Business compliance and M&A
With the US authorities announcing that the pharmaceuticals and medical devices industries are squarely in the bullseye of FCPA enforcement and the UK Anti-Bribery Act‘s entry into force around the corner (April 2011), the need for companies in these industries to avoid the risks associated with contravention of these rules increases more and more. Also, Eucomed and Advamed, the EU and US self-regulatory organisations that are particularly active in this area are now increasing their cross-Atlantic cooperation. You will probably find out a lot more about that on the conference they are organizing on 19-20 May 2011 in London. I am definitely planning to attend.
In practice companies spend a lot of resources to draft a business compliance that is often rigid and weighted down with bottlenecks at crititcal stages (e.g. approval by a legal department that does not have sufficient staffing to deal with compliance requests quickly). Such business compliance programmes are often also only focused on facilitating day-to-day processes and might be organized much more efficiently and effectively, as I have argued on occasions. As a result, compliance risks in M&A transactions are often overlooked, especially if the target is not too big.
Why bother assessing business compliance risks in an M&A project in the first place? Here is the thing: the buyer of a medical devices company may be held liable for past anti-bribery violations from a company it acquires. And the buyer may not only be liable under national law of the target, but also under statutes of other jurisdictions with extra-territorial effect, such as the FCPA and UK Anti-Bribery Act. Getting this wrong may lead to financial exposure that is greater than the value of the target and may in addition lead to very bad press for the buyer, as well as significant restraints on its operations in the future as a result of agreements with authorities, e.g. a deferred prosecution agreement with US authorities. And last but not least, managers implicated may go to jail or be have to pay fines.
Accordingly, a (medical devices) company considering to buy a target in the medical devices industry should review, as part of the acquisition due diligence process, the both the national and the foreign activities of the target company. This way, the buyer can assess not only the risks the target’s operations will present going forward with respect to compliance with anti-bribery laws, but also potential exposure stemming from the target’s past activities.
The due diligence process should also address whether the target has any weaknesses in accounting and record keeping requirements and internal controls procedures. It is important that this due diligence is tailored to the country and business of the target company and conducted at the same time as the deal diligence so that a medical devices company may act upon any information it receives before the deal is finalized.
Particular attention should be paid to among others the following types of information that a buyer typically obtains during the due diligence process:
• The percentage of the target’s business derived from public sector contracts;
• The types and identities of agents and consultants the target uses and their compensation arrangements;
• The assets and processes impacted by arrangements with agents and consultants used by the target (e.g. a license for a patent with a surgeon from a hospital that the target sells products to);
• The target’s countries of operations;
• The involvement of public sector officials in the target’s business (as consultants, owners, directors or employees);
• The condition of the target’s internal controls and books and records; and
• Whether the target has ever been accused of violating anti-bribery laws.
This is not an exhaustive list, but it gives you an idea of the things a buyer should be looking for. However, these issues are equally important for a seller to address in the framework of its vendor due diligence, as to avoid nasty surprises that may jeopardize the deal or may lead to pre-closing adjustment of the purchase price.
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