The DOJ‘s settlement with Panalpina and others has been well reported (for example, see our previous article). The size of the settlement clearly highlights the importance of anticorruption controls from a regulatory and compliance perspective.
Panalpina’s Deferred Prosecution Agreement (PDF/2.08MB/77 pages) with the DOJ makes a good read. Among other things, the agreement provides that Panalpina shall adopt new or modify existing internal controls, policies and procedures in order to ensure that Panalpina maintains corruption compliance code, standards and procedures designed to detect and deter violations of the FCPA and other applicable anti-corruption laws. The DOJ states that such systems should include, but not be limited to, the minimum elements set out in Attachment C (Corporate Compliance Program) to the Deferred Prosecution Agreement.
Of particular interest is the guidance given in the Corporate Compliance Program relating to agreements with business partners. It suggests that, in order to help prevent violations of anticorruption laws, agreements with business partners should contain the following provisions:
- Representations: representations and undertakings relating to compliance with anticorruption laws;
- Audit Rights: rights to conduct audits of the books and records of the business partner to ensure compliance with such representations and undertakings; and
- Termination Rights: rights to terminate a business partner as a result of any breach of anticorruption laws and regulations or representations and undertakings related to such matters.
From a corporate perspective, this guidance is helpful in that it informs the drafting of contractual language. In the context of, for example, a joint venture transaction, one would expect there to be a sale and purchase agreement relating to the acquisition of shares or certain assets depending upon the contribution of the respective partners. Given the successor liability risk in relation to FCPA breaches, this would be an ideal place for warranties stating that the subject matter has been dealt with in accordance with the relevant anticorruption laws, i.e. the assets are not “tainted”. One would also expect there to be an investment or shareholders’ agreement in respect of the joint venture vehicle and such agreement could contain undertakings or covenants relating to the post-purchase treatment of the assets, i.e. the respective partners agree not to deal with the assets in breach of relevant anticorruption laws and give each other audit rights in order to monitor compliance.
Interaction with other areas of law should also be borne in mind. For example, in the UK there are certain rules applicable to public companies whose shares are listed on the stock exchange (an issuer) which can be found in Chapter 10 (PDF/360KB/22 pages) of the UK Listing Rules. Generally, transactions between an issuer and a third party will be classified according to certain percentage ratios which are known as the “class tests”. Depending on the outcome of the class tests – which would give an indication of the size of the transaction – notification to the market via a regulatory information service may be required and, in certain cases such as large transactions, shareholder approval may need to be obtained.
Where joint venture transactions contain exit arrangements such as the rights to terminate described above, the need for shareholder approval depends on the class tests and whether or not the issuer retains sole discretion over the event which requires it either to purchase the joint venture partner’s stake or sell its own.
As such, the Panalpina settlement provides some useful pointers for M&A practitioners.