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FCPA Blog Daily News

Entries in Termination (3)

Wednesday
Oct222008

Business Down, Compliance Risks Up

When times are tough and markets shrink, new international joint ventures sprout up everywhere. They're a fast and inexpensive way to expand commercial reach. JVs formed out of economic necessity often bring together companies that in good times are competitors. So their concerns about the arrangements usually focus on competitive risks, such as exposing their proprietary plans, customers lists, intellectual property and key personnel to potential poachers.

But another joint venture-related risk is compliance with the Foreign Corrupt Practices Act. Companies new to joint venturing may not understand how easily their overseas partners' illegal practices can be imputed to them. More ominously, companies facing financial flak might take intentional risks for the sake of survival. The law, they convince themselves, doesn't really mean what it says. Joint venture partners, after all, are beyond their control and therefore beyond their legal responsibility. That's not true, of course. But when backed into a financial corner, priorities can shift -- with tragic results.

Compliance is never easy, and in bad times it's harder than ever. Potential partners, for example, may be evaluated only for their effectiveness, without regard to their reliability. So what's needed to police joint ventures? The steps below are minimum requirements for an effective compliance program -- in good times and bad:

Due Diligence. Take all necessary and prudent precautions through well-documented due diligence to ensure that business relationships are formed only with reputable and qualified joint venture partners.

Board or Management Reviews. Examine the suitability of all prospective joint venture partners for purposes of compliance with the Foreign Corrupt Practices Act. Review the adequacy of due diligence performed in connection with the selection of overseas partners, as well as the joint venture's selection of agents, subcontractors and consultants for business development outside the United States. Reviewers should not be subordinate to the most senior officer of the Company's department or unit responsible for the relevant transaction.

Compliance Obligations in the Joint Venture Documents. Include in all joint venture agreements representations and undertakings by the joint venture partners, with periodic re-certifications, that no payments of money or anything of value have been or will be offered, promised or paid, directly or indirectly, to any foreign officials, political parties, party officials, or candidates for public or political party office, to influence the acts of such officials, political parties, party officials, or candidates in their official capacity, to induce them to use their influence with a government or an instrumentality thereof to obtain or retain business or gain an improper advantage in connection with any business venture or contract in which the Company is a participant

Audits and Approvals. Retain audit rights over the joint venture. Agree with all partners that the joint venture will not hire an ­agent, subcontractor or consultant without the Company's prior written consent (to be based on adequate due diligence).

Right to Terminate. Make sure all joint venture documents allow for immediate and unfettered termination for any breach of compliance-related obligations.

View other posts about joint ventures here.

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Wednesday
May282008

終了すると極端な偏見

That's right. The title of today's post says in Japanese, Terminate With Extreme Prejudice. Why? Well, we were spending just a few minutes surfing the internet (only during our company-approved tea break, of course) and happened to see the following news item from Japan's Yomiuri Shimbun (here):

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U.S. firm asks court to void contract with Yamada

LOS ANGELES--A U.S. aviation fuel-related equipment manufacturer has filed a lawsuit at a U.S. district court in Cleveland against defense equipment trader Yamada Corp. and its U.S. subsidiary, claiming Yamada's involvement in bribery cases violated their contract, which therefore should be terminated, The Yomiuri Shimbun has learned.

Cleveland-based Argo-Tech Corp. also demanded compensation from Yamada and its subsidiary.

In response, Yamada filed a countersuit against Argo-Tech at a U.S. district court in California, claiming the termination of their contract would be illegal.

According to the claims by the two sides, former Yamada President Masashi Yamada, 84, participated in a 150 million dollars capital boost for Argo-Tech around 1990, when the U.S. company faced financial difficulty.

Argo-Tech in return concluded a 50-year exclusive agency agreement with Yamada on the sales of Argo-Tech's fuel pumps for aircraft and other products in 1994.

