Avoiding FCPA Surprises: Safe Harbor from Successor Liability in Cross-Border Mergers and Acquisitions

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TABLE OF CONTENTS  INTRODUCTION I.   BACKGROUND      A. FCPA Rules      B. Companies Subject to the FCPA      C. FCPA Liability in Mergers and Acquisitions II.  PROBLEM AND PARTIAL SOLUTION      A. Problem: Potential FCPA Liability Is a Significant Risk         1. Expensive Due Diligence Slows Transactions         2. Companies May Be Forced to Abandon Deals         3. Select Case Studies            a. Pre-Acquisition Issues            b. Post-Acquisition Issues      B. Partial Solution: A Safe Harbor in Opinion         Procedure Release 08-02      C. 2012 FCPA Guidance         1. Promotion of a Safe Harbor         2. Lingering Uncertainty III. COMPLETE SOLUTION: A SAFE HARBOR PROVISION        IN THE FCPA      A. Uncertainty Creates Need for Consistency      B. A Proposed Safe Harbor Provision         1. Provision Text         2. Hypothetical Provision Explained         3. Comparison with Other Laws      C. The Proposed Safe Harbor Provision in Practice IV.  A SAFE HARBOR PROVISION WOULD BE BENEFICIAL FOR      BOTH BUSINESSES AND THE GOVERNMENT      A. Benefits for Companies         1. Lower Transaction Costs         2. Facilitating Mergers and Acquisitions      B. Furthering the Purpose of the FCPA      C. Alternatives and Counterarguments CONCLUSION 


In November of 2012, the Department of Justice (DOJ) and the Securities and Exchange Commission (SEC) jointly issued a widely demanded and unprecedented resource guide to the Foreign Corrupt Practices Act (FCPA). (1) "The Guidance" came in response to a letter from the U.S. Chamber of Commerce and a coalition of over thirty business organizations, representing the views of over three million businesses, that identified areas in critical need of clarification regarding the Agencies' enforcement of the FCPA. (2) Among several other requests, the Chamber of Commerce letter asked for particular guidance in mergers and acquisitions. The letter claimed, "[t]he threat of successor liability even if a thorough investigation is undertaken prior to a transaction has had a significant chilling effect on mergers and acquisitions, and therefore clearer parameters for successor liability under the FCPA are needed." (3) The letter, claiming that the FCPA reduces merger and acquisition activity, further explained that there "has been a chilling effect on legitimate business activity" as a result of uncertain enforcement practices. (4)

In response, the Guidance pays close attention to FCPA enforcement in mergers and acquisitions and takes a significant step toward reducing uncertainty for businesses engaged in cross-border mergers and acquisitions. The Guidance, however, is not entirely clear and still presents companies with significant legal questions that they must weigh when considering cross-border transactions. This Note argues that although the Guidance dramatically reduces uncertainty in some instances, the FCPA still lacks clarity. To increase clarity and transactional certainty, the DOJ and SEC should provide additional clarification or include a provision that grants safe harbor from successor liability for FCPA violations in certain transactions. (5) Such change is especially necessary in cross-border mergers and acquisitions, in which proper pre-acquisition due diligence is inherently more difficult and sometimes impossible. (6)

Part I presents the background of the FCPA and its impact on mergers and acquisitions. Part II discusses how unanticipated successor liability for FCPA issues can be difficult to discover and can be a significant barrier to mergers and acquisitions (M&A) (7) activity. This Part also notes the unique safe harbor from liability that was granted for a transaction in 2008 and analyzes the 2012 Guideline's expansion of this safe harbor. Part III argues that a clear safe harbor provision should be added to the FCPA and discusses how that provision should be structured, and Part IV explains how a safe harbor provision, whether as extended in the Guidance or as proposed in Part III, is good economic and legal policy. …