When acquiring, know what you're getting.
Successor liability is a concern in any acquisition. In buying a business, the acquirer, or buyer, is preoccupied with inherited labor, tax, contractual, and litigation contingencies. In Latin America, successor liability for acts of corruption invoking governmental authorities has taken front stage as the United States Department of Justice (DOJ) and the Securities and Exchange Commission (SEC) have dramatically increased enforcement of the U.S. Foreign Corrupt Practices Act (FCPA). Such contingencies not only may delay the acquisition process, but also can ultimately kill a deal.
The lack of clarity about how successor liability operates in the context of the FCPA was somewhat reduced in November of 2012 with the DOJ's publication of A Resource Guide to the U.S. Foreign Corrupt Practices Act.
The DOJ went on record saying that an entity acquiring a foreign business previously not subject to the FCPA because of a lack of the required jurisdictional nexus would have no successor liability under the FCPA for acts of the foreign business before the acquisition. In other words, no successor liability would attach under the FCPA if the target business and the entity that operated it did not conduct business in the United States, its securities were not traded in the U.S. securities markets, and no acts of corruption at issue were masterminded or otherwise conducted through U.S. means such as U.S. banks.
That sense of clarity has been short-lived in light of the DOJ's Opinion Release 14-02 in November 2014 relating to a multinational consumer products company that was looking to acquire a foreign consumer products company not subject to the FCPA. The buyer had discovered improper payments by the target, none of which had a jurisdictional nexus to the United States.
The acquirer promised that no violations would occur after the closing, that the target would be incorporated into the acquirer's reporting and compliance program within one year, and that an integration schedule would be implemented that included risk mitigation, dissemination, and training with regards to compliance procedures and policies, and standardization of business relationships with third parties. The DOJ agreed that the acquirer would have no liability under the FCPA.
What has raised concern is that the Opinion implies that if the target were to continue to receive a benefit from the inappropriate payments after the acquisition, that could subject the acquirer to successor liability. The Opinion states: "Requestor also represents that, based on its due diligence, no contracts or other assets were determined to have been acquired through bribery that would remain in operation and from which Requestor would derive financial benefit following the acquisition."
This statement suggests that if the target had obtained a contract through inappropriate means and the purchaser after the closing of the transaction continued to benefit from the agreement through the target, then the purchaser could have FCPA liability for the acts that occurred before the closing even though those acts when conducted were not in violation of the FCPA. With an isolated contract, the buyer might be able to require the target to terminate the contract before consummating the acquisition and thus escape FCRA successor liability But in transactions involving concessions and permits vital to the business being acquired, there may be no practical way to undo the benefit acquired by inappropriate acts of the target before the closing.
This new concept of successor liability by the DOJ represents an attempt by the Department to fashion "federal common law" that imposes requirements beyond those that apply under traditional notions of state and foreign law. It would likely be rejected if tested in U.S. courts in light of reasoning in the Supreme Court decisions in United States v. Kimbell Foods, 440 US 715 (1979) and United States v. Bestfoods, 524 US 810 (1998). Based on these decisions, one would think that the Supreme Court would similarly reject a proposition that a U.S. acquirer should be liable for actions by a foreign subsidiary when the foreign subsidiary would otherwise have no liability under the relevant foreign law. Nevertheless, many companies are loathe to incur the cost required to test judicially positions taken by a government agency.
Thus, the DOJ position for now may have a chilling impact on certain acquisitions in Latin America.
Sanjiv K. Kapur, a partner in the Jones Day offices of Sao Paulo and Cleveland, practices U.S. and international corporate and commercial law and has extensive experience in mergers and acquisitions and joint ventures. The views and opinions expressed herein are the personal views or opinions of the author: they do not necessarily reflect the views or opinions of the law firm of which he is a partner.
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|Title Annotation:||M&A: SUCCESSOR LIABILITY|
|Date:||Jan 1, 2016|
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