12/2/2010

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Mayer Brown is a global legal services organization comprising legal practices that are separate entities ("Mayer Brown Practices"). The Mayer Brown Practices are: Mayer Brown LLP, a limited liability partnership established in the United States;

Mayer Brown International LLP, a limited liability partnership incorporated in England and Wales; Mayer Brown JSM, a Hong Kong partnership, and its associated entities in Asia; and Tauil & Chequer Advogados, a Brazilian law partnership with which

Mayer Brown is associated. "Mayer Brown" and the Mayer Brown logo are the trademarks of the Mayer Brown Practices in their respective jurisdictions.

FCPA Risks in the

Mergers & Acquisitions World

Michael VolkovPartner

(202) 263-3288mvolkov@mayerbrown.com

December 2010

Overview

• Overview of the U.S. Foreign Corrupt

Practices Act (FCPA)

• FCPA Cases / DOJ Opinion Releases

Involving M&A

• Lessons Learned

• Pre-Acquisition Due Diligence Steps

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Anti-Bribery:

– Domestic concerns (defined as a U.S. person or corporate entity)

are prohibited from making corrupt payments or promises to pay

foreign officials for the purpose of obtaining or retaining business

Accounting / Recordkeeping Provisions:

– Internal control and recordkeeping provisions applicable to

corporations whose securities are registered with the SEC, or

who must file regular reports with the SEC

Basic FCPA Prohibitions Who is liable under the FCPA?

• Domestic

– All US “issuers” and private companies (“domestic concerns”)

– Any US corporation or national or any foreign bribery-related conduct

– US citizens or foreign nationals operating in the US or using instrumentalities

• Foreign

– Foreign corporations subject to SEC regulation (e.g., via ADRs) and using instrumentalities

– All foreign corporations when in US territory, whether or not they use instrumentalities of interstate commerce

• Includes directors, officers, employees, and agents of entities subject to the statute

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� Corporate mega fines

� Obama administration's focus: "HIGH PRIORITYHIGH PRIORITY"

� New and aggressive investigative tactics

� Industry focus

Increased and Aggressive FCPA Enforcement

FCPA–Why Important?

• “Foreign bribery is a law enforcement challenge

of truly global dimensions. It is, as the Attorney

General has said, a “scourge on civil society.” We

in the Criminal Division combat foreign bribery

each and every day. And as we go about our

business, we are looking carefully at lapses in

corporate compliance.”

(Lanny A. Breuer, Ass’t Attorney General, Criminal

Division. DOJ, May 26, 2010)

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[1] Gibson, Dunn & Crutcher, LLP Publication "2009 Year-End FCPA Update" (Jan. 4, 2010)

The Numbers Tell the Story Mergers and Acquisitions:FCPA Liability

• Acquiring company may be held criminally liable for

FCPA violations committed by target company BEFORE

and AFTER closing – Successor Liability

• Pre-closing due diligence is critical to assessing risks and

avoiding liability

• Due diligence should identify risks of potential FCPA

violations

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Mergers and Acquisitions:Impact of FCPA Liability

• Impact of FCPA violations on transaction structure, price,

and need for additional warranties and indemnifications

• Terminate or delay proposed deal

• Corporate integration issues

• Need to implement enhanced FCPA compliance program

• Possible voluntary disclosure to Justice Department

• Opportunity to resolve potential liabilities

• Need to halt illegal conduct and dismiss officers and employees

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Basic Purchase Agreement ProtectionsAgainst FCPA Liability

• Warranties and Indemnifications against possible FCPA

violations

• Participation in transactions permitted under local law

• Absence of government owners in company

• No corrupt payments were made to foreign officials

• Books and records are complete and accurate

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FCPA Successor Liability for Mergers and Asset Sales

• Successor liability generally attaches in stock transfer or

merger because assets and liabilities of target company

generally transfer to the acquiring company after closing

• Successor liability may attach in asset purchase

depending on extent of asset purchase and inquiry

focused on whether business of target is continuing or if

agreement specifies which assets and liabilities transfer

Form will not trump substance and due diligence may

just as critical as in stock acquisition.

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FCPA Successor Liability for Joint Ventures and Minority Stake Acquisitions

For joint ventures and minority acquisitions, company can be held

liable for future conduct of joint venture or majority partner. FCPA

liability will depend on a governance test: how involved is the joint

venture partner or minority owner in the governance of the joint

venture or majority company – board members, voting rights.

To minimize risk, party should promote FCPA compliance by requesting

measures for good governance, accurate recordkeeping, and anti-

bribery efforts; seek audit rights, anti-corruption representations, and

written commitments to abide by anti-corruption laws .

Even if not adopted, maintaining a record of such requests could help

protect against or minimize FCPA exposure

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Recent Cases Involving Successor LiabilitySnamprogetti, ENI, Saipem

• Snamprogetti: a subsidiary of ENI, engaged in bribery

scheme for 10 years ending in 2004. In 2006, ENI sold

Snamprogetti to another company, Saipem.

