This post goes inside PBSJ and highlights how PBSJ’s FCPA inquiry caused a company with the highest bid to seek closing conditions regarding the FCPA inquiry that PBSJ found unacceptable, thereby prompting it to select a company with a lower bid price.

The glimpse inside PBSJ is courtesy of the company’s preliminary proxy statement filed with the SEC on August 27th (see here).

The proxy statement provides an informative glimpse into how FCPA issues affect real business decisions.

Among other things, interested purchasers of PBSJ: held meetings with PBSJ’s outside counsel (Greenberg Traurig) and its in-house counsel to discuss the FCPA investigation; requested the opportunity to meet with DOJ representatives regarding the FCPA investigation; and requested access to attorney-client privileged documents regarding the FCPA investigation.

As noted in the proxy statement, on July 30th, representatives of Atkins, the lower bidder that PBSJ ultimately chose, its counsel, as well as counsel to PBSJ met with DOJ representatives regarding the FCPA investigation.

[Note - DOJ seldom gives assurances to a company during a Foreign Corrupt Practices Act investigation. Thus, it is difficult to see what comfort or assurances Atkins or its counsel could receive from meeting with the DOJ. If anyone has participated in such a DOJ / company under investigation / potential acquirer company meeting as described above, please consider this an open invitation to share via a guest post your first-hand generic insight into the general issues discussed and resolved during such a meeting]

Here is the PBSJ merger story, in summary fashion, as told in the proxy statement.

“From time to time throughout 2009 [...] members of senior management, primarily our then chief executive officer, John B. Zumwalt, III, held informal discussions with other companies concerning possible strategic transactions and with financial sponsors concerning possible investments in PBSJ. Although we held preliminary discussions and entered into confidentiality agreements with certain prospective strategic partners, these discussions did not result in any formal proposals.”

“On December 30, 2009, we announced that we would be unable to timely file our annual report on Form 10-K for fiscal year 2009 due to an internal investigation that was being conducted by the audit committee of our board of directors to determine whether any laws had been violated, including the FCPA, in connection with certain projects undertaken by PBS&J International, Inc., one of our subsidiaries, in certain foreign countries. Our annual report on Form 10-K for fiscal year 2009 was subsequently filed on January 13, 2010, within the extended time period permitted by SEC rules.”

“Barclays Capital, on behalf of PBSJ, contacted 23 potential bidders during the late-March to mid-April period, including Atkins, Company A [a company involved in engineering and construction investments] and Company B [an industry competitor]. These potential bidders were selected by our senior management [...] in consultation with Barclays Capital. Of the 23 potential bidders, 13 were strategic buyers and ten were financial sponsors. Sixteen potential bidders, including eight strategic buyers and eight financial sponsors, executed confidentiality agreements with PBSJ between April 1 and April 20, 2010. During the end of March and the first two weeks of April, our senior management, with assistance from Barclays Capital, prepared a confidential information memorandum (“CIM”) describing PBSJ and its business. Copies of the CIM were provided to each of the potential bidders that executed a confidentiality agreement with PBSJ. Potential bidders also received a bid instruction letter from Barclays Capital, on behalf of PBSJ, requesting that initial indications of interest be submitted by April 28, 2010.”

“On April 28, 2010, ten potential bidders, including six strategic buyers and four financial sponsors, submitted initial non-binding indications of interest to acquire PBSJ. The indication of interest from Atkins, which indicated a range of $16.29 to $18.71 per share, represented the highest valuation of the indications of interest, based on the high end of its range. Company A and Company B were among the potential bidders that submitted indications of interest.”

“On April 29, 2010, our senior management [...] met with representatives of Barclays Capital to review and discuss the initial indications of interest. The representatives of Barclays Capital presented their analysis of the indicated valuations of PBSJ and the transaction terms proposed by the potential bidders. Barclays Capital recommended that one of the strategic buyers and the four financial sponsors not be invited to proceed to the second phase of the sale process because their valuations of PBSJ were lower than the valuations of the other five strategic buyers.”

“On April 30, 2010, our board of directors met to review and discuss the initial indications of interest.”

“[O]ur board of directors determined to permit five of the ten potential bidders, all of which were strategic buyers, to proceed to the second phase of the sale process. These five potential bidders, which included Atkins and Company B, presented the highest indicated enterprise valuations of PBSJ in their indications of interest.”