In the documents submitted to the Ohio court, Argo-Tech claimed that incidents including former Yamada executive Motonobu Miyazaki's bribing of former Administrative Vice Defense Minister Takemasa Moriya and Miyazaki's provision of 100 million yen to Naoki Akiyama, former executive director of the Japan-U.S. Center for Peace and Cultural Exchange, in connection with the company's winning contracts for the disposal of chemical weapons found in Fukuoka Prefecture violated their contract, in which they agreed they would adhere to the U.S. Foreign Corrupt Practices Act.

For its part, Yamada claimed in its documents submitted to the California court that the incidents mentioned by Argo-Tech had no relation to the company, so they should not cause the termination of their contract.

(May 28, 2008)

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Now we know nothing about the story except what's printed above. But assuming the Yomiuri Shimbun has its facts straight, we can say for sure that Cleveland-based Argo-Tech made a fundamental compliance error when it entered into the 50-year agency agreement with Yamada in 1994.

Long-suffering readers of this Honorable Blog will know that every agreement with an overseas partner or agent should give the principal the unfettered right to terminate if the agent breaches its obligations to comply strictly with the requirements of the Foreign Corrupt Practices Act. Otherwise, the principal might get caught between a 石 and a ハード面. That's exactly what the Department of Justice warned against in Opinion Procedure Release 2001-01 (May 24, 2001) (here).

In that case, a U.S. company (called the “Requestor”) proposed to enter into a joint venture with a French company. There were doubts about how the French company obtained some of its contracts. So the Requestor took various precautions to protect itself against an FCPA violation. Accordingly, if it learned its French partner had breached the compliance warranty, the Requestor could terminate the relationship if the breach had a “material adverse effect” upon the business.

Not good enough, said the DOJ:

Should the Requestor's inability to extricate itself result in the Requestor taking, in the future, acts in furtherance of original acts of bribery by the French company, the Requestor may face liability under the FCPA. Thus, the Department specifically declines to endorse the "materially adverse effect" standard.

The lesson from Release 2001-01 is this: Accept no limits or conditions on the right to terminate a joint venture or agency when there is evidence of an FCPA violation.

We don't know the terms of the agreement between them, but if Argo-Tech had to file a lawsuit in federal court to get away from a bribe-paying Yamada, then Argo-Tech surely didn't have an unfettered right to terminate because of the breach of FCPA compliance obligations. And that's a serious mistake to have made, even way back in 1994. On the other hand, if Argo-Tech neglected to include a proper termination clause, going to court now to end the agreement (and at the same time establish that it had nothing to do with Yamada's alleged bribery) is its best course of action -- even though the litigation will be expensive, time-consuming, and on public display.

So that's today's post, along with a confession -- well, two confessions. We were surfing before and after our tea break today. In fact, it was only during our tea break that we stopped surfing. And our Japanese fluency isn't what you might call . . . fluent. So there's a chance the post's title doesn't quite say Terminate With Extreme Prejudice. Another plausible translation may be Thank You For The Wonderful Visit, Beloved Mother-In-Law.

View DOJ Opinion Procedure Release 2001-01 (May 24, 2001) here.

Wednesday
Sep052007

The Requestor's French Dilemma

Facing a decision to either stay in a joint venture or leave, when staying means violating the Foreign Corrupt Practices Act and leaving means breaching contractual obligations, is a legal disaster. But it's an easy trap to fall into.

One U.S. company (called the “Requestor”) proposed to enter into a joint venture with a French company. There were doubts about how the French company obtained some of its contracts. So the Requestor took various precautions to protect itself against an FCPA violation. Accordingly, if it learned its French partner had breached the compliance warranty, the Requestor could terminate the relationship if the breach had a “material adverse effect” upon the business.

Not good enough, said the U.S. Department of Justice:

Should the Requestor's inability to extricate itself result in the Requestor taking, in the future, acts in furtherance of original acts of bribery by the French company, the Requestor may face liability under the FCPA. Thus, the Department specifically declines to endorse the "materially adverse effect" standard.

The Lesson: Accept no limits or conditions on the right to terminate a joint venture when there is evidence of an FCPA violation.

View DOJ Opinion Procedure Release 2001-01 (May 24, 2001) Here.