Jerry Hansen: What about due diligence for domestic M&A?

Anti-bribery and corruption due diligence should be conducted on cross-border transactions. The prospect of successor liability alone makes performing such due diligence a requirement for corporate acquirers answering to boards and shareholders, and private equity funds answering to investors.

But what about domestic acquisitions? Should the same rigor of performing anti-bribery and corruption due diligence apply? 

In most cases, yes. 

Most companies — even those with operations in only one country — conduct some form of business outside of their own borders. A U.S. acquirer contemplating a deal with a U.S. based target company (with no locations outside the United States) should still inquire about sales, purchases, and other business activities that occur outside the U.S. and involve dealing with foreign government officials. 

The same would apply for domestic transactions in other countries with law similar to the FCPA, such as the UK Bribery Act, Germany’s Law on Fighting Corruption and the Administrative Offences Act, and France’s Sapin II, among others.

Consider a UK-based computer company that manufactures certain parts and performs assembly of the computers in the UK. Some components it uses come from Korea and Japan, but the company has no visible operations or employees in either country. Does this create potential bribery and corruption risk for a potential acquirer of the UK computer company? Most definitely.

Using the same company in the example, let’s say an acquirer attempts to avoid potential successor liability (and therefore the need for any anti-bribery and corruption due diligence) by structuring the transaction as an asset purchase and sale. The acquirer arranges for new supplier contracts after the acquisition closes, and thereby avoids liability for past actions that may or may not have violated any anti-corruption laws.  The acquirer is in the clear, right? Not necessarily.

In the United States, successor liability can apply to an asset acquisition if:

• The acquirer assumes the liability either expressly or impliedly

• The transaction is an attempt to fraudulently evade liability

• The transaction is intended to be a mere continuation of the seller’s business, or

• The transaction is a de factor merger.

The specifics of the exceptions are a topic for another post. But they highlight that an asset sale is not a guarantee of avoiding successor liability. 

In other words, appropriate anti-bribery and corruption due diligence is advisable even for asset deals involving domestic transaction parties that could have some level of dealings outside of the home country.

Bottom line: The term “domestic” shouldn’t lull anyone into a false sense of security on M&A and even asset acquisitions. It’s always prudent and advisable to ask the right questions to identify potential bribery and corruption risks.

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Jerry Hansen, pictured above, is a CPA and a Partner at FRA based in Dallas, Texas. His work includes accounting and forensic services involving mergers and acquisition disputes, audit/accounting malpractice litigation, forensic due diligence, and fraud investigations. He’s co-author of the book M&A Disputes – A Professional Guide to Accounting Arbitrations (Wiley 2017). He can be contacted here.