The Wall Street Journal published an article this week about corporate acquirers demanding protections in mergers against undiscovered criminal acts. It got us thinking about some of the investigations we do during due diligence, and how a relatively inexpensive investigation can ultimately save corporations millions of dollars down the road.
In an increasing number of mergers and acquisitions, companies being acquired are being asked to guarantee that their senior employees have not committed certain criminal acts by the time of the merger. This is aimed at undiscovered criminal activity. Although employers might know if one of their senior employees has been convicted of or is under investigation for an act carrying a fine of more than $10 million or five years in prison, they may not know if an employee has committed an act, but hasn’t yet been caught. If one of these undiscovered acts comes out prior to the merger, the acquiring company can completely abandon a sometimes multibillion dollar transaction without penalty.
So how would a company best discover undiscovered criminal acts? We note that it’s in the interest of both the buyer and the seller to learn whether there has been any illegality going on in the company being acquired. The company being acquired risks having the deal fall through and the acquiring company risks potential successor liability. It would be helpful to review corporate records to look for any potential FCPA or insider trading issues, but something like a payment to a foreign official to win business just might not be on the books. That’s why we always advocate interviewing.
Take the recent admission of the former Bernard Madoff CFO that he was aware fake trading was rampant at the firm and that other employees knew as well. Employees, present and former, know things and are often willing to talk. When we do interviews we tend to focus on former employees. This is both because we don’t want to run up against the no-contact rule in the litigation context, and also because former employees feel more removed from their past employer and are less worried that their statements might get back to the wrong people. Depending on what the client is comfortable with, present employee interviews can be effective as well, but it’s important to remember that present employees may not want to bite the hand that feeds them.