Coty Inc. could be buying a massive foreign bribery liability if a deal to purchase Avon Products Inc. were to close, experts said.
Though Avon rejected Coty’s unsolicited $10 billion bid, the potential liability Coty would acquire in a deal could be massive. Avon has spent hundreds of millions of dollars over the past several years investigating possible violations of the Foreign Corrupt Practices Act, which bars bribing foreign officials for business, and the probe is continuing.
Last year alone, Avon spent $93.3 million investigating possible FCPA breaches, the company said in its annual report. Standard & Poor’s downgraded the company’s debt last month, partly due to the risk of further FCPA costs.
There’s also the risk of legal penalties, though no charges have been filed. The company has said it is cooperating with the investigations and has fired several executives amid the internal investigation. An Avon spokeswoman didn’t immediately respond to a request for comment Monday.
The Wall Street Journal reported on its front page in February that a case was brought before a grand jury.
“You buy a company, you buy their problems,” said Rita Glavin, a partner at Seward & Kissel LLP who formerly served as head of the Justice Department’s Criminal Division, where she led prosecutors pursuing FCPA cases. “Any company interested in Avon would know this has been going on for some period of time.”
Glavin noted that because Avon has been disclosing how much it has spent on the investigation, it would be clear to any potential buyer what they would be facing upon purchasing the New York-based cosmetics company.
To that end, Coty Chairman Bart Becht said in an interview with the Wall Street Journal that the corruption investigation is a concern because the company needs to better understand the liabilities tied to it.
The concept in question is called successor liability, where an acquirer assumes responsibility for a company’s misconduct even if it occurred prior to the acquisition.
“It’s settled law and it’s a principle that has parallels in other areas in international regulatory enforcement, including U.S. export controls and sanctions laws,” said Wynn Segall, a partner at Akin Gump.
Alleged prior misconduct “could be an important variable in valuation” and the assessment of a deal in that kind, Segall said, because if the potential penalty is big enough, it could be material to the terms of a transaction.
Successor liability in the FCPA context, known by the shorthand of “buying an FCPA violation,” was the subject of six enforcement actions in 2011. Mike Volkov, a newly minted shareholder at LeClair Ryan who blogs prolifically about corruption issues, wrote recently that it will continue to be a focus of U.S. authorities as merger activity increases in 2012.
“To avoid FCPA risks, companies must recognize that compliance does not end with pre-closing due diligence – compliance must be a priority after a closing,” Volkov wrote.
Source: Wall Street Journal Blogs