“From May 4, 2010 to May 20, 2010, our management made separate presentations to representatives of each of these five potential bidders and conducted additional meetings with some bidders. In addition, our management participated in conference calls and meetings with Barclays Capital and potential bidders responding to questions throughout the time period up to the date refreshed indications of interest were due. On May 14, 2010, the five potential bidders were given access to an electronic “data room” that had been assembled by our management, with the assistance of Barclays Capital, in order to provide the bidders with additional confidential information regarding PBSJ. Bidders were also given an updated bid instruction letter from Barclays Capital, on behalf of PBSJ, requesting that refreshed indications of interest be submitted. On May 24 and 25, 2010, three of the five potential bidders, including Atkins and Company B, had discussions with representatives of GT [Greenberg Traurig - the company's legal counsel] and our in-house counsel to discuss the FCPA investigation.”

“Between May 27, 2010 and June 3, 2010, four potential bidders submitted refreshed indications of interest to acquire PBSJ, including Atkins and Company B. The fifth potential bidder informed Barclays Capital that it did not wish to continue in the sale process.”

“On June 3, 2010, our senior management and Mr. Klatell [chairman of the strategic finance committee of the PBSJ board] met with representatives of Barclays Capital in order to review and discuss the refreshed indications of interest.”

“The refreshed indication of interest from Atkins, which indicated a price per share of $16.65, continued to represent the highest valuation among the indications of interest. Company B’s refreshed indication of interest indicated a price per share of $15.08 and the refreshed indication of interest from the next highest potential bidder (“Company C”) indicated a price per share of $14.18.”

“[O]ur board of directors determined to permit the three potential bidders with the highest indicated valuations of PBSJ—Atkins, Company B and Company C—to proceed to the third phase of the sale process. Barclays Capital, on behalf of PBSJ, communicated this information to the three potential bidders.”

“On June 14, 2010, Company C informed Barclays Capital that it would not be able to present a more competitive proposal to PBSJ and thus would not continue in the sale process.”

“On June 10 and 11, 2010, Barclays Capital, on behalf of PBSJ, provided Atkins and Company B, respectively, with a form of merger agreement that had been prepared by GT and our in-house counsel and requested that Atkins and Company B submit “final” bids and mark-ups of the merger agreement by July 6, 2010.”

“On July 6, 2010, both Atkins and Company B submitted to Barclays Capital bids to acquire PBSJ, as well as initial mark-ups of the draft merger agreement, which were then provided to our senior management, Mr. Klatell and GT. Atkins initially proposed to acquire PBSJ for a price per share of $15.57 and Company B initially proposed to acquire PBSJ for a price per share of $16.89. However, later that same week, after discussions between Barclays Capital and advisors for Atkins, Atkins and its advisors communicated with Barclays Capital that, subject to the completion of additional financial due diligence, Atkins would be prepared to submit a proposal to acquire PBSJ for a price per share of $17.137. Company B initially proposed that the merger consideration be paid in an unspecified mixture of cash and Company B’s common stock. Company B later proposed that the mixture of cash and Company B common stock be determined at the election of each PBSJ shareholder, provided that not less than 10% of the consideration for each PBSJ shareholder was in the form of Company B common stock. Company B also proposed to make $8.5 million in equity grants to undisclosed members of PBSJ’s management at the closing of the merger.”

“On July 11, 2010, our board of directors met in order to review and discuss the bids to acquire PBSJ. Members of our senior management and representatives of Barclays Capital and GT were also in attendance. [...] The representatives of GT summarized the various concerns regarding risk allocation and deal completion certainty raised by the two bids.”

“In particular, the representatives of GT discussed the closing conditions regarding the FCPA investigation that had been included in the mark-ups to the merger agreement received from Atkins and Company B. Atkins included a closing condition in its mark-up to the merger agreement that there must not be any adverse development in the FCPA investigation, including the imposition of any sanction, fine or operating restriction on PBSJ or its subsidiaries. Further, Atkins’ mark-up included a definition of “Company Material Adverse Effect” that allocated significantly more risk to PBSJ.”

“Contrary to indications previously provided by its chairman of the board, Company B included a condition that the FCPA investigation must be resolved to Company B’s satisfaction prior to closing. Both Atkins and Company B also requested the opportunity to meet with representatives of the DOJ regarding the FCPA investigation prior to the execution of the merger agreement; representatives of the DOJ had previously indicated to PBSJ that it would accommodate a meeting with one bidder.”

