In today’s edition of Daily Compliance News:
- Seller’s remorse (they bought me and were mean).(WSJ)
- Retro is cool again. (WSJ)
- SFO outgunned. (Bureau of Investigative Journalism)
- No more Royal Dutch. (NYT)
Tag: M&A
Welcome to a special five-part podcast series sponsored by K2 Integrity. This month we consider the intersection of compliance, diligence and mergers & acquisitions (M&A). I am joined by Hannah Coleman, Managing Director in K2 Integrity’s Investigations and Risk Advisory practice. She specializes in fast-moving, complex, and specialized research assignments in a variety of areas including investigative due diligence, corporate contests, intellectual property investigations, media transparency assessments, and litigation support. Also joining this week’s series is Tom Pannell, Managing Director in K2 Integrity’s Investigations and Risk Advisory practice. With a focus on financial investigations, Tom leads multi-disciplinary teams working with corporate clients and their legal advisors responding to crisis events, including multi-jurisdictional white-collar crime, misconduct, financial statement fraud, anti-bribery and corruption incidents, and compliance risk advisory work. In this episode, I visit with Tom about deals through a global lens.
Join us tomorrow for our final episode as we consider some post-closing integration issues.
For more on K2 Integrity, check out their website, here.
In this episode, I visited with Don Stern, Managing Director of Corporate Monitoring & Consulting Services. We consider how the M&A process benefits from independent oversight. Stern believes the best time to bring in an independent is “as early as is practicable”. By doing so there can be preliminary discussions with senior management about the process, sometimes at the Chief Executive Officer (CEO) level and at other times with the Chief Financial Officer (CFO). From these initial meetings an independent monitor could be a part of the acquirer’s team assembled for the project. He also noted there would probably be a due diligence room with documents made available for the acquiring company to review under a nondisclosure agreement (NDA). That could be meetings where teams from one company meet with teams from the other company. Stern reminded us that M&A work to some extent is “a fire drill, as everyone’s working very hard in compressed time schedules, trying to do a lot in a very short period of time.” This means at times issues pop up which may require the companies to further negotiate the terms of an escrow or other risk management protection for the buyer.
A key is the independent nature of the monitor. Part of it is that they have no stake in the outcome, no stock to vest or other remuneration. Also, it is natural for the target company’s employees to have their guard up as they are more than a little wary about anybody coming in and asking a question. Stern said, “I find that people open up, I’m more willing to be forthcoming when somebody’s outside either company comes in and is asking the questions really in a non-threatening way. The independent monitor is just looking for the facts. I find that we are able to get more information than I think we would otherwise get if we were not independent.”
This FCPA Safe Harbor for M&A re-emphasizes how powerful a tool an independent monitor can be in the M&A context. Stern ended his remarks by noting that the Department of Justice (DOJ) certainly sees it as good practice to have a third party independent involved on both the company side and the reporting side, if required. All of this lends credibility to your ethics and compliance program. If your company finds itself under scrutiny from a M&A transaction, you can take some comfort in the strategies outlined in this series.
In this episode, I visit with Rod Grandon, Managing Director of Government Services, from Affiliated Monitors, Inc. we consider the types of things a monitor would review to determine if a company adequately considered ethics and compliance during the M&A process. Grandon sees two distinct phases in the M&A process; pre- and post-acquisition. In each phase an independent monitor would look at different aspects of it. The first is the planning, the negotiation and the due diligence. This review goes up to the point at which the transaction is completed. From there is the post-acquisition phase, the integration phase. Grandon sees a distinct role in both the pre and post-acquisition phases for an independent monitoring. During the pre-acquisition transaction phase an “independent monitor can come in without preconceived notions, without shackles, as to any corporate expectations and do that deep dive that is really necessary for the parties if that information is shared or at least one of the parties to gain an understanding of what is being purchased or what is missing.”
In the integration phase, he noted the type of culture which exists through working with the respective workforces to understand what are their cultures. Are these cultures compatible in terms of bringing together a program to promote ethics and compliance? This requires, in many cases, deep dives, particularly the use of focus groups to get down to the workforce to get a true understanding of what some of the cultural elements that are in play. And in many cases, this is just a critical and complicated piece. From there, Grandon advocates moving into the controls area to literally put an independent set of eyes on the internal compliance controls. This is to help the parties understand the risk environment they find themselves in and the culture that is in play for the post-acquisition phase.
Moving to the post-acquisition phase Grandon noted that the independent monitor can also provide a key piece to help the integration phase. It can be a critical asset in this process of coming in helping management understand what it has acquired. This is the point there are no limitations on getting in and doing that deep dive with the workforce which already knows it’s been merged or acquired. Also the public already knows so no excuses for not getting in and getting a very good understanding the culture and how the workforce sees the ethics and compliance structure of the company.
