Asia Pacific Acquisition/Merger Due Diligence Best Practices

September 14, 2011

Performing Pre- and Post-Transaction Due Diligence on Compliance Issues

Irina DragulevSenior Corporate Counsel, M&A Compliance

M&A Compliance Program Core Objectives

– For designated transactions, ensure that due diligence is undertaken to identify and report to senior management potentially significant compliance-related risks (e.g., FCPA, Promotional Practices, GxP, Global Trade Practices) and that such risks are evaluated and addressed appropriately.

– Ensure that potential JV and other transactional partners understand and accept Pfizer’s expectations for lawful business conduct and adopt appropriate compliance governance, polices and internal controls to ensure legal compliance.

– Ensure that acquired/merged entities are fully integrated into the Pfizer compliance program.

M&A Compliance Program Types of Transactions

Types of Transactions:

– Certain Asset Acquisitions

– Divestitures of Subsidiaries

– Acquisitions/Mergers

– Joint Ventures

– Co-Promotion Agreements

– Venture Capital Investments in Certain Jurisdictions

Transactional Compliance Diligence Key Considerations

Transactional Compliance Diligence Practical Implications

Diligence may help minimize potentially significant transactional risks:

Civil and criminal penaltiesLost value of targetDisgorged profitsHiring and maintaining an outside monitorDebarmentOther civil actions, e.g. shareholder actions and RICO violationsNegative publicity and reputational loss.

Transactional compliance diligence may help ensure that target entity takes responsibility for and covers costs of violations (resolve matter with relevant authorities pre-close; proper indemnification).

Transactional compliance diligence may help ensure appropriate valuation of the target asset .

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Johnson & Johnson Settlement

In April, J&J agreed to pay penalties of $70 million in connection with the provision of improper payments to employees of public health care providers. Majority of problematic operations resulted from insufficient implementation of compliance program in acquired companies.

Received a DPA in part due to enhanced compliance undertakings.

Enhanced Compliance Obligations re: Acquisitions:

New business entities can only be acquired after thorough FCPA/anti-corruption diligence by legal, accounting and compliance personnel;

Should pre-acquisition diligence not be practicable, post-closing diligence will have to be conducted and any findings of corrupt payments, inaccurate books, or inadequate internal controls reported to DOJ;

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Johnson & Johnson Settlement Cont’d

Enhanced Compliance Obligations re: Acquisitions (cont’d):

J&J’s anti-corruption policies and procedures to be implemented as quickly as practicable, but no later than one year post-closing;

Anti-corruption and compliance training to all employees and third parties who “present a corruption risk to J&J”; and

FCPA-specific audit of all newly-acquired entities within 18 months of acquisition.

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Case Study

Latin Node Inc (2009) – Provider of Telecommunications Services

Post acquisition, Buyer uncovered a number of pre-closing improper payments to a third party.

Buyer conducted an internal investigation, terminated improperly-obtained agreements, terminated Latin Node’s management, and voluntarily disclosed payments to DOJ and SEC.

Significant resources devoted to the investigation and enhancing internal controls and compliance.

Latin Node pleaded guilty to violating the anti-bribery provision of the FCPA and had to pay a fine.

Latin Node lost numerous contracts and relationships.

Within a year of acquisition, Buyer’s investment wiped out, while at the same time additional costs incurred relating to the internal investigation, the remediation and Latin Node’s eventual bankruptcy.

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Toolkit Overview

• Transaction types covered include:

– Minority Interest Acquisitions/JVs – Majority Interest Acquisitions/Mergers/JVs – Co-Commercialization Agreements – Certain Venture Capital Investments

• Toolset includes

– Risk assessment framework– Diligence process guidance– Supporting documentation (sample contract language, etc.)

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Unified electronic toolset supporting transaction compliance diligence

Launch Page

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“Temperature Check” Guidance

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Examination Guidance

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Example: Tools & Templates/Sample Language

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Example: FCPA/Anti-Corruption Assessment Tool

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Example: International Trade Compliance Assessment Tool

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Example: US Promotional Practices Assessment Tool

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