Attorneys

• V. Susanne Cook
• Megan E. Finkelstein

Related Practices

• Customs
• International Business
• Mergers and Acquisitions

In our global post 9/11 environment, the failure to conduct due diligence import/export reviews on acquisition or merger targets with international business activities, regardless of whether such international business is conducted via foreign affiliates, can have serious financial consequences.  As this article illustrates, failure to discover an undisclosed compliance problem in the importing/exporting area can result in substantial civil and possibly criminal penalties.

Federal Government “Successor Liability” Standards

The Department of Commerce Bureau of Industry and Security (BIS) has taken a strict view on the concept of “successor liability” and generally asserts that successor liability applies in the context of an acquisition/merger of an international company, even where the deal is structured as an acquisition of assets.  BIS has taken the position, which has been confirmed in Sigma-Aldrich by an Administrative Law Judge of the U.S. Coast Guard, a Division of the Department of Homeland Security, that it will penalize successor companies for export violations that occurred prior to an acquisition or merger.  In Sigma-Aldrich the Administrative Law Judge concurred with BIS and held the successor liable, reasoning that the concept of “substantial continuity” justified this result.  The fines involved in this particular BIS case resulted in a $1.76 million settlement. 

In the Boeing-Hughes case, the Office of Defense Trade Controls (ODTC) similarly applied the legal theory of “successor liability,” holding the Boeing Company liable for export violations that occurred prior to Boeing's acquisition of Hughes Space and Communications.  The Boeing Company paid $32 million to settle this case.  Under conventional successor liability principles that would apply for any purpose (e.g. environmental or other kinds of liability), when a seller sells assets,  exposure to successor liability is significantly reduced, but in these cases, the government has signaled that it may hold the successor liable even if the transaction is an asset sale.

U.S. Customs and Border Protection (CBP), also a division of the Department of Homeland Security, along with the Office of Foreign Assets Control expressed their approval of  BIS’s and ODTC’s interpretation of “successor liability,” but neither has yet advanced a legal challenge to serve as a clear legal precedent.

Import/Export Due Diligence Compliance Reviews Are a Necessary Element for Most Due Diligence Merger/Acquisition Programs

The completion of an import/export due diligence compliance review is necessary when the acquisition/merger target (or buyer) is involved in international trade.  Such review should evaluate areas in a company’s organization involved with international trade.  As with other due diligence reviews, the import/export compliance review must be tailored to the specific transaction involved.  A review of the organization’s structure relative to its international activities, interviews with key personnel and an understanding of a company's import/export operations will generally provide an indication of areas of risk that could potentially impact the acquisition.

Discovering a problem during the due diligence review enables the buyer or seller to examine the available options and initiate a plan to address such problem.  For example, if a potential risk exposure is discovered, specific buyer protection indemnity language may be developed, a portion of the purchase price may be withheld pending a satisfactory resolution, the purchase price may be renegotiated, or, depending on the severity of the liability exposure, the transaction may be terminated.  With advance notice and planning, it may even be possible to correct deficiencies detected in a compliance review.  For example, a prior disclosure may be advisable combined with the development of a structured customs/export compliance program.

Import Due Diligence Compliance Review

An import due diligence compliance review should focus on areas similar to those examined in a CBP audit.  The review should include an examination of the company's corporate customs policy; the customs compliance program, which should include the written procedures concerning recordkeeping and entry filing; a description of the use and eligibility requirements of special trade programs, classifications, anti-dumping or countervailing duty orders and internal controls implemented in response thereto; C-TPAT membership and any other areas that are deemed relevant to the specific international business at issue.  The review should also examine any previous interactions that the company has had with CBP, for example, the submission of any prior disclosures, penalties, seizures, classification rulings, audits, etc.  Evidence of an insufficient customs compliance program, or the absence of a program, should immediately raise a “red flag” signaling the potential exposure to liablity for failure to implement adequate safeguards resulting in the potential for serious penalty exposure with CBP and other related government agencies.

Export Due Diligence Compliance Reviews

Similarly, an export due diligence compliance review should be conducted.  This review should include an examination of a representative sample of the export documents and shipper export declarations, an analysis of the type of export controls that are relevant to the specific products, an analysis of the applicable federal licensing requirements, a review of the defense manufacturer/exporter registrations (if applicable) and commodity jurisdiction rulings, an analysis of the boycott/embargo and denied persons/affiliate screening procedures and any other relevant export procedures and requirements relevant to the international activity.

Recommendations

In today’s global and continually changing economy, most mergers and acquisitions involve companies engaged in international trade.  As with other areas of due diligence review, import/export compliance reviews will protect the buyer from unknown compliance issues, which may have the potential of escalating out of control if discovered at a later date.  Post closing discovery of an import/export compliance issue may not only cause significant financial loss, but also result in stressful customer, affiliate and government relations.  Companies should include an import/export due diligence compliance review module as part of the overall due diligence proceedings of a merger or acquisition of al company involved in international trade. 

For more information, please contact scook@cohenlaw.com or mfinkelstein@cohenlaw.com