Choose your friends wisely: valuable lessons we have learned in Latin America

March 2016 | EXPERT BRIEFING | FRAUD & CORRUPTION

financierworldwide.com

Companies have a range of options when it comes to expansion in Latin America, from establishing their own ground-up operations or acquiring a target company (thereby retaining the most control), to partnering with distributors, licensors or joint venturers with boots on the ground (which entails bringing in a third party to your organisation). Regardless of the final structure, however, corruption, bribery and ethical matters are now front and centre of every transaction in the region and are no longer relegated to ‘boilerplate’ contractual provisions that were seldom enforced or even negotiated.

Some of the reasons for this development are the heightened regulatory scrutiny and the onslaught of actual high profile enforcement actions and related media coverage. Moreover, in the past year, we witnessed how pressure ceased to originate exclusively from the jurisdictions controlling capital (e.g., FCPA in the US, Bribery Act in the UK) but started coming from the jurisdictions receiving it, as portrayed by the recent examples in Brazil, Chile, Colombia, Panama and Guatemala, to name a few.

In this article, we describe some ways in which companies doing business in Latin America are mitigating risks relating to corruption, bribery and ethical matters.

Conducting preliminary due diligence

This is perhaps the most critical step and the one that is most often overlooked, much to the regret of the parties involved. This oversight is with good reason: conducting a thorough due diligence on a counterparty, be it a seller, distributor or joint venturer, is tantamount to asking someone about his or her sexual history during a first date. Difficult and uncomfortable questions need to be asked at this stage, especially when there are specific areas of concern, and no one likes to do this during the courtship phase. At the outset, we recommend identifying all of the relevant parties involved, as well as their beneficial owners (individuals), and retaining independent advisers with significant country and industry experience and relationships. It is through these advisers and face-to-face meetings (preferably at the counterparty’s home office) that companies can conduct an initial informal background check or ‘sniff test’. If there any areas of concern, such as, for example, former ties to a government that is under investigation for corruption, or there is little historical information on a counterparty, we customarily advise clients to obtain a more thorough investigative report from specialised firms.

Requiring thorough disclosures

The final product of the due diligence process is a go/no-go decision that has the consensus of all relevant stakeholders of a company and its advisers. At this point, the parties will have agreed at least on same basic deal terms and the lawyers will be moving towards a final agreement that will contain specific disclosures where the counterparty will ‘represent and warrant’ the matters that were discussed during the preliminary due diligence sessions, among other things. Thorough disclosures will include governmental investigations, lawsuits, tax audits, claims, violations of law, and so on. Here, too, many companies tend to ‘drop the ball’ in the haste of getting a deal done – again, just to later regret.

These disclosures have to be as specific as possible, which requires a thorough understanding of the industry and country, so that items can be specifically identified and tied to specific representations and warranties. Moreover, companies must ‘drill down’ on each relevant disclosure during meetings and thoroughly assess their exposure to each item and the potential liability. This requires the active participation of all parties involved.

Negotiating strong contractual rights

But due diligence and disclosures, no matter how thorough, have their shortfalls. First, one may not obtain all the pertinent information from a less than forthcoming counterparty or through an independent investigation. Also, disclosures are backward-looking; they do not cover events or actions taking place after a contract is signed. This is why strong contractual rights that are enforceable and have meaningful avenues for recourse are must-haves in any transaction. A well drafted contract should, at a minimum, give a company rights pertaining to information and reports (e.g., notice of certain ‘qualifying’ events) and enumerate certain ‘bad’ acts or events as defaults allowing the company to terminate the contract without penalties. In addition, companies should obtain indemnification rights in case any of these enumerated events ends up involving them in an investigation or claim. In certain transactions, such as an acquisition, indemnification rights have sharper teeth, such as providing for a holdback of a certain portion of the purchase price. This not only provides companies a more clear and meaningful path to redress, but also incentivises counterparties to be forthcoming and comply with the contract terms. All these rights would be meaningless, however, in the absence of an enforceable contract with a neutral, expedient and binding dispute resolution mechanism, enforceable in a counterparty’s home country or where its assets are located, without need for ‘substantive’ review by a local court. This requires the input of sophisticated US and local counsel and a thorough understanding of the parties and their business.

Proactively monitoring partners

After the deal is closed or the joint venture is successfully formed, it is time to just let the operations proceed and watch the business grow, right? This is a common mistake that businesses frequently make, and it can cost them not only in the local region but also at home. It is imperative to continue to monitor and diligence your local operations and partners to ensure that the operations comply with not only company policies and local law and but also applicable foreign anti-bribery laws. As many of the largest companies in the world have discovered the hard way, failure to monitor local operations and partners have led to significant fines in the US and the UK, among other the countries. Particularly with the increased scrutiny of local regulators emboldened with stronger anti-bribery laws implemented in recent years in countries throughout Latin America, it is more important than ever to stay on top of your local operations.

Reassessing periodically

Oftentimes, parties enter into the purchase agreement or joint venture or distribution agreement and continue on their merry way without ever looking back at the terms of their agreements to ensure that they have been updated to reflect the evolving realities of their business and the regulatory environment in which it operates. This failure can either leave money on the table or, even worse, fail to mitigate significant risks that were either not identified or did not exist at the outset of the transaction. Contracts are living and evolving organisms that should reflect the evolving nature of business, relationships, regulations and best practices. This requires a disciplined and proactive approach that ultimately reduces risks and helps management sleep at night.

David R. Yates is a partner and Stefano D’Aniello a senior attorney at Hunton & Williams LLP. Mr Yates can be contacted on +1 (404) 888 4238 or by email: dyates@hunton.com. Mr D’Aniello can be contacted on +1 (305) 810 2471 or by email: sdaniello@hunton.com.

David R. Yates and Stefano D’Aniello

Hunton & Williams LLP