“In addition, our senior management and representatives of Barclays Capital and GT discussed with our board of directors Atkins’ request that PBSJ allow representatives of Atkins to review attorney-client privileged documents regarding the FCPA investigation prior to execution of the merger agreement. The representatives of GT and our in-house counsel advised our board of directors with respect to possible consequences of complying with Atkins’ request.”

“Our board of directors, after extensive discussion with our senior management, Barclays Capital and GT regarding the bids, instructed our senior management and advisors to continue to negotiate with both Atkins and Company B in order to achieve a definitive proposal that provided the greatest combination of shareholder value and deal completion certainty.”

“On July 12, 2010, GT, through Barclays Capital, circulated revised drafts of the merger agreement to each of Atkins and Company B. The revised drafts of the merger agreement provided that developments in the FCPA investigation could serve as a basis not to close the transaction only if the developments rose to the level of a “Company Material Adverse Effect” and, in the case of Atkins, further revised its definition of “Company Material Adverse Effect” to a market standard.”

“Between July 12, 2010 and July 21, 2010, representatives of PBSJ and its advisors held discussions with each of Atkins and Company B and their advisors regarding the issues in the merger agreement, including the treatment of the FCPA investigation and Atkins’ request that PBSJ allow representatives of Atkins to review attorney-client privileged documents regarding the FCPA investigation prior to the execution of the merger agreement. GT and each of Hunton & Williams LLP (“Hunton”), counsel to Atkins, and in-house counsel to Company B continued to exchange drafts of the merger agreement and negotiate the terms thereof. During this time, both Atkins and Company B agreed to the treatment of the FCPA investigation as proposed by PBSJ and, in the case of Atkins, to a market standard definition of “Company Material Adverse Effect.” In addition, during the week of July 12, 2010, representatives of Atkins conducted additional on-site financial due diligence regarding PBSJ and representatives of Company B conducted additional on-site legal due diligence regarding PBSJ, each at PBSJ’s Tampa headquarters.”

“On the morning of July 21, 2010, Atkins submitted to Barclays Capital a revised bid to acquire PBSJ for a price per share of $17.137, consistent with its prior indication. However, Atkins’ offer continued to be conditioned on PBSJ allowing representatives of Atkins to review attorney-client privileged documents regarding the FCPA investigation prior to execution of the merger agreement. Also on July 21, 2010, Company B increased its bid to acquire PBSJ from a price per share of $16.89 to a price per share of $17.197 and reduced the value of equity grants to be made to undisclosed members of PBSJ’s management at the closing of the merger from $8.5 million to $3.5 million, having been advised that our board of directors did not consider such grants relevant in choosing a successful bidder. Company B also indicated that it would allow PBSJ shareholders to elect to receive merger consideration in any mixture of cash and Company B common stock, including all cash consideration.”

“During the evening of July 21, 2010, our board of directors met in order to review and discuss the revised bids submitted by Atkins and Company B. Members of our senior management and representatives of Barclays Capital and GT were also in attendance.”

“Representatives of Barclays Capital reviewed and discussed with our board of directors their analysis of the financial aspects of both bids, including the implied valuations of PBSJ. Our board of directors also reviewed and discussed a presentation by our chief financial officer regarding the possible alternatives to the sale of PBSJ.”

“Our senior management and representatives of GT also discussed with our board of directors the condition to Atkins’ offer that its representatives be allowed to review attorney-client privileged documents regarding the FCPA investigation prior to execution of the merger agreement and the implications that such review could have.”

“During the course of the meeting and at the instruction of our board of directors, Mr. Klatell contacted the chairman of the board of Company B to discuss Company B’s valuation of PBSJ. After discussions with Mr. Klatell, the chairman of the board of Company B indicated to Mr. Klatell that Company B would increase its bid to acquire PBSJ from a price per share of $17.197 to a price per share of $17.498 and eliminate the equity grants to be made to undisclosed members of PBSJ’s management at the closing of the merger.”

“Our board of directors, after extensive discussion with our senior management, Barclays Capital and GT regarding the proposals, including the value of the proposals to our shareholders, the uncertainty created by the requirement that Atkins’ shareholders approve the transaction, the potential adverse implications to PBSJ from Atkins’ insistence that its representatives be allowed to review attorney-client privileged documents regarding the FCPA investigation prior to execution of the merger agreement, and the business risks facing PBSJ in the execution of its short and long-term business strategies if it remained independent, unanimously authorized our senior management and advisors to finalize the terms of the merger agreement with Company B and to coordinate the requested meeting between Company B and the DOJ regarding the FCPA investigation.”

