Sun Microsystems said last week it may have violated the Foreign Corrupt Practices Act. It didn't reveal where the payments might have occurred or how much the bribes amounted to. But it said the potential offenses, which it has reported to U.S. and other authorities, "could possibly have a material effect on our business." Oracle Corp., which agreed last month to buy Sun for $7.4 billion, said it was aware of the potential anti-bribery violations.
Sun's Form 10-Q filed May 8, 2009 for the period ending March 29, 2009 said:
We have identified potential violations of the Foreign Corrupt Practices Act, the resolution of which could possibly have a material effect on our business. During fiscal year 2009, we identified activities in a certain foreign country that may have violated the Foreign Corrupt Practices Act (FCPA). We initiated an independent investigation with the assistance of outside counsel and took remedial action. We recently made a voluntary disclosure with respect to this and other matters to the Department of Justice (DOJ), Securities and Exchange Commission (SEC) and the applicable governmental agencies in certain foreign countries regarding the results of our investigations to date. We are cooperating with the DOJ and SEC in connection with their review of these matters and the outcome of these, or any future matters, cannot be predicted. The FCPA and related statutes and regulations provide for potential monetary penalties, criminal sanctions and in some cases debarment from doing business with the U.S. federal government in connection with FCPA violations, any of which could have a material effect on our business.The timing of Sun's disclosure suggests the potential FCPA compliance problems were discovered during pre-acquisition due diligence, either by Oracle or by Sun itself. Their merger agreement was dated "as of April 19, 2009." That's after the period when Sun reported the questionable payments to the government.
Sun provided anti-corruption warranties in the merger agreement (see below), but it had a chance to give Oracle an "exceptions list" of potential violations before signing. Assuming it did that, Oracle couldn't cite the disclosed violations as a reason to renege on its agreement to buy Sun. If Sun were to cause the deal to fall through, however, it would have to pay Oracle a $260 million breakup fee and reimburse up to $45 million of Oracle's expenses.
Sun and Oracle must be hoping for a quick resolution of the potential violations. The federal government is one of Sun's biggest customers and, as the disclosure noted, a penalty for violating the FCPA is possible debarment from government contracts. The law even allows the government to suspend vendors that have been indicted for violating the FCPA but haven't resolved the charges. Sun, of course, hasn't been charged and neither the DOJ nor the SEC have commented publicly on its disclosure.
Download a copy of Sun's Form 10-Q filed May 8, 2009 for the period ending March 29, 2009 here.
In their agreement, Sun gave Oracle the following compliance warranties -- subject to the "exceptions list":
Section 4.24. Compliance with the U.S. Foreign Corrupt Practices Act and Other Applicable Anti-Corruption Laws..
(a) The Company and its Subsidiaries have complied with the U.S. Foreign Corrupt Practices Act of 1977 and other applicable anticorruption laws.
(b) Neither the Company nor any of its Subsidiaries nor any director, officer, agent, employee or representative of the Company or any of its Subsidiaries at the direction of or on behalf of the Company or any of its Subsidiaries corruptly or otherwise illegally offered or given anything of value to: (i) any official, employee or representative of a Governmental Authority, any political party or official thereof, or any candidate for political office; or (ii) any other Person, in any such case while knowing, or having reason to know, that all or a portion of such money or thing of value may be offered, given or promised, directly or indirectly, to any official, employee or representative of a Governmental Authority, any political party or official thereof, or candidate for political office for the purpose of the following: (x) influencing any action or decision of such Person, in his or her official capacity, including a decision to fail to perform his or her official function; (y) inducing such Person to use his or her influence with any Governmental Authority to affect or influence any act or decision of such Governmental Authority to assist in obtaining or retaining business or to secure an improper business advantage; or (z) where such payment would constitute a bribe, kickback or illegal or improper payment to assist the Company or any of its Subsidiaries in obtaining or retaining business for, or with, or directing business to, any Person or in securing any improper advantage.
(c) There have been no false or fictitious entries made in the books or records of the Company or any of its Subsidiaries relating to any illegal payment or secret or unrecorded fund and neither the Company nor any of its Subsidiaries has established or maintained a secret or unrecorded fund.