Investor protections – are your ABC provisions robust enough?
Our recent experience advising on investments in challenging African jurisdictions highlights the importance of adequate investor protections when faced with unpredictable counterparties. This post considers the key bribery and corruption risks for investors, how they can be mitigated through anti-bribery and corruption (ABC) protections, and what to do if an issue arises in a group or portfolio company. Successful mitigation will depend on whether an investor’s contractual position is sufficiently robust to allow it to restructure or withdraw from the investment if required.
Key ABC risks
Breach of ABC laws by an investee company carries not only the risk of criminal sanctions, civil claims and confiscation of proceeds of crime, but also potential individual liability for any investor representatives on the investee company’s board. The reputational impact for the company and, by association, the investor, cannot be underestimated in terms of negative impact on investment value.
What’s the problem?
The acquisition of minority interests presents considerable risk for investors, particularly where the founder retains voting and management control of the company. The potential for discord derives from misalignment of interests, cultural differences over business ethics and compliance, and sometimes concealment of issues to present the business as a sound investment.
Examples of issues include the founder behaving as if they still own 100% of the company, overriding internal controls, funding purchases with company funds, contracting with and employing friends and family, refusing to comply with the investor’s compliance policies, or turning a blind eye to the payment of bribes.
Risk mitigation steps
Robust due diligence
Prior to investing, robust and thorough due diligence should be undertaken, with enhanced due diligence in relation to any high-risk jurisdiction or sector, as appropriate.
Comprehensive warranties and indemnities regarding past conduct of a portfolio company that draw out all relevant disclosures are critical in an ABC context. Investors may want to walk away from a transaction if a significant compliance issue is disclosed. Investors should negotiate undertakings and obligations regarding future conduct, extensive monitoring powers, and crucially, the right to exit or fully buy out the investment at an acceptable value in the event that corruption is discovered and the investment becomes untenable.
The investor should ensure the investee company implements an effective ABC compliance programme and should monitor its operations against those standards.
Next steps on discovery of a potential issue
Review contractual rights to clarify options
In the event of an ABC issue arising, an investor should review its contractual position to map out the options for addressing the issue, including (i) requesting additional information; (ii) instructing lawyers to undertake an independent, privileged investigation to verify any allegations and facilitate remediation of any issues; (iii) restructuring or exiting the investment; and (iv) whether it has a warranty claim against the party from which it acquired its interest.
Consideration must be given to whether it is it an isolated incident which can be remediated immediately, or requires comprehensive investigation to rule out any broader concerns. Legal privilege may protect documents from disclosure to regulatory authorities and in litigation. Jurisdiction-specific advice will be critical to ensure that privilege is preserved in any investigation.
The investor may have regulatory reporting obligations in connection with a suspected or discovered ABC issue which will carry an associated reputational and financial impact, particularly given prosecuting authorities in different jurisdictions co-operate and share information.
Be prepared: prepare for the worst, conduct robust due diligence, insist on comprehensive contractual protections, monitor performance, hold individuals to account, and manage risk pro-actively.