“On July 22, 2010, after Mr. Klatell notified the chairman of the board of Company B that Company B had been selected as the bidder with which PBSJ would proceed with the sale process, assuming that negotiations could be satisfactorily completed, representatives of Company B began to advise members of our senior management and representatives of Barclays Capital and GT of changes to Company B’s position regarding the FCPA investigation, including a proposal for PBSJ and Company B to enter into an exclusivity agreement until the FCPA investigation was resolved. On July 23, 2010, in-house counsel for Company B provided a revised draft of the merger agreement to GT. The revised draft of the merger agreement included substantial additional closing conditions regarding the FCPA investigation and a definition of “Company Material Adverse Effect” that would have allowed Company B to terminate the merger agreement in the event of developments in the FCPA investigation that did not rise to the level of a material adverse effect. On July 25, 2010, GT provided a revised draft of the merger agreement to in-house counsel for Company B that rejected substantially all of Company B’s additional conditions regarding the FCPA investigation. Our senior management, Mr. Klatell and our advisors continued to negotiate these matters with representatives of Company B and its advisors over the course of July 22-26, 2010; however, despite the indications provided by Company B’s chairman of the board earlier in the sale process, Company B was unwilling to propose terms to address its concerns regarding the FCPA investigation that would provide PBSJ with sufficient certainty regarding the completion of the transaction.”

“Also on July 22, 2010, representatives of Atkins informed our senior management that Atkins was withdrawing the condition that its representatives be allowed to review attorney-client privileged documents regarding the FCPA investigation prior to the execution of the merger agreement, which eliminated the need to provide Atkins with attorney-client privileged materials. Atkins also informed our senior management that, due to an increase in the market value of Atkins’ ordinary shares, Atkins’ shareholders were no longer required to approve the transaction with PBSJ because the size of the transaction with PBSJ did not exceed the threshold requiring a vote, given Atkins’ higher market capitalization. On July 23, 2010, our senior management and representatives of GT held discussions with representatives of Hunton and in-house counsel for Atkins regarding these matters and other issues in the merger agreement. On July 24, 2010, Hunton provided a revised draft of the merger agreement to GT that incorporated the developments from July 22-23, 2010. Over the course of the remainder of July 24, 2010 through July 26, 2010, representatives of Atkins and Hunton and representatives of PBSJ and GT held numerous discussions and negotiated the remaining unresolved issues in the merger agreement.”

“On July 26, 2010, our board of directors met in order to review and discuss the developments in the sale process since their July 21, 2010 meeting. Members of our senior management and representatives of Barclays Capital and GT were also in attendance. Prior to the meeting, the directors were provided with updated summaries of the draft merger agreements for each of Atkins and Company B. Our senior management and Mr. Klatell reviewed for the directors the developments since the July 21, 2010 board meeting and the then-current proposals from Atkins and Company B. The representatives of GT summarized the various changes in the structures of the two bids and the merger agreements, as well as the impact of these changes on the deal completion certainty provided by each of the bids. Representatives of Barclays Capital summarized the impact of these changes on the financial aspects of the bids.”

“Our board of directors held an extensive discussion with our senior management, Barclays Capital and GT regarding the proposals and discussed the value of the proposals to our shareholders, the certainty provided by Atkins’ proposal as a result of the withdrawal of its condition to review attorney-client privileged documents regarding the FCPA investigation and the lack of a requirement that Atkins’ shareholders approve the transaction, the uncertainty regarding Company B’s proposal as a result of its closing conditions regarding the FCPA investigation, and the business risks facing PBSJ in the execution of its short and long-term business strategies if it remained independent. While not dispositive, our board of directors also considered whether, given Atkins’ limited operations in the United States, there might be a lesser likelihood of reductions in force as a result of a transaction with Atkins than with Company B. Our board of directors determined that, in light of the foregoing, the combination of share price and deal certainty provided by Atkins’ proposal provided a superior alternative to Company B’s proposal despite Company B’s slightly higher value. Following this discussion, our board of directors unanimously authorized our senior management and advisors to finalize the terms of the merger agreement with Atkins and to coordinate the requested meeting between Atkins and the DOJ regarding the FCPA investigation.”

