M&A bribery due diligence




Anti-bribery regulation has, within the last few years, become a major concern for companies acting globally. The UK Bribery Act has been designed to force companies to engage in the fight against corruption, providing the Serious Fraud Office jurisdiction over foreign companies. Other countries are following suit. The risk for global businesses is twofold: bribery offences are penalised with fines with no statutory limit and, as new legislation impacts moral standards and procedures that just a few years ago were viewed as acceptable but are suddenly deemed criminal behaviour, companies are exposed to negative press coverage.

Mitigating bribery risks in your own organisation in accordance with applicable legislation may be a difficult task. It is, however, even more difficult to handle bribery risks in a target company where the buyer does not know the organisation from the inside.

For US businesses acquiring companies abroad, bribery due diligence has been part of the acquisition process for several years. However, in many other countries, including European countries, many prospective buyers are still adapting to new legislation requiring anti-bribery due diligence. This article seeks to provide an overview of how such buyers can engage in a bribery due diligence process.

Bribery risks in the target group

A prospective buyer should be aware of the risk of recent bribery offences in the target group as well as the risk of acquiring a group with a corporate culture that paves the way for future bribery offences. Potential issues could range from systematic bribery by the target company in order to obtain business, bribery by third party agents acting on behalf of the target company which crosses the blurry line between relationship building by means of corporate hospitality and bribery, or making small payments to facilitate expedited execution of standard routines in third world countries.

Bribery due diligence

Risk assessment is a key word when conducting bribery due diligence. Rather than just turning each and every stone in the target group, the buyer’s legal team should take a risk based approach to the bribery due diligence. This will ensure a cost effective approach as well as focusing efforts on those parts of the target group’s activities that carry a medium to high risk. When making the risk assessment, the due diligence team should consider general levels of corruption in the geographical areas in which the target group operates, the target group’s industry, exposure to foreign officials, characteristics of the group’s transactions, a review of any internal e-learning or surveys taking the temperature on the organisation’s attitude towards corruption, the target group’s track record, and its use of third party contractors, agents and distributors.

When the due diligence team has conducted the risk assessment, the due diligence process should be planned and the relevant team gathered. The bribery due diligence should be initiated as early as possible in the transaction process to allow for refocusing of the investigation if the findings suggest that the initial planning should be adjusted.

When conducting bribery due diligence, the team often needs to pay special attention to services provided by independent contractors, as such independent contractors under certain circumstances may carry a high risk. The team should consider how relevant employees of the independent contractor are incentivised and whether the target group has provisions in place in contracts with third party contractors to mitigate bribery risks. The legal team and the audit team often work together to follow the money trail and analyse the internal audits to single out areas open for creative bookkeeping. Bribery due diligence may require scanning of email servers for keywords, which could indicate bribery and it may require interviews with employees on all levels in the target group’s organisation. Normally, it will also be within the scope of the bribery due diligence team to establish if the target group has adequate procedures in place and, if not, what could be done post-closing to implement adequate procedures.

Bribery due diligence will normally be reflected in a due diligence report or in a red flag due diligence report. The due diligence report serves as a tool for drafting the transactional documents and as a record of the buyer’s adequate procedures.

Bribery warranties

Even the most thorough bribery due diligence cannot prevent bribery issues from surfacing post-signing or post-closing. The warranties provided by the seller are designed to address these potential issues.

Bribery issues are different from most other warranty issues as a potential pre-closing bribery matter surfacing post-close may have a significant financial impact on the target group, even if it eventually turns out that no bribery offence was actually committed. Hence, the management may become aware of a potential bribery issue post-closing and, depending on jurisdiction, the management may be under an obligation to self-report, to initiate an internal investigation, to initiate an investigation conducted by outside counsel, to agree with authorities to conduct certain initiatives, etc. All of the above may create a lot of unforeseen costs for the buyer – even if no offence was actually committed. Standard warranties would not allow for any indemnification if no wrongdoing or other breach had occurred pre-closing. The main issue is therefore how to allocate the financial risk that follows from the pre-closing conduct. Such conduct may, even though not contrary to applicable law, cause lead to investigations. The buyer and the seller will need to negotiate this allocation of risk.

Specific bribery indemnifications

If the bribery due diligence team identifies actual offences conducted by the target group, its employees or by third party contractors, the buyer will need to carefully consider whether to acquire the inherent risk stemming from such offences. Also, the team may, without being conclusive, identify circumstances indicating that bribery may have been conducted or identify high risk areas where it has not been possible to rule out bribery offences. In either case, the buyer could request that the seller provides specific indemnifications serving as security for the buyer. In general, specific indemnifications will not be subject to the same cap, time bar, de minims, etc., as warranties. However, the buyer should be aware that the share purchase agreement may not allow for indemnification of a loss based on multiples.

To-dos post-closing

Post-closing, the buyer often allocates additional resources to ensure that the target group’s bribery policies and procedures are fully integrated with those of the buyer. This serves two purposes: it allows for a timely discovery of any issues to be claimed under the warranties or under the specific indemnifications and it allows for a unified approach to bribery in the combined group.


Christian Bredtoft Guldmann is a partner at Moalem Weitemeyer Bendtsen Advokatpartnerselskab. He can be contacted on +45 33 77 90 69 or by email: cbg@mwblaw.dk.

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Christian Bredtoft Guldmann

Moalem Weitemeyer Bendtsen Advokatpartnerselskab

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