Corporation, Securities
& Business Law Forum
June 1999 Vol. 44, No. 4
Statements or expressions of opinion or comments appearing herein are those of the editors or contributors, and not necessarily those of the association or section.
Contents
* OECD Convention on Combating Bribery and new amendments to Foreign Corrupt Practices Act
* Fast track at last for LLCs and LPs in Illinois
* Is stock in a close corporation a security?--Illinois courts split--Will they now follow the U.S. Supreme Court in Landreth Timber?
* Confidentiality agreements for a corporate acquisition
* General partnership agreement of a business owned by individuals
Our fourth issue of the newsletter was developed by council member, John Doyle, and includes our regular columns and some interesting new ones. As always, we welcome your comments and suggestions, as well as material for the next issue of the newsletter.
Robert C. Knuepfer, Jr.
Baker & McKenzie
Editor
By James J. Moylan, Arnstein & Lehr, Chicago
In the March 1999 issue of the Corporation, Securities and Business Law Forum, the section council announced our pro bono initiative. The newsletter also contained an article by William D. McGrath, Executive Director of the Illinois Pro Bono Center. Mr. McGrath discussed the need for business law pro bono volunteers and identified pro bono opportunities in Chicago with the Community Economic Development Law Project ("CEDLP"). Volunteers can work directly with CEDLP groups, write newsletter articles for CEDLP's planned newsletter, or serve as speakers on business law related topics to the participants in the CEDLP's seminar programs. In addition, Mr. McGrath identified the Illinois Pro Bono Center in Champaign, Illinois as a source for pro bono opportunities outside Chicago and downstate. A volunteer form was printed in the newsletter.
In the May 1998 issue of the newsletter, the volunteer form was republished. To date, the response has been, in a word: "underwhelming."
I respectfully request each member of the section council, and there are almost 1,500 of us throughout the state of Illinois, to consider carefully the opportunity to provide pro bono services in our field of business law.
The business lawyer's typical lament is that we are reluctant to participate in traditional pro bono activities because of our unfamiliarity with the applicable law and the lack of time to learn the law's intricacies.
The section council's pro bono initiative addresses these concerns. The areas of law in the CEDLP project are familiar to us. We do not need to take the time for special study. The business law we practice every day is the type of law the constituents of the CEDLP and the Illinois Pro Bono Center need.
An absence of experience in a particular area is no longer an acceptable excuse. The section council is enabling you to give something back to our profession and to our society by providing pro bono business law services to community groups that are trying to make a difference. I urge you to participate in this initiative.
Please complete and return your volunteer form today.
Thank you.
By James J. Moylan, Arnstein & Lehr, Chicago
Any reader of the financial press knows that financial reporting is one of the brightest blips on the Securities and Exchange Commission's ("SEC") radar screen. SEC Chairman Arthur Levitt publicly speaks about it almost every chance he gets.
On September 28, 1998, Chairman Levitt gave a speech entitled, "The Numbers Game," wherein he expressed his concerns about financial management and reporting. In response to Chairman Levitt's remarks, the New York Stock Exchange, Inc. ("NYSE") and the National Association of Securities Dealers Inc. (n/k/a NASD Inc.) ("NASD") created an 11 member panel comprised of stock market regulators, accounting officials and corporate executives, and named it the "Blue Ribbon Committee on Improving the Effectiveness of Corporate Audit Committees" ("committee").
On February 8, 1999 the committee issued its report and recommendations. The committee's work addresses the need to increase the quality of corporate financial reporting. It does so by proposing 10 recommendations to corporate audit committees, grouped in three major areas, as summarized below:
I. Independence
A. The audit committee should be independent.
1. "Independent" defined:
Audit committee members are to be considered independent if they have no relationship to the corporation that may interfere with the exercise of their independence from management and the corporation.
2. The report also provides examples of relationships that could inhibit independence.
B. The audit committee should consist solely of independent directors.
II. Effectiveness of performance
C. The audit committee should have at least three directors who are "financially literate" and one member with accounting expertise.
1. "Financially literate" defined:
The ability to read and understand fundamental financial statements, including a company's balance sheet, income statement and cash flow statement.
D. Adopt a formal written charter that specifies the scope of the audit committee's responsibilities and how the audit committee discharges those responsibilities.
1. Five principles are advanced for inclusion in the audit committee's charter:
a) Monitor the audit process.
b) Assure independent communication (unfettered by management) between audit committee and internal auditors.
c) Assure independent communication (unfettered by management) between audit committee and outside auditors.
d) Require candor in conversations with management, especially in areas such as:
i) SEC financial disclosure filings
ii) Changes in financial reporting/accounting policies
iii) Accounting treatment for significant transactions
iv) Budget v. actual numbers
v) Etc.
e) Consider training and education programs in financial reporting and accounting for audit committee members.
