil penalty and pled guilty and Syncor's Taiwan subsidiary paid a $2 million fine. Similarly, GE was able to acquire InVision, but only after a fine and a deferred pros-ecution agreement. Vetco Gray had already pleaded guilty when GE acquired it, but the ongoing investi-gation into Vetco by the DO
J
resulted in additional guilty pleas at the time of the acquisition and record criminal fines of $26 million.While not producing similar results and not tack-led in the same manner, each of these transactions provides ample support for the notion that the FCPA is increasingly present in the transactional world.
WarningSigns
FCPA problems come in many shapes and sizes, but there are common warning signs that should alert a buyer. While the presence of any number of warning signs, or "red flags", may not present an unacceptable risk, they can help a buyer plan due diligence and negotiation strategies to mitigate its risks.
"Red Flag" Jurisdictions and Industries. Where
does the seller/ target operate? Transparency International publishes the Corruption Percep-tion Index,1 which should be used as a tool in assessing a foreign jurisdiction's vulnerability to corruption. A company that is operating in a jurisdiction that has no FCPA equivalent or a country that has recently enacted a similar law may be more vulnerable to FCPA-related prob-lems. Additionally, a buyer should take into account that certain industries are historically more susceptible to corruption.
Ethics Culture of the Target. The culture that
pervades a business can be an important gauge on the likelihood of corruption within the
busi-ness. Important warning signs include past violations of any law (even if unrelated to the FCPA) as well as the lack of a code of ethics and business conduct.
Past FCPA Problems. If the seller has had past
FCPA problems, how were these handled? In-ept or incomplete handling of past problems should be an important warning to any buyer. In addition to the obvious ramifications this has on the target's culture, the possibility exists that the problem was not adequately handled be-cause the personnel responsible was considered irreplaceable or the particular corrupt practice was deemed necessary to the continued success of the business.
Government Contractors. Does the target
de-rive a substantial amount of business from government contracting? If the target derives a substantial part of its revenue from govern-ment contracts and has any of the previously discussed warning signs, a buyer should focus its diligence efforts on ensuring that no corrup-tion is present, which might jeopardize such contracts.
Lack of Willingness to Cooperate. If the
sell-er indicates a lack of willingness to coopsell-erate with the buyer's FCPA due diligence procedures or indicates that it will not comply with FCPA compliance efforts going forward, a buyer should seriously reconsider whether to proceed with the transaction.
Due Diligence
The due diligence efforts undertaken in response to FCPA risks are integral to completing a deal that makes financial sense for both parties while allocat-ing the risks appropriately. In plannallocat-ing its diligence review, a buyer should begin by focusing on any red flags that it identified in its first look at the target. With these risks in mind, the buyer can customize its diligence efforts for maximum efficiency.Since a business is often purchased in a competitive situa-tion, a buyer will most often not have the time to conduct an exhaustive due diligence investigation and the seller will normally not subject itself to any kind of forensic investigation. Accordingly, the buy-er's focus should be on conducting a commercially reasonable due diligence investigation, taking into
account the perceived risks and then preparing to deal with any issues post-closing. Below are some suggestions on how to determine whether the seller, its principals, employees or agents have been en-gaged in corrupt practices. The degree and intensity of a buyer's due diligence should depend on the facts and circumstances, including whether there are any red flags, and, therefore, may consist of one or more of the following suggestions:
Due Diligence Questionnaire. A buyer should
start its FCPA due diligence by distributing a carefully crafted due diligence questionnaire to the seller. This questionnaire should request in-formation and related documents from the seller regarding its ownership structure, directors and management, ties to governmental officials, and the use of commercial agents, consultants and subcontractors.
u.s. Government Inquiries. Inquiries to officials
from U.S.Embassies, the Department of Com-merce and Department of State can provide valuable information about the reputation of a company and its management as well as the climate for corruption in a country.
Electronic Research. The electronic research
should include a review of the target's website, appropriate news and legal databases on Lexis! Nexis or Westlaw, searches for resources from the countries in which the target operates as well as general searches on internet search en-gines such as Google or Yahoo. These searches will help alert a buyer to FCPA-related news stories or litigation involving the target or a re-lated person.
Document Review. The buyer should also
re-view documents relating to the ownership of the target, its principals and commercial agents as well as banking documents. From these documents the buyer may be able to ascertain whether any government official is a direct or indirect owner or beneficiary of the target, and whether the seller utilizes any unusual payment or banking practices.
Interviews. The buyer could also choose to
in-terview persons related to the target. The inter-views should principally pertain to the
tion and qualifications of the interviewee and the ultimate beneficial owners of the target.
Use of Investigative Firms. If the buyer is not
satisfied with the results of the previous meth-ods, feels there is more information that the tar-get is not disclosing or just wants to be more thorough, it should also consider employing an investigative firm such as Control Risks or FTI Consulting.
The results of each of the methods of investiga-tion should be memorialized so that the buyer can demonstrate that it employed commercially reason-able due diligence in case an FCPA violation is later discovered. If the buyer, during the due diligence process, uncovers past problems with unethical be-havior or corrupt practices, it becomes imperative to dig deeper and obtain more information about such things as:
Whether the unethical behavior/payments have been or will need to be continued in order to retain important contracts, benefits or rela-tionships? If a substantial portion of the tar-get's business has been obtained and retained through unethical behavior, the value of the tar-get may be substantially reduced to the buyer, as the buyer will be unable to continue the behav-ior once in control of the target.
