International Law Advisory - New Department of Justice FCPA Opinion Procedure Release Establishes a Limited Safe Harbor Against Successor Liability Based on Significant Undertakings by An Acquirer Regarding Its Post-Closing Conduct

On June 25, 2008, the US Department of Justice (“DoJ”) published its latest Foreign Corrupt Practices Act (“FCPA”) Opinion Procedure Release No. 08-02, dated June 13, 2008 (the “June 2008 Opinion” or “Opinion”). The Opinion was sought by Halliburton Co., a US oil field services and technologies provider, in connection with its attempts to acquire a UK-based and listed company in a competitive bidding process in which, primarily for reasons of UK law, Halliburton was unable to conduct full FCPA due diligence before the expected closing date. 

The DoJ’s response, indicating that Halliburton would not be subject to enforcement action for entering into the transaction itself, or for pre- or post-closing unlawful conduct by the target if Halliburton implemented a robust post-closing due diligence, remediation, and disclosure plan, is the DoJ’s most detailed statement to date regarding successor liability in the M&A context, and the first to attempt to address what type of post-closing grace period the Department may consider appropriate.  The Opinion puts acquirers on notice that where pre-closing diligence is limited (even if for reasons beyond an acquirer’s control), the expectations for post-closing diligence and remediation will be high in order to avoid successor liability.  By implication, the Opinion also emphasizes the need for significant pre-closing due diligence where feasible.  While it is not entirely clear that DoJ would expect all acquirers contemplating acquisitions with non-trivial FCPA/anticorruption risk profiles to undertake measures as robust as those contemplated in the June 2008 Opinion (indeed, as with all opinions issued under the Opinion Procedure, this Opinion has no application beyond the specific requestor), the Opinion reflects enforcement expectations that both acquirers and acquirees will need to consider carefully in deciding how to handle FCPA issues in mergers and acquisitions.

Halliburton’s Opinion Request and DoJ’s Response

Halliburton requested an opinion from the DoJ with respect to its enforcement intentions in the context of its attempt to acquire a UK-based and listed oil field services company.  As Halliburton was in competition with a non-US private investment consortium and was unable, under the UK takeover code, to require the target to allow it to conduct significant FCPA due diligence as part of the bid process, Halliburton was faced with the prospect of having its bid rejected if conditioned on significant FCPA due diligence, or entering into the transaction with unknown FCPA enforcement risk if an unconditioned bid was accepted.  Moreover, although Halliburton had access to a data room established by the target, it was prohibited under the terms of a confidentiality agreement from disclosing any information gleaned regarding the target to US enforcement authorities.  As the target was described as a listed UK oil field services company with over 4,000 employees doing business around the world, including in Africa, Asia and Latin America, and having a number of national oil companies as customers, the potential FCPA risks posed by the target were presumably perceived to be non-trivial. 

Evidently to mitigate that risk, Halliburton asked the Department for an opinion on its enforcement intentions with respect to three questions: 

• whether the proposed acquisition itself would violate the FCPA;

• whether Halliburton would incur successor liability for any pre-acquisition unlawful conduct by the target; and

• whether Halliburton would be held criminally liable for any post-acquisition unlawful conduct by the target, with the understanding Halliburton would execute a robust post-closing FCPA due diligence, remediation and compliance plan. 

The plan required that:

• immediately after closing, Halliburton would disclose to the DoJ whether any of the limited information it had access to in the target’s data room pre-closing indicated any FCPA, corruption, internal controls, or books and records-related issues;

• within 10 days of closing, Halliburton would present to the DoJ a comprehensive FCPA/anti-corruption-related due diligence plan, tiered into high, medium- and low-risk workstreams addressing the target’s main risk areas such as third-party relationships, commercial relationships with state-owned customers, joint venture/business partnership arrangements, customs and immigration, tax matters, and government licensing and permitting issues; and

• the results of those workstreams would then be fully disclosed to the DoJ within 90, 120 and 180 days, respectively, with any issues uncovered and not able to be fully investigated during those periods to be fully investigated, disclosed and resolved within a calendar year of closing.