• Four years later, in 2010, Snamprogetti was charged with

FCPA criminal violations.

• Snamprogetti agreed to $240 million fine, and ENI and

Saipem were jointly liable for fine.

• ENI, Snamprogetti and Saipem had to institute a

corporate compliance program.

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Recent Cases Involving Successor LiabilityAlliance One

• Alliance One was formed in 2005 with merger of Dimon

Inc. and Standard Commercial Corporation.

• In 2010, DOJ brought criminal case against Alliance One

for FCPA violations committed by foreign subsidiaries of

Dimon and SCC BEFORE the merger.

• Foreign subsidiaries entered guilty pleas; Alliance One is

required to cooperate and retain an independent

compliance monitor for 3 years. Alliance One settled

civil complaint by disgorging $10 million.

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Successor Liability : Deal Terminated Lockheed and Titan

• Lockheed and Titan: In 2005, while conducting pre-

acquisition due diligence of Titan, Lockheed discovered

bribe payments by Titan which were made to obtain

telephony contract s in the Republic of Benin.

• Out of concern for successor liability, Lockheed pulled out

of deal.

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Successor Liability: Finding a Way Forward:GE and InVision

• GE and InVision: In 2005, while conducting pre-

acquisition due diligence of InVision, GE discovered

potential FCPA violations surrounding InVision;s use

of consultants to obtain contracts for explosives

detection equipment in China, Thailand and

Philippines.

• GE went forward with the deal after rigorous due

diligence, deal modifications, and requiring

InVisionto make a voluntary disclosure to Justice

Department.

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Due Diligence: General Considerations

• Due diligence is not a legal defense but it can minimize

risk of successor liability when coupled with acquiring

company’s FCPA compliance commitment

• Timing of voluntary disclosures should be carefully

considered since DOJ involvement raises stakes

• Due diligence has to be tailored to transaction – whether

it is merger, asset acquisition, joint venture or minority

stake purchase

• Overall strategy should be flexible as information is

learned

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What Does Due Diligence Require?

• Little available authority on required due diligence steps

– “an art, not a science”

• Depends on the Business Combination and the Specific

Facts

• Educate diligence team on FCPA issues

• Factor in necessary time for FCPA review – process likely

will require phases of review

• Follow-up on identified red flags and risk areas

• Document due diligence steps

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What If Due Diligence Cannot be Completed Before Closing? 2008 Haliburton Precedent

• In the face of legal obstacle to obtaining information from

target oil and gas company, Halliburton went to the

Justice Department to minimize its risk of FCPA liability

• No Successor Liability With Stringent Conditions

• Halliburton imposed FCPA compliance policy on the target

company at closing and conducted post-closing FCPA due

diligence inquiry and report the results

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Haliburton Due Diligence:DOJ Deadlines and Investigation

• DOJ imposed strict timeline on Haliburton for post-

acquisition due diligence over 180 days.

• DOJ required Haliburton to conduct extensive post-

closing internal investigation, including examination of

relevant [target company] records, including e-mail

review and review of company financial and accounting

records, as well as interviews of relevant [the target

company’s] personnel and other individuals.

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Haliburton Precedent: Can Similar Procedures be Used in Analogous Circumstances?

• Party may seek accommodation when

– disclosure of certain information prior to closing could place

target company at competitive disadvantage.

– Significant time restraints require less thorough due diligence

inquiry before closing

• DOJ will impose conditions requiring acquiring company

to disclose corrupt activity uncovered post-closing on

strict timeline and to undertake a rigorous internal

investigation.

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FCPA Due Diligence Inquiry:Basic Risk-Based Assessment

– What countries does target company operate in and how do

they rank on Transparency International’s Corruption Index?

– What is level of corruption in each country?

– Does target company sell to foreign governments?

– Does target company’s business depend on licenses or other

approvals from foreign governments?

– Gather basic information about target company (Dun and

Bradstreet. Department of State, Commerce Department,

Treasury Department)

– Try to determine whether relationships exist among target

company personnel and government officials through family,

friends, etc

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FCPA Due Diligence Inquiry:Basic Risk-Based Assessment

– Does the Target Company have an FCPA compliance policy?

Does the target company maintain compliance records?

– Is the target company, or any of its competitors, suspected or

under investigation for corruption?

– Does the target company use third-party agents?

– Any prior internal investigations?

– Any prior corruption investigations of target company or any

officers , managers or employees?

– Does the company maintain hotline reporting system?

– Does the company conduct FCPA training?

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Step Two: Focusing on Key Components(A) Financial Controls

Financial controls – what are basic financial controls?

How are financial controls maintained and structured?

Can system catch corrupt payments?

Who conducts financial audits?

What level of transactions do they examine?

Do they employ “materiality test?

How can adequacy of books and records be tested?