Whether any corrupt individual or entity re-mains connected to the target? It is important to learn whether the target removed anyone par-ticipating in unethical behavior at the time of the discovery.
If the target is a government contractor, whether there is any risk of debarment? For many Fed-eral contractors, debarment would be a death sentence.
Whether the past unethical behavior may result in accounting or disclosure issues for the target and/or expensive or time consuming litigation? Accounting restatements and litigation are very costly, but a buyer must also consider the dis-traction to management such predicaments will cause.
Whether the past corrupt behavior should be reported to authorities? This is a particularly delicate situation that will require open com-munication between the buyer and target. Public disclosure may result in near term
consequenc-es, but may prove beneficial to both the buyer and the target in the long term. In particular, if a buyer is already under government investi-gation, the buyer's only real option may be to disclose and discuss the target's past behavior with the authorities (i.e., DO] and SEC).
Negotiationof PurchaseAgreement
Gathering the appropriate information during the due diligence investigation will help to ensure that the buyer knows what it is buying and pays a fair price. The representation below, made by the seller for the benefit of the buyer, ensures a level of com-fort, even if small, on the part of the buyer, as no diligence review will ever turn up all potential FCPA related risks. The specific representation should vary from deal to deal based on the facts and cir-cumstances involved, but below is an example of a representation that offers broad protection for the buyer:
"Neither the Company, nor any of its sub-sidiaries, nor any of their respective di-rectors, officers. employees or agents has taken any action, directly or indirectly, that would result in a violation by such per-sons of the Foreign Corrupt Practices Act of 1977, as amended (such act, including the rules and regulations thereunder. the "FCPA"),including, without limitation, of-fered, paid, promised to payor authorized the payment of any money. or offer, gift, promise to give. or authorized the giving of anything of value to any "foreign official"
(as suchterm is defined inthe
FCPA)or any
foreign political party or official thereof or any candidate for foreign political office, in contravention of the FCPA,and the Com-pany and. to the knowledge of the Compa-ny, its affiliates have conducted their busi-nesses in compliance with the FCPAand have instituted and maintain policies and procedures designed to ensure, and which are reasonably expected to continue to en-sure. continued compliance therewith."A FCPA representation of the target drafted and tailored to the specific transaction should be in-cluded in each merger or purchase agreement. In
addition, the buyer should seek to negotiate specific indemnification provisions with respect to any past FCPA violations. However, no representation or in-demnification will serve to fully correct a flawed dili-gence process--each buyer should focus on dilidili-gence as the most effective method of limiting liability to the FCPA and assuring itself of what is being pur-chased.
FCPA
Compliance
AftertheDeal
The investigation and mitigation of FCPA risks by the buyer prior to closing are an indispensable part of an overall strategy meant to combat potential li-abilities, but the efforts must not end on the day of closing as the true test still lay ahead. If the target has no past problems and has an effective FCPA compliance program in place, then the next step may involve nothing more than administrative mat-ters such as changing the internal person to whom possible violations are reported. However, if the sell-er has a history of problems and/or does not have a functioning FCPA compliance program, then the next step will involve a greater challenge.
Every purchase of a company that does not havean effective FCPA compliance program should involve the immediate implementation of such a program. The DO], at least implicitly,provided guidance as to what constitutes an effectiveFCPA compliance pro-gram in its ]uly 12,2004 Opinion Procedure Release.2 In that release, an investment group requested that the DO] not pursue an enforcement action based on FCPA violations by the target it was acquiring. The requestors made several representations regarding an FCPA compliance program that would be imple-mented going forward, and, ultimately, the DO] de-clined to pursue enforcement against the requestor. The FCPAcompliance program had many parts, but among the most important and universally applica-ble were that the compliance program:
contain a clearly articulated policy against cor-ruption;
be implemented and overseen by senior execu-tives;
be accompanied by regular training and annual certifications of compliance;
contain a hotline for reporting possible viola-tions;
be implemented in future business relationships through such things, among others, as represen-tations in contracts and education of business partners;
contain appropriate discipline, monitoring, ac-counting and reporting procedures; and contain appropriate provisions regarding audits by outside counsel and auditors to ensure its ef-fectiveness.
These are some of the elements of an effective FCPA compliance program, but they are not com-prehensive, and they may not be sufficient in every situation. In order to be effective, a FCPA compli-ance program must be backed by a corporate culture of integrity. From the CEO down, each company that wishes to avoid exposure to the FCPA must back up the policy with action that leaves no doubt in the mind of each employee as to where the com-pany places its values.
Conclusion
The implications of the FCPA, especially for gov-ernment contractors, are enormous, and the acquisi-tion of another company may open a veritable Pan-dora's Box of potential FCPA-related risks. These risks are particularly acute in cross-border transac-tions where "red flags" are present. Every buyer must walk the fine line between performing adequate due diligence while not scaring away the target. This can be an especially tough task if the target is foreign, where cultural differences must also be taken into account. Some of the attendant burdens, uncertain-ties and risks faced by u.s. buyers could be alleviated through greater transparency in the interpretation and enforcement of the FCPA by the DO] and SEC and the adoption of "safe harbor" type guidelines. In the absence of such measures, U.S.companies will continue to be competitively disadvantaged in the global mergers and acquisitions markets.
NOTES
1. See http://www.transparency.org/policy_research
/surveysjndiceslcpi.
2. See DOJ Foreign Corrupt PracticesAct Review, Opinion Procedure ReleaseNo. 04-02 (July 12, 2004),availableat http://www.usdoj.gov/criminall fraudlfcpalopinionl2004/0402.html.
