Private equity firms are in certain circumstances liable for the actions of their portfolio company management teams, warned this week the director of the UK’s Serious Fraud Office (SFO), Richard Alderman.
Speaking at a London conference hosted by law firm Debevoise & Plimpton Alderman said even GPs who were unaware of a bribe paid by a portfolio company manager could face liability under the UK Bribery Act.
The Bribery Act, which comes into effect next month and catches private equity real estate fund managers, requires firms with operations in the UK to put in place “adequate procedures” to prevent situations of bribery. The UK government published guidance on the Act last March. The SFO is responsible for investigating and prosecuting corruption cases.
Liability will ultimately be interpreted with regard to the extent to which a private equity owner is involved in the management of the portfolio company, said Alderman. Pure ownership would not trigger liability, but placing a partner on the company’s board for instance can be seen as becoming “actively involved”.
Alderman further clarified that the SFO welcomed private equity firms wishing to discuss (either through proper protocols or informally) corruption issues they discover in takeover targets during advanced stages of due diligence. “What happens in practice though, it seems to me, is that the acquiring company decides to take the commercial risk of making the acquisition without getting a view from the SFO”.
The SFO would however be sympathetic to GPs coming to them with corruption concerns post-acquisition. The office views beneficially the opportunity for ethical firms to raise the governance standards of businesses with poor track records in corruption. “What is important is that the acquiring company gets on and sorts out the problems that it has inherited,” Alderman said.
With respect to GPs’ concerns over wining and dining clients, Alderman said talk of a “ban on hospitality” was overblown. “The overall question was whether or not the expenditure was sensible and proportionate…. whether [firms] would like to see details of the expenditure on the front-page of newspapers is always a very good test.”
In the end firms will be expected to instil a firm-wide culture of compliance, said Alderman citing GPs’ questions over what happens when a portfolio company is involved in corruption without the owner’s knowledge and they receive benefit through dividends or some other type of distribution. He added this was an area the SFO will be looking to clarify and develop over the next year.