The depth of effort associated with a due diligence plan of such wide scope was correspondingly robust, with Halliburton undertaking to hire external counsel and forensic accountants, and use its own personnel to review all pertinent documentation, including e-mail, paper and accounting records, and to conduct interviews of target personnel.  The contemplated due diligence plan continues the line-blurring between transactional due diligence and internal investigations in other FCPA M&A cases in recent years.¹ Although no specific “red flags” are set out in the Opinion, it is possible that concerns were identified by Halliburton in the course of the data room due diligence, prompting its request.

With respect to post-closing compliance measures, the DoJ-approved plan required Halliburton to conduct post-closing FCPA compliance activities at the target, including:

• separately vetting each of its third party agents and service providers, terminating those with which it uncovered FCPA issues, and entering into new contracts, with appropriate FCPA-related safeguards, with those agents that did not have FCPA issues;

• within 60 days, providing FCPA training to all target officers and employees whose job functions required such training on an expedited basis, including all management, sales, accounting and financial control positions.  All other appropriate personnel would be required to receive training within 90 days of closing; and

• immediately imposing its own Code of Conduct and FCPA/anti-corruption policies and procedures on the target.

In response, DoJ indicated that it did not intend to take enforcement action against Halliburton for:

• the consummation of the acquisition itself (emphasizing the publicly-traded status of the target and the fact that many of its shareholders were known to be institutional investors);

• any pre-acquisition unlawful conduct by the target disclosed to the DoJ within 180 days of closing; and

• any post-acquisition unlawful conduct by the target disclosed within 180 days of closing, provided such conduct was stopped and remediated if possible within that time period.

Effectively, Halliburton was given a 180-day grace period to investigate, disclose, and remediate, without successor liability.

The DoJ reserved the right to take enforcement action against the target and its affiliates (noting, however, that any matters disclosed by Halliburton would be treated as having been voluntarily disclosed by the target), as well as against Halliburton for: any undisclosed matters, any violations in which Halliburton personnel knowingly participated, regardless of their timing, and any issues disclosed during the 180-day grace period not fully investigated within a year of the closing.

How Much of a Safe Harbor and at What Price?

While the opinion, and the depth and breadth of the measures DoJ required, were likely influenced by the fact that Halliburton – which, according to its public securities filings has additional FCPA-related issues pending before the DoJ and SEC - was the requestor, the opinion is an important policy statement on M&A-related FCPA topics.  Following a number of recent enforcement actions involving M&A transactions, as well as other Opinions discussed below, the June 2008 Opinion may indicate significantly increased expectations as to the appropriate level of FCPA due diligence acquirers should conduct in transactions with a non-trivial FCPA risk profile, as well as the measures that DoJ believes should be taken to avoid successor liability.  

The Opinion cites two earlier M&A-related opinions, Opinion Procedure Release 01-01 (May 24, 2001) and Opinion Procedure Release 03-01 (January 15, 2003), in which the DoJ based its decisions not to take enforcement action against the requestors for pre-acquisition conduct, respectively, on (a) representations from the requestor’s foreign JV partner that no FCPA-violative conduct had taken place, and prospective contractual safeguards implemented as part of the JV transaction, and (b) pre-closing disclosures to the DoJ, pledges to continue cooperating with DoJ, and undertakings to implement the acquirer’s compliance program in the target.   These measures are in significant contrast with the requirements set out in the Opinion discussed above, as well as Opinion Procedure release 04-02 (July 12, 2004), issued in the wake of the criminal prosecutions of three ABB/Vetco Gray entities.  The latter confirmed that the acquirers of the Vetco Gray entities themselves would not be subject to enforcement actions for those targets’ pre-acquisition conduct in Nigeria and elsewhere after a due diligence investigation involving the review of over 4 million electronic documents, the work of 115 lawyers and the expenditure of 44,770 man-hours of effort.²

The Opinion also represents an important pronouncement on the compliance-related steps (apart from due diligence) DoJ expects companies to take post-closing, and the time frames in which it expects those measures to be taken.  These included Halliburton imposing its Code of Business Conduct “immediately” upon the target, requiring all third-party agents for which no FCPA issues were identified during the review to sign new contracts with robust FCPA safeguards “as soon as commercially reasonable”, termination of problem agents/third parties “as expeditiously as possible”, and “immediate” imposition of the acquirer’s FCPA compliance program including training of all target officers and personnel in high-risk job functions within 60 days, and all other appropriate target employees within 90 days.

The Opinion underscores that direct liability for an acquirer can arise through the actual consummation of a transaction, depending on the shareholder profile and the expectations regarding the use of the closing proceeds. 