“Between July 26, 2010 and July 30, 2010, representatives of our management, GT, Atkins and Hunton held numerous discussions and negotiated the remaining unresolved issues in the merger agreement. On July 30, 2010, representatives of Atkins and its counsel, as well as counsel to PBSJ, met with representatives of the DOJ regarding the FCPA investigation. Over the course of the remainder of July 30, 2010 and the morning of July 31, 2010, representatives of our management, GT, Atkins and Hunton negotiated the final terms of the merger agreement and disclosure letters.”

“In the afternoon of July 31, 2010, our board of directors met to consider Atkins’ definitive proposal. Members of our senior management and representatives of Barclays Capital and GT were also in attendance. The directors had previously been provided with a substantially final draft and a detailed summary of the merger agreement. Representatives of GT briefly reminded the directors of their fiduciary duties under Florida law. The representatives of GT informed the directors that the terms of the merger agreement were substantially as the board of directors had reviewed at their July 26, 2010 meeting.”

“Our board of directors again discussed the value of Atkins’ proposal to our shareholders and the certainty provided by that proposal, as well as the business risks facing PBSJ in the execution of its short and long-term business strategies if it remained independent. Our board of directors determined that, in light of the foregoing, the relative certainty provided by Atkins’ proposal provided a greater value to our shareholders, notwithstanding the higher price per share offered by Company B.

“After extensive discussion among our board of directors, senior management and our advisors, our board of directors unanimously approved and adopted the merger agreement, approved the merger and the other transactions contemplated by the merger agreement, unanimously declared the advisability of the merger agreement, and determined that the merger, the merger agreement and the other transactions contemplated by the merger agreement are fair to and in the best interests of PBSJ and our shareholders. The board of directors further resolved to recommend to our shareholders that they vote to approve the merger agreement and the merger.”

“During the morning of August 1, 2010, the board of directors of Atkins unanimously approved the merger agreement. In the afternoon of August 1, 2010, PBSJ and Atkins executed the merger agreement. Prior to the opening of trading of Atkins’ ordinary shares on the London Stock Exchange on August 2, 2010, Atkins and we issued press releases announcing the transaction. Later on August 2, 2010, we filed a Current Report on Form 8-K with the SEC disclosing the execution of the merger agreement and attaching a copy of the definitive merger agreement as an exhibit.”

“In reaching its decision to approve and adopt the merger agreement with Atkins, approve the merger and the other transactions contemplated by the merger agreement, authorize PBSJ to enter into the merger agreement and recommend that our shareholders vote to approve the merger agreement, our board of directors consulted with its financial and legal advisors and our management. The board of directors considered a number of potentially positive factors and negative factors. The board of directors did not assign relative weights to the factors listed below or the other factors considered by it. In addition, the board of directors did not reach any specific conclusion on each factor considered, but conducted an overall analysis of these factors. Individual members of the board of directors may have given different weights to different factors.”

“Positive factors considered by the board of directors included the following material factors: [...] the terms of the merger agreement and the related agreements, including:

the limited number and nature of the conditions to Atkins’ obligation to consummate the merger, including its willingness not to impose special conditions related to our previously disclosed Foreign Corrupt Practices Act (“FCPA”) investigation beyond those developments that would independently constitute a material adverse effect.”

One reason is that mere existence of an FCPA inquiry can significantly throw a wrench into a company’s ability to sell itself. Another reason is that mere existence of an FCPA inquiry can cause an analyst to downgrade a company’s stock.

Both are discussed in this post starting with a real-world case study.

The case study involves Allied Defense Group, Inc. (here).

It turns out that Smith & Wesson (see here) is not the only publicly traded company affected by the Africa Sting case (see here for prior posts).

Also affected is ADG – a “multinational defense business focused on the manufacture and sale of ammunition and ammunition related products for use by the U.S. and foreign governments.” According to its website, ADG has “has two operating units in the Weapons & Ammunition industry: Mecar, S.A. and Mecar USA.”

On January 19, 2010, ADG agreed to be acquired by Chemring Group PLC (see here). See here for the release.

January 19, 2010 turned out to be an eventful day at ADG because on that same day, the company received a subpoena from the DOJ requesting that it produce documents relating to its dealings with foreign governments. ADG learned that the subpoena was related to an employee of Mecar USA being indicted in the Africa Sting case. The employee (reportedly Mark Frederick Morales) was terminated the next day and ADG stated that Mecar USA transacted business, either directly or indirectly, with six individuals indicted in the Africa Sting case.

