Anti-corruption due diligence
Both Norwegian and international corruption legislation is global in extent and can strike even Norwegian investors that are initially innocent depending on the circumstances. This does not mean that you should avoid investing in high-risk countries, but it means that the scope of preventive work, both due diligences prior to closing as well as monitoring of the target company after the transaction, must be in line with the risks faced.
Corruption risks in international transactions may be related to processes regarding negotiation of purchase contracts, obtainment of licenses/concessions, choice of joint venture (JV) partner, financing partner, lender and/or guarantor, or channeling of financial flows to tax havens. Corruption risks can typically be high if agents are frequently used, high contributions to political persons/parties/bodies or by weak internal control within functions such as financial and procurement, to name a few.
Consequences of being involved in a corruption scandal may be criminal, such as fine, imprisonment and/or corporate penalties, and economic, such as costs of managing the consequences of corruption action(s). The consequences can occur both directly for the target company or for the acquirer, or indirectly for the shareholder in the target company. In addition, a corruption case could result in civil legal consequences, such as cancellation of contracts and liability. Everything depends on the circumstances in each case. Other consequences may also be of commercial significance, such as reputational loss, exclusion from public procurement processes, or loss of licenses/permits - which can affect the target company’s value and business, as well as the acquirer’s.
How should investors approach corruption risk?
To reduce corruption risks in transactions in demanding markets should the acquirer consider the implementation of:
- Anti-corruption due diligence as part of the transaction prior to closing
- Anti-corruption audit as a follow-up of the target company, for example one year after closing
Anti-corruption due diligence
Findings in the due diligence process are typically used to provide a better basis for investment decisions and in negotiations in favor of the client. Findings can include new information about vulnerable risk areas, such as circumstances regarding the target company’s management, agents, suppliers, the company’s cash flows and/or contracts or licenses/permits, to name a few.
The purpose of an anti-corruption due diligence will never be to stop execution of a transaction, but rather to implement it in the best possible and proper manner for the client.
For the acquirer, the implementation of an anti-corruption due diligence could provide valuable information and knowledge, which could be utilized in negotiations. Experience shows that this information provide a good basis for M&A team negotiations on areas such as purchase price, financing structure, warranty clauses, settlement date and voting provisions.
For the seller, information on critical improvement areas that should be addressed prior to a sale could help increasing the company’s value and give a purchase price above expected.
Many people forget that the risk of corruption in a company are just as real after a purchase, even if you have done thorough due diligence before closing. Often directors and management changes immediately, anti-corruption and compliance programs and other agreed measures are not implemented. A follow-up review in the form of an anti-corruption audit, together with the M&A team/client, to ensure compliance of the transaction terms, is as important as a thorough due diligence before closing.