In this episode, I visit with Eric Feldman about planning out your post-acquisition merger strategy. Recent FCPA enforcement actions have stressed that an acquiring entity apply or ascertain that its Code of Conduct, policies and procedures regarding corruption are consistent with the acquired company’s policies and processes. If they are not consistent, the acquiring company should apply it’s Code of Conduct and anti-corruption policies and procedures to the newly acquired company within 18 months or “as quickly as is practicable”. Employees from the newly acquired entity must be trained on their new Code of Conduct and policy and procedure. There must also be a forensic audit to see if any FCPA issues pop up. This same language was brought forward into the 2020 FCPA Resource Guidance, 2nd edition.
If pre-acquisition due diligence is done correctly, it will identify risks associated with the target and a risk assessment of that company should follow as a part of your pre-acquisition due diligence along the line to your post-acquisition, to give you a roadmap of what areas of risk need to be addressed immediately. Some of the things you would specifically look for in an integration plan are around internal controls. Feldman noted, “Are you going to use the acquired entities internal controls or are you going to put your company’s internal controls regime in place? If so, how are you going to integrate them? How are you going to address any training and awareness gaps as it relates to ethics and compliance responsibilities of the employees, of the new company that are coming into your company? Do people understand the acquiring company’s anti-corruption posture and their ABC policies and procedures and all of that needs to be well documented into an integration plan.”
Near and dear to my heart is Document Document Document as it is very hard to demonstrate the pre and post-acquisition due diligence to an external entity like the DOJ without documentation. The real issue has to do with how you can demonstrate to a government regulator that you have done everything that you can do as a company to identify risk associated with corruption and misconduct. Moreover, if you do identify the misconduct, that you have taken the right steps to inform the government and make that disclosure.
In this episode, I visit with Don Stern, Managing Director of Corporate Monitoring & Consulting Services. We explore how to go about assessing ethics and compliance in the mergers and acquisition (M&A) context and the impact that M&A has on both the acquired entity and the acquirer. Stern began by noting the inherent risk in the entire M&A process. Yet, the culture perspective is not often considered in the pre-acquisition phase. Stern believes companies are making a big mistake in doing so. Companies spend huge amounts of resources to hire lawyers, investment bankers, accountants for the pre-acquisition phase. They scrub the financials, look at income and look at revenues and expenses. Yet they often spend almost no time in looking at issues like the ethical culture of the company to be acquired. Stern stated, “I’ve never quite understood that everyone understands the risk of any acquisition. That the company picture may not work out quite as rosy as was expected. They may be some synergies that were expected from an expense point of view that don’t quite work out.”
The lack of knowledge on each parties culture can lead to many problems in the post-acquisition phase. Stern emphasized that the key is to not only come in with a plan but to listen and be attentive while implementing the plan. This can lead to a standoff in accomplishing the integration steps required under the Foreign Corrupt Practices Act (FCPA) or similar legislation. However, this is the situation where an independent monitor can assist both parties. Even after closing, an independent integrity monitor can come in and help to smooth out the process. An independent third party comes in with credibility and experience which allows employees at the acquired entity to communicate their concerns in a way that really is very helpful to the acquiring company. Employees can communicate such basic issues as they do not understand the new training they are required to go through, how things do not seem to fit together or the most basic question of why they are now required to do something. Employees can explain why risk areas may exist in other places but not exist in some others. Someone who is truly independent, with no stake in the game, can help make those explanations in a non-threatening way. The key is that independent third-party expert.
In this episode I visit with Eric Feldman on the why’s, what’s and how’s of an independent assessment of a target. Feldman began with the observation that most of the issues in the M&A context come from the target or acquired company and most usually from the acquiring entity simply not paying enough attention during the pre-acquisition phase and making a discovery post-closing. This one of the reasons the Department of Justice (DOJ) has put such important stock in the pre-acquisition phase where a company needs to perform compliance due diligence and a risk assessment which will inform the entire process.
Near and dear to my mantra of Document, Document, and Document, was Feldman’s thoughts on keeping a thorough record of your entire process. Not only should the target (or at least you would hope) have a documented process of all of the above issues, but you should be sure to document your entire pre-acquisition process as well. This could be important if you discover any nefarious conduct in the pre-acquisition phase which you should report to the DOJ or if such discovery occurs after closing. If it happens after closing you will need to be able to document the reasonable steps you took in pre-closing and how you will remediate the issue(s) going forward.
Finally, your pre-acquisition investigation and due diligence will inform your post-acquisition steps. Hallmark 10 of the Ten Hallmarks of an Effective Compliance Program mandates that companies will develop and implement policies and procedures for mergers and acquisitions requiring the company to conduct appropriate risk based due diligence on potential new business entities including Foreign Corrupt Practices Act (FCPA) and anti-corruption due diligence. Obviously, this should be a documented process. By having an independent third party do this, with a documented process, it can lower the risk if there is a problem. As problems are identified, the acquiring entity can decide whether to go forward with the M&A. If there is a very specific identification of misconduct, the company can make a disclosure to the DOJ. By using this process, there is a road map created for remediating the issue as a part of your post-acquisition steps after closing.
In today’s edition of Daily Compliance News:
- M&A is not dead. (FT)
- Businesses worry about opening too soon. (NYT)
- Google institutes KYA. (NYT)
- Who will protect workers? (Houston Chronicle)