E. Disclosure in proxy materials regarding the audit committee, adoption of a charter, etc.
1. Akin to a corporation's compensation committee and report--business judgment rule applies--safe harbor provisions.
III. Accountability for oversight responsibilities
F. The outside auditors are ultimately accountable to the board of directors and the audit committee.
G. The audit committee is responsible for the independence of the outside auditors.
H. Modify Generally Accepted Auditing Standards ("GAAS") to require outside auditors to discuss their judgments regarding the quality of the corporation's financial accounting and reporting with the audit committee.
I. Include in SEC Form 10-K a letter from the audit committee disclosing what the committee has done to improve the quality of the company's financial reporting by and among, management and the outside auditors, and state whether the financial statements are fairly presented in conformity with Generally Accepted Accounting Principles ("GAAP") in all material respects, subject to a safe harbor provision.
J. The SEC should require the outside auditor to conduct an interim financial review prior to Form 10-Q filings to reduce the frequency of year end "adjustments," consistent with Statement of Auditing Standards ("SAS") 71.
The above would be implemented primarily by the SEC, NYSE and NASD adopting new rules and would generally apply to companies with capitalization above $200mm.
Copies of the committee's report can be located online at http://www.nyse.com or http://www.nasd.com.
OECD Convention on Combating Bribery and new amendments to Foreign Corrupt Practices Act
By Arthur L. George, Partner, Baker & McKenzie, Chicago
I. Introduction
In November 1998, President Clinton signed into law amendments to the U.S. Foreign Corrupt Practices Act ("FCPA") implementing the requirements of the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions (the "Convention"). The Convention, which entered into force on February 15, 1999, requires its signatory states to enact legislation which (a) criminalizes bribery of foreign public officials in international business and (b) imposes record keeping and accounting requirements. These developments provide U.S. FCPA enforcement authorities (the Department of Justice and the Securities and Exchange Commission) with better means to enforce the FCPA's requirements, and indeed they have indicated that they intend to enforce the FCPA more vigorously.
Accordingly, the Amendments and the Convention are significant for companies doing business internationally. In particular, they may necessitate that companies make certain adjustments in their business practices and review and revise their corporate compliance programs and internal guidelines. Reexamining and updating company compliance programs and guidelines is important for three reasons. First, such guidelines must accurately reflect current legal requirements; otherwise, the risk of a violation is significantly increased. Second, U.S. enforcement authorities pay great attention to whether a company's compliance program is a formality, or whether instead the company takes it seriously and implements it effectively. If a program is effective, it will be more difficult for enforcement agencies to prove the elements of an FCPA violation, prosecution is less likely, and even if a violation is found the penalties will likely be less severe under the U.S. federal sentencing guidelines. A failure to review and update, however, would provide enforcement agencies with a basis for deeming a company's compliance program ineffective. Finally, company directors could be rendered liable for failure to fulfil their duty (suggested by recent corporate case law) to ensure that effective compliance programs addressing the risks of the business are in place.
This article describes the amendments and their significance after first summarizing the general provisions of the FCPA and the Convention.
II. FCPA general provisions
The antibribery provisions of the FCPA (as they stood prior to the amendments) prohibit the payment of (or offer to pay) anything of value to foreign officials, political parties, or candidates for political office corruptly for the purpose of influencing any official actions of such persons. This includes attempting to induce such persons to do or omit to do an act in violation of their lawful duties, or inducing them to use their influence with a foreign government in order to retain or obtain business, or to direct business to any person. The FCPA also applies to payments or offers made to other persons with the knowledge that such payment will be offered to foreign officials, political parties or candidates for political offices for such prohibited purposes.
Separate from the FCPA's antibribery provisions are its accounting provisions, which require accurate accounting and recordkeeping. A major purpose of these provisions is to prevent off-the-books slush funds and other concealment of bribes. The accounting provisions apply only to public companies.
A violation of the FCPA can lead to both civil and criminal liabilities, the latter including both fines and (for individuals) imprisonment.
III. OECD Convention
After the enactment of the FCPA in 1977, the United States was, for years, virtually alone in its prohibition of bribery of foreign officials. Not surprisingly, this disadvantaged U.S. companies doing business abroad, as their competitors generally were not subject to such restrictions. The worst offenders were companies from OECD countries. When the FCPA was first amended in 1988, Congress instructed the Executive Branch to embark on international efforts to level the playing field for U.S. companies. These efforts eventually culminated in the signing of the Convention in December 1997 by all OECD countries plus five others. The Convention obligates its signatories to embody its requirements in domestic legislation.