In a June 2010 press release (see here), ADG stated as follows:

“The DOJ recently advised ADG that it is conducting an industry-wide review, and therefore the DOJ’s investigation of ADG will be ongoing. As a result, Chemring indicated that it was unwilling to consummate the merger pursuant to the terms of the merger agreement.”

Cherming Group noted (see here) that because of the DOJ’s expanded review “it could not complete the acquisition of ADG pursuant to the Merger Agreement.”

Instead, Cherming “entered into a new conditional agreement with ADG to acquire ADG’s two principal operating businesses – Mecar S.A., based in Nivelles, Belgium and Mecar US, based in Marshall, Texas (collectively “Mecar”). Pursuant to this new agreement, Chemring agreed to acquire the entire issued share capital of Mecar S.A. and the business and assets of Mecar US for a total cash consideration of $59 million.

Fast forward to last week.

ADG filed its definitive proxy statement regarding the merger.

In pertinent part it stated as follows:

“ADG’s audit committee, with the assistance of independent outside counsel, is conducting an internal review of the matters raised by the DOJ’s subpoena and the related indictment of Mecar USA’s former employee. ADG has been cooperating with the DOJ and is working to comply with the DOJ’s subpoena. ADG has also been providing regular updates to Chemring on the progress of the internal review and has been responding to Chemring’s requests for additional information.”

“As a result of the DOJ subpoena, the special meeting of stockholders to adopt the Merger Agreement with Chemring, originally scheduled for April 8, 2010, was postponed twice and then adjourned several times, most recently to June 30, 2010. As discussed below, our board of directors determined that these postponements and adjournments were desirable, for among other reasons, to continue ADG’s internal review, to respond to requests from Chemring for additional information and, with respect to the later adjournments, to provide additional time for ADG and Chemring to discuss restructuring Chemring’s acquisition of ADG.”

Restructuring did indeed occur.

As stated in the proxy materials:

“After Chemring indicated it would not complete the originally contemplated merger pursuant to the Merger Agreement, we entered into the Sale Agreement to restructure the acquisition as a purchase of our assets in order to address Chemring’s concerns about the uncertainties arising out of the DOJ subpoena. This revised transaction structure allows us to complete the sale of our operating assets to Chemring while retaining liabilities and expenses associated with the DOJ subpoena.”

[Note - in an asset sale an acquirer ordinarily does not acquire the selling entity's liabilities, in a stock sale or merger the acquirer ordinarily does]

“Our board of directors’ original decision to enter into the Merger Agreement, and its subsequent decision to restructure the acquisition as the proposed Asset Sale, were the result of a decision-making process that evaluated ADG’s strategic alternatives, including its prospects of continuing as a stand-alone company, and that followed a market test process with the assistance of our financial advisor.”

The proxy materials then state:

“Our board of directors recommends that you vote FOR the authorization of the Asset Sale.”

The special meeting of shareholders is currently scheduled for August 31, 2010.

The ADG – Chemring saga is an interesting case study of the FCPA’s long tentacles.

It is particularly relevant given the recent General Electric settlement of a SEC FCPA enforcement action for $23.4 million. As noted in this prior post, GE’s exposure was primarily based on the conduct of two entities GE acquired after the conduct at issue occurred. Yet, as the SEC alleged, GE acquired the liabilities of these entities, along with assets, in the acquisition and that GE is the successor to the liability of these entities.

ADG – Chemring is not the only deal in which the FCPA is an issue.

For another real-world example look no further than The PBSJ Corporation – WS Atkins merger.

Remember PBSJ?

In January, the company disclosed the existence of an internal investigation to “determine whether any laws, including the Foreign Corrupt Practices Act (“FCPA”), may have been violated in connection with certain projects undertaken by PBS&J International, Inc., one of our subsidiaries with revenue of $4.3 million in fiscal year 2008 and $3.9 million in fiscal year 2009, in certain foreign countries.” (See here).

In its May 10-Q filing (see here) PBSJ stated that the “udit Committee completed the internal investigation in May 2010. The results of that investigation suggest that FCPA violations may have occurred.”

According to this recent filing, the company has spent $7 million on the FCPA investigation … that’s nearly twice the FY 2009 revenue of the relevant subsidiary!

