Anti – Bribery in the context of M&A and Private Equity

23 Jul 2012

The Bribery Act 2010 came into force on 1 July 2011. It brought in a number of changes to anti-corruption law in the UK, and was heralded by numerous articles extolling the need to clean up business practices. In connection with this Transparency International UK, a leading organisation focussed on fighting corruption, has recently issued guidelines detailing practical due diligence steps to be taken by those looking to either acquire or invest in other companies. The following is a brief summary of some of the key issues which that set of guidelines highlighted.

As documented in a recent survey carried out by Ernst & Young: "Despite the many recent examples of the perils of ignoring the fraud and corruption dimension of these assessment, a fifth of companies still do not consider it as part of M&A due diligence, and a quarter never consider it in a post-acquisition review".

For many, the issue of avoiding corruption does not feature high on the list of key issues in any given transaction. By not giving this issue the priority it requires during the initial due diligence phase invariably an opportunity to mitigate the proliferation of any corrupt practices is avoided. Perhaps more importantly to your average hard-nosed businessmen not making an assessment of potential bribery risks part of your standard due diligence process can have a direct impact on the commercial parameters of your commercial transaction.

This is perhaps best illustrated by noting some of the core aims of anti-bribery due diligence which can be summarised as follows:

1) Identifying at an early stage whether any bribery issues will impact the chances of a deal completing as envisioned. If a deal collapses, or its basis substantially shifts because of bribery issues, this will result in wasted resources and/or potentially a less profitable outcome;

2) Deciding whether there will be any potential successor risks or inherited liability attributable to previous bribery which might result in civil/criminal penalties and therefore loss of business value and related consequences;

3) Assuring that the valuation of the business is correct and not distorted by bribery. It is clear that ignoring bribery issues can have a real impact on the financial success of transactions.

Two points highlighted by the guidelines produced by Transparency International UK is that anti-bribery due diligence needs to be proportionate to the contemplated transaction, and more than likely needs to be an ongoing process. The due diligence needs to be proportionate because it should be recognised that not all practice areas and jurisdictions generate the same bribery risks.

This is a fact specifically contemplated by the law, and organisations need to be aware that the resources allocated to their anti-bribery due diligence will need to vary from transaction to transaction. A "one size fits all" approach will not do and there may be instances where enhanced processes will need to be considered. Conversely in many cases a brief review may show that bribery issues can be dealt with very quickly in the due diligence process.

The process will also need to be ongoing because often complete transparency vis-à-vis the bribery risks in the context of a particular transaction will only be available near its completion - for example, a company which is an acquisition target may only be in a position to provide concrete information and access to senior management once there is a degree of certainty as to its completion. As a consequence it is critical that the late provision of such anti-bribery due diligence information is catered for, and if necessary remedial steps should be factored into the post-transaction steps.

Summary Companies need to be clear about their anti-bribery due-diligence policies and procedures with regards to their transactional activities. They should carry out anti-bribery due diligence throughout the whole transactional process, assessing the risks related to the specific transaction, jurisdiction and parties involved, together with taking steps to verify any "legacy risks" associated with the transaction and identifying any post-transaction remedial steps that need to be taken.

Ragavan Arunachalam, Associate

Corporate and Commercial

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