The main consequence of an M&A transaction is that the buyer becomes a "partner" in the assets and liabilities of the target company. For this reason, it is very important for the buyer to be able to foresee the risks it is taking on before the share transfer takes place. The buyer can identify these risks by carrying out due diligence before negotiating the transaction documents (usually a share purchase agreement and, where the seller will remain a shareholder in the target company, a shareholders' agreement). In recent years, buyers' due diligence has gone beyond general legal and financial review to cover compliance matters governed by the Foreign Corrupt Practices Act (the "FCPA"), a federal law of the United States. This article looks at the importance of the FCPA in M&A transactions in jurisdictions outside the US, such as Türkiye.
Scope of the FCPA
Under the FCPA, any direct or indirect monetary or other payment that may be described as bribery or a corrupt transaction is a criminal offence if made to any of the following: (i) public officials or employees of public offices of a country other than the US, (ii) political parties, party officials or candidates of a country other than the US, or (iii) international organisations or their directors. The following natural and legal persons fall within the jurisdiction of the FCPA:
- any company listed on a US stock exchange, regardless of where it is incorporated or which jurisdiction it belongs to,
- (i) companies, including their affiliates and subsidiaries, (ii) joint ventures and (iii) sole proprietorships incorporated in the US,
- US citizens and resident aliens, whether their commercial activities take place inside or outside the US,
- (i) shareholders, (ii) board members, (iii) representatives or (iv) other persons acting on behalf of a company incorporated in the US,
- persons directly or indirectly engaged in interstate commerce in the US, and their employees,
- non-US citizens who commit bribery or take part in any other corrupt transaction in any way within the US, and
- any company incorporated outside the US that commits bribery or takes part in any other corrupt transaction in any way in the US.
Under the principle of territoriality, the law of each state applies within its own borders. There are, however, laws and regulations in the US and in several European countries (such as the UK Bribery Act) that have extraterritorial effect for political and economic reasons. As the list above shows, the jurisdiction of the FCPA is very wide. Although it is a US law, its provisions make it possible to penalise bribery or other corrupt transactions involving non-US third parties.
Enforcement
The US Securities and Exchange Commission (the "SEC") has imposed extremely high penalties on several multinational companies for FCPA violations. The five highest penalties imposed under the FCPA are listed below. Notably, four of the five companies penalised are incorporated outside the US. Most of these penalties were set through settlements between the SEC and the companies concerned. These settlements clearly show how effective the FCPA's penalty system is, and they underline the importance of FCPA risk assessment when negotiating an M&A transaction.
- Siemens (Germany), 2008: 800 million, for committing bribery on a regular basis.
- Alstom S.A. (France), 2014: 772 million, for committing bribery to gain advantages in energy tenders.
- KBR and Halliburton (USA), 2009: 579 million, for bribing Nigerian public authorities.
- BAE Systems (UK), 2010: 400 million, for keeping false accounts and records of an agreement signed in Tanzania.
- Total S.A. (France), 2013: 398 million, for bribing Iranian authorities in connection with petroleum agreements.
FCPA Due Diligence in M&A Transactions
Buyers in M&A transactions may acquire shares directly or through special purpose vehicles. In either case, the target company becomes a direct or indirect subsidiary of the buyer after closing. If the ultimate parent company is within the jurisdiction of the FCPA, its subsidiaries are automatically regarded as falling within that jurisdiction as well. As the extraterritorial reach of the FCPA continues to grow, the number of companies and managers subject to its provisions keeps rising. To minimise the related risks, FCPA due diligence should be carried out with a focus on the following matters:
- Where a company already subject to the FCPA acquires shares in a company that is not, the target company will become subject to the FCPA after closing.
- Where a company not subject to the FCPA acquires shares in a company that already is, the acquiring company will become subject to the FCPA after closing.
- Where the authorised representatives or shareholders of a company not subject to the FCPA have previously been blacklisted for an FCPA violation and take an active part in an M&A transaction in which the acquiring company is already subject to the FCPA, their involvement may create a significant risk for the acquiring company.
In light of the above, it is very important for the buyer's due diligence to establish whether (i) the target company or (ii) any board member or representative of the target company has been penalised or blacklisted for an FCPA violation, or carries similar risks for the future. FCPA due diligence will also guide the parties concerned in deciding on their human resources strategies and on whether to continue a commercial activity that may carry a risk under the FCPA.