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Step Two: Focusing on Key Components(B) Third-Party Intermediairies

• For third-party intermediaries, all red flag

transactions must be investigated.

• Basic questions must be answered.

– How are they paid? What services do they provide?

– How are expenses paid?

– Are their books subject to audit by company?

– Do they maintain copies of written retainer/consulting

agreements? Do they contain FCPA compliance clauses?

– What procedure for approval of third party contract?

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Step Two: Focusing on Key Components(C) FCPA Training

• What type of FCPA training program?

• Who is subject to training requirement? How often?

• Does company obtain certifications from attendees?

• Does company maintain records of FCPA training

program?

• Does training program distinguish between lawyers,

accountants, and sales staff?

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Step Two: Key Components(D) Employee Discipline/Hotline Reporting

• Does company have written employee discipline

procedures?

• Do procedures include discipline for corruption

violations?

• How do procedures address FCPA compliance?

• Is compliance a factor in employee evaluation?

• Does company maintain records of hotline reports?

• If yes, reports should be reviewed.

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Step Two: Key Components(E) Overall Compliance Structure

• Does company have designated compliance officer?

• To whom does officer report?

• How is compliance program structured and managed?

• What documentation is maintained of compliance

program?

• What audits, if any, are conducted? How often? What

areas?

• How is compliance program structured to address

identified risks?

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Step Three: Identifying Areas for Further Inquiry

• After review of five components and documents, follow

up interviews of staff should be conducted?

• It is better to be safe than sorry – interview any potential

areas for violations or deficiencies in financial controls,

third-party reviews or overall compliance program

• Leave no stone unturned and follow all reasonable leads

• Even if transaction appears to be small, due diligence

requires careful examination

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Step Four: Continuous Assessment and Due Diligence Flexibility

• As more information is gathered, risks can be sifted and

prioritized

• As information paints picture, consider how to raise issues

with target company

• Identify how you want to handle potential FCPA problems,

adopt strategy aimed at securing protections against

liability, and implement as quickly as possible

• Do not run to Justice Department. Voluntary disclosures

are by means mandated and can raise more problems than

warranted. Use as a strategy card to secure best position.

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Ryan MorganFCPA SpecialistWorldCompliance

ryanm@wor ldcompl iance .com(305) 579-2298 x262

Case Study: Elandia - Latinode

• Elandia Acquired Miami Based Latin Node (Latinode) in

2007

• After Acquisition, realized that Latinode had been involved

in attempt to bribe executives at Hondutel, over $2 million

in total

– Initially $300k passed through consulting firms

– A total of $1 million passed directly into FOs bank accounts

• eLandia admitted later that they overpaid by $20 million

due to legal fees, penalties,cost of labor, etc.

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M & A Due Diligence

• United States – Background Check

– Provides Identity Verification – name, address, phone

– Check against criminal record

– May/may not check sanctions list

• Foreign Person/Entity Background Check

– Identity Verification Details lacking

– Publicly available data on criminal records scarce

– Need for sanctions screening (OFAC, BIS) critical

– Due to FCPA concerns, DD process needs to different

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M & A Due Diligence – Catering for your Anti Corruption Program

• Critical first step – Negative Database Check

– Verify person involved in transactions are not a foreign official

– Verify company is not tied to a foreign government – owned or controlled by

FOs

– Verify 3rd party not investigated for corruption

*If any of the above provides a “hit” - may be enough to kill the deal

• Next step – Evaluate risk of transaction to decide if EDD report is necessary

– Deal Size

– Geography

– Industry

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M & A Due Diligence – Catering for your Anti Corruption Program

• Details for your due diligence process:

– Name

– Location

– Dates of Birth – Enforcement community use DOB as an identifier

– Copy of photo ID

– Passport number

– National ID – Latin America

• Timeframe is also critical, if this is a process to go on for

months – do you have an ongoing due diligence process?

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M & A Due Diligence

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Perform a “real time” check to find potential risk

Investigate “hit” to see if person is in fact your contact

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M & A Due Diligence

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Ability to quickly find ties is critical in an M & A environment

M & A Due Diligence

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Mayer Brown is a global legal services organization comprising legal practices that are separate entities ("Mayer Brown Practices"). The Mayer Brown Practices are: Mayer Brown LLP, a limited liability partnership established in the United States;

Mayer Brown International LLP, a limited liability partnership incorporated in England and Wales; Mayer Brown JSM, a Hong Kong partnership, and its associated entities in Asia; and Tauil & Chequer Advogados, a Brazilian law partnership with which

Mayer Brown is associated. "Mayer Brown" and the Mayer Brown logo are the trademarks of the Mayer Brown Practices in their respective jurisdictions.

FCPA Risks in the

Mergers & Acquisitions World

Michael VolkovPartner

(202) 263-3288mvolkov@mayerbrown.com

Q&A

Ryan Morgan

FCPA Specialist

(305) 579-2298 x262

r y a n m @ w o r l d c o m p l i a n c e . c o m