New risks ahead as M&A activity returns

IN SPITE of remaining economic uncertainty, the M&A market displays signs of resurging activity.

IN SPITE of remaining economic uncertainty, the M&A market displays signs of resurging activity. However, with this fragile recovery comes a new risk in the form of new legislation. The Bribery Act is due to come into force in April 2011. Are deal doers prepared?

Much has been written on the Bribery Act. It consolidates various pieces of existing legislation, much of which relates to offences for individuals involved in bribery and corruption and it adds some new significant requirements. The Act strengthens UK law and should make it easier to enforce, resulting in heavy fines or even imprisonment.

However, less attention has been drawn to the significant development for the M&A market. The Act introduces a new offence for an organisation which fails to prevent bribery. Let’s pause to consider this. For the first time, not only will the individual perpetrator be liable, but the organisation itself will face unlimited financial exposure, including being disbarred from tendering for Government contracts, and reputational damage.

What’s more, this organisational exposure arises not just from errant employees. Any person “associated” with the organisation puts it at risk, which means anyone providing a service. So, manufacturers, suppliers, distributors and agents also pose a serious risk, particularly those that interface with foreign public officials. But consider who else would be caught. Accountants, lawyers, off-shoring providers, recruitment consultants, shipping agents. The list goes on.

As if that wasn’t enough, the Act turns a blind eye to geographical boundaries. Not only are UK companies caught, but so are foreign companies who happen to conduct business in the UK (regardless of where in the world the offence takes place).

Those looking to acquire better take note. Liabilities can be inherited. Take heed of a recent prosecution in the case of US v Bourke under the Foreign Corrupt Practices Act (a watered down version of the Bribery Act). Bourke had failed to identify that the venture he was investing in was involved in bribery and corruption. Consequently, and despite losing his $8million purchase price, he was subsequently deemed to have been a participant in those offences even though, allegedly, he had no knowledge. Turning a blind eye was not a defence.

Whilst Bourke was a US case, don’t be fooled into thinking that an oft- criticised regulatory laxness in the UK offers safety. A new dawn has arrived. Our conversations with the Serious Fraud Office reveal that the regulator fully intends to reverse the UK’s international embarrassment. No longer will the UK be seen as a soft touch. The US example provides an attractive model for UK enforcers.

But potential acquirers need not put their cheque books away. Like many risks faced by deal doers, homework is the key to minimising risk and maximising value. A defence exists to the organisational offence of failure to prevent bribery. If an organisation can demonstrate that it had “adequate procedures” in place to prevent bribery, it will not be held accountable for offences committed by employees or associated persons. Appropriate and well-designed due diligence is key.

Bribery Act diligence needs to have two key foci. First, review for possible pre-acquisition offences. Actual practices at the coal face must be understood. The review’s scope and extent must reflect geographical, sector and business model based risks. Second, ensure a safety net exists. Does the target organisation have adequate procedures in place? This could be crucial to mitigating otherwise unlimited fines if previous offences subsequently come to light.

The Bribery Act should not be taken lightly. The UK has finally responded to unfavourable international attention. Bribery and corruption will not be tolerated, regulators are gearing up to take a hard line. Buyers need to respond. Not only could significant financial and reputational liabilities be acquired, but the core value of the acquired business could be at stake. Let the buyer beware.

:: Debra Halcrow is forensic services director at PwC, Newcastle tel: 0191 232 8493 or email: debra.halcrow@uk.pwc.com

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