In light of the above, the new task of U.S. companies is to learn the new requirements in each Convention signatory country in which they have operations and track developments thereafter. Many companies with sophisticated compliance programs already maintain country-by-country guidelines based on the domestic laws of countries in which they do business. The Convention makes this approach even more important.
In addition to local legislation applicable to the payers of bribes, most countries also have anti-corruption legislation prohibiting government officials from demanding and receiving bribes. If a company decides to include country-by-country tracking in its compliance program, covering this "passive" bribery legislation is also advisable so that the company can avoid placing foreign officials in legal jeopardy. This is essential for companies which make it their policy to comply with local law in countries where they do business.
The Convention includes record keeping and accounting requirements, which also must be reflected in local legislation. Technically, these also will need to be followed by a company's foreign operations and, therefore, should be reflected in their compliance program and controls. In practice, however, since the FCPA's strict accounting provisions are already applicable to foreign subsidiaries, few, if any, modifications to accounting practices at subsidiaries are likely to be needed.
An important aspect of the Convention for companies which operate in former state-run economies relates to its application to persons working at state-owned enterprises. Senior persons from state-owned enterprises generally have been deemed foreign officials for FCPA purposes. The Official Commentary to the Convention, however, indicates that a person from such an enterprise will not be deemed to perform a public function (and therefore will not be covered by the Convention) if the enterprise "operates on a normal commercial basis in the relevant market, i.e., on a basis which is substantially equivalent to that of a private enterprise, without preferential subsidies or other privileges". The amendments and their legislative history do not contain any similar qualification. As it is thus far unclear whether the U.S. enforcement authorities will depart from their prior practice, prudence dictates treating persons from state-owned enterprises as foreign officials, unless and until such change in policy occurs.
Another potentially important aspect of the Convention is that it provides for cooperation between the governments of signatory states, such as in evidence gathering and in extradition of violators, which will enable the enforcement authorities in signatory states to aggressively enforce the new requirements. Enforcement officials in the United States view this provision as one which will facilitate the expected increase in enforcement activity. This procedure could facilitate, for example, overturning bidding results where it is discovered that the winner paid a bribe.
IV. FCPA amendments and significance
There are four principal amendments to the FCPA of importance to U.S. companies and their compliance programs, each of which is described below.
First, whereas the FCPA previously applied only to U.S. companies and their officers, directors, employees, agents and stockholders, the amendments extend the FCPA's application to "any person," provided that such person commits an act in furtherance of a foreign bribe while in the United States. (It is not yet clear what meaning will be attached to "in" the United States, as it might be interpreted to include actions taken in (or to or from) the United States even without the physical presence of the person in the United States.) Thus, foreign persons, even if they are not employed by a U.S. company, or foreign companies or their officers, directors, employees, agents or stockholders, could be held liable under the FCPA. In particular, this can directly subject foreign subsidiaries of U.S. companies to the FCPA (which previously was not the case).
Second, the amendments extend the coverage of the FCPA to any U.S. person even while located and acting outside the United States. Thus, it will be important for U.S. companies to educate their employees abroad regarding the requirements of the FCPA as amended and ensure that their corporate compliance programs extend to them.
Third, whereas the FCPA had previously prohibited bribes designed "to obtain or retain business," the amendments add that the prohibition also extends to bribes made for the purpose of "securing any improper advantage." This language was included in the Convention at the request of the United States because it was feared that the term "to obtain or retain business" could be interpreted too narrowly by other signatories as not applying to benefits obtained other than the award of contracts (e.g., environmental approvals, tax benefits). Because the responsible U.S. authorities already interpreted the prior FCPA language broadly, they believe that the new language adds little if anything and that it merely supports their already broad interpretation of the statute.
Fourth, the amendments extend the FCPA's coverage to bribes paid to officials of international organizations. Previously, the FCPA had applied only to bribes paid to foreign government officials. The organizations covered by this provision are to be specified in an Executive Order. Companies should ensure that such officials are covered by their programs.
V. Conclusion
The Convention and the amendments, together with stepped up enforcement efforts, mean that companies will need to be more attentive and rigorous in their FCPA compliance, and that such efforts must now extend to compliance with similar foreign legislation. Companies will therefore need to train their employees regarding the new requirements of U.S. and foreign legislation and reflect them in their corporate compliance programs.
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Arthur George is a partner in the Chicago office of Baker & McKenzie practicing in the areas of international commercial and M&A law and corporate compliance. Telephone (312) 861-8066; fax (312) 861-2899; e-mail: arthur.l.george@bakernet.com.