Most significantly, the Opinion represents the first time the Department has offered any type of safe harbor from successor liability for post-closing activity.  As described above, the plan accepted by DoJ required Halliburton to disclose its investigative findings of "high risk" FCPA issues within 90 days of closing, “medium risk” issues in 120 days, and “low risk” issues in 180 days.  Such disclosures, absent knowing participation in a violation or a failure to adequately run any identified issues to ground within a year of closing, would insulate Halliburton against successor liability. 

It seems clear, however, that this safe harbor will not be made available in all cases.  DoJ’s expectation is for companies to conduct FCPA due diligence pre-closing to the extent doing so is reasonably practicable; where such an opportunity exists, it is not clear the Department would provide any type of post-closing safe harbor, or a safe harbor of this duration.  The Opinion also explicitly discourages companies from entering into confidentiality agreements with targets restricting their ability to disclose information to the government.

Such expectations are bound to send a chill through the business community. Acquirers rarely have the ability to do unfettered due diligence on a target pre-closing, due to information, time, and access constraints, and confidentiality agreements are often essential in order to secure access to information. Equally problematic for many companies may be the proposition that disclosure to the government based on a pre- or post-closing process tantamount to an internal investigation is the only way to insulate themselves from successor liability.  Ultimately, as with other FCPA compliance matters, a decision regarding the appropriate steps to be taken by an acquirer in an M&A context will need to be made on a case-by-case basis, based on a careful weighing of the risks, taking into account the specific facts and circumstances. 

We will continue to keep you apprised of developments and trends in FCPA regulation and enforcement. If you have any questions or desire further information, please feel free to contact Lucinda Low at 202.429.8051; Erik Kitchen at 202.429.8132; Pat Norton at 202.429.8034; Jonathan Drimmer at 202.429.6477; Matt Herrington at 202.429.8164; Andrew Irwin at 202.429.8177; Julia Court Ryan at 202.429.6418; David Lorello at 44(0)20.7367.8007; Alexandra Baj at 202.429.6478; Tom Best at 202.429.8079; Owen Bonheimer at 202.429.6266; Michael Pass at 202.429.8101; Brittany Prelogar at 202.429.5518; Sarah Lamoree at 202.429.6488; Michael Lieberman at 202.429.8064; or William Gordon at 202.429.8013.  

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_{1. FCPA-related issues are increasingly arising through the M&A diligence process, resulting in close collaboration by acquirers with the enforcement agencies to limit successor liability:  the following recent enforcement actions each were the result of voluntary disclosures by acquirers seeking to limit or eliminate the prospect of successor liability during or immediately following acquisitions: ABB/Vetco Gray (US v. ABB Vetco Gray, Inc. and ABB Vetco Gray UK, Ltd. (Case No. 04-CV-279-01), S.D. Tex., July 2004; and SEC v. ABB, (Case No. 1:04CV1141[RBW]) D.D.C., July 2004); Syncor (US v. Syncor Taiwan, Inc. (Cr. No. 02-1244). C.D. Cal., December 2002; In the Matter of Syncor Int’l Corp., SEC Administrative Proceeding Filing No. 3-10969 (December 10, 2002)); Lockheed/Titan (United States v. Titan Corp., Case No. 05CR0314-BEN (S.D. Ca. 2005) (plea agreement); SEC v. Titan Corp., Case No. CV-05-0411 (D.D.C. 2005) (complaint); SEC Lit. Rel. No. 19107 (Mar. 1, 2005)); Teleglobe/IXTC (United States v. Amoako (D.N.J. 2005) (Information); SEC v. Amoako  (D.N.J. 2006) (Complaint); United States v. Ott and Young (D.N.J. 2007) (Information); SEC v. Ott and Young (D.N.J. 2006) (Complaint); see also Teleglobe’s October 25, 2004 10-Q filing); GE/Invision (SEC Exch. Act Rel. No. 51199 and Acctg. Rel. No. 2186; Lit. Rel. No. 19078 and Acctg. Rel. No. 2187 (all Feb. 14, 2005)); and Baker Hughes (2001) (In the Matter of Baker Hughes Inc., SEC Acctg. and Auditing Enf. Rel. No. 1444 (Sept. 12, 2001) at 13).}

_{2. Opinion Procedure release 04-02 (July 12, 2004).}