Yesterday, PBSJ announced (see here) “that it has entered into a definitive merger agreement by which WS Atkins plc, [headquartered in the United Kingdom] the world’s 11th largest design firm, will acquire PBSJ in an all-cash transaction for $17.137 per share of PBSJ.”

The merger agreement (see here) states that PBSJ “has fully disclosed to [WS Atkins] all information that would be material to a purchaser’s assessment of the FCPA Investigation or that has been prepared or gathered in connection with the FCPA Investigation that could reasonably be expected to have a Company Material Adverse Effect.” The agreement further states that the parties “agree that neither the existence of the FCPA Investigation nor any particular development in the FCPA Investigation shall, in and of itself, constitute a Company Material Adverse Effect, but any significant effect, event, development or change relating to the FCPA Investigation may be considered in determining whether there has been a Company Material Adverse Effect.”

One more example of the FCPA’s long tentacles?

Analysts may downgrade a company because of FCPA issues.

That is exactly what Cowen & Co. recently did with Raytheon Company.

Among the reasons for the downgrade to neutral from outperform was the FCPA.

In a report authored by Cai von Rumohr, Gautam Khanna, and Mark Hokanson the authors state:

“Since second-quarter 2009, Raytheon has conducted ‘a self-initiated review’ of FCPA issues with ‘possible areas of concern’ regarding ‘a jurisdiction where we do business.’ It’s unclear when the review might end or if it’s related to early retirement of D. Smith, president of IDS when Raytheon signed the $3.3 billion UAE Patriot order. FCPA issues are a risk given: (1) increased Department of Justice priority; (2) rising size of FCPA fines (top four year-to-date average equals $300 million-plus); (3) noncompliance is fined even with voluntary disclosure and strict ethics programs; and (4) whistleblower provision in Financial Reform Law.”

The company’s most recent 10-Q filing (see here) states as follows:

“We are currently conducting a self-initiated internal review of certain of our international operations, focusing on compliance with the Foreign Corrupt Practices Act. In the course of the review, we have identified several possible areas of concern relating to payments made in connection with certain international operations related to a jurisdiction where we do business. We have voluntarily contacted the SEC and the Department of Justice to advise both agencies that an internal review is underway. Because the internal review is ongoing, we cannot predict the ultimate consequences of the review. Based on the information available to date, we do not believe that the results of this review will have a material adverse effect on our financial position, results of operations or liquidity.”

Raytheon “is a technology and innovation leader specializing in defense, homeland security and other government markets throughout the world.” The company is one of the largest defense contractors to the U.S. government and the majority of its revenue comes from U.S. government contracts.

Included in the $235 million figure (see here) is “$550,000 and 5 positions (3 attorneys) to increase [the Criminal Division's] capacity prosecute crimes of financial and mortgage fraud, procurement and grant fraud, and violations of the Foreign Corrupt Practices Act.”

Not exactly a figure that “knocks one’s socks off,” but nevertheless consistent with repeated DOJ statements about a ramp-up in FCPA resources and enforcement.

The SEC’s budget justification (here) does contain any FCPA specific language.

*****

Perhaps it’s because my favorite show, Mike Rowe’s Dirty Jobs on the Discovery Channel, recently profiled this company (see here). In any event, PBS&J continues to make news and continues to intrigue even though the whole issue, at least it seems, involves a relatively minor potential FCPA issue. This week, Florida media (here) reports that the company’s CEO, John Zumwalt, has resigned. The article notes that up until summer 2009, Zumwalt was also the President of PBS&J International, the subsidiary that has become the focus of an FCPA internal investigation. See here for prior posts. According to the article, Zumwalt will continue as Chairman of the company’s board. Should PBS&J become the focus of an enforcement action, it will be interesting to follow as the company has millions of public sector contracts.

I noted that while it is increasingly common for a company to disclose such FCPA issues, it is rather unusual for the FCPA disclosure to prevent the company from otherwise meeting its disclosure requirements under the securities laws.

Well, 14 days have passed and PBSJ filed its annual report (here). As to the FCPA internal investigation, here is what the filing says:

“As previously reported on our Form 8-K filed December 30, 2009, an internal investigation is currently being conducted by the Audit Committee of our Board of Directors to determine whether any laws, including the Foreign Corrupt Practices Act (“FCPA”), may have been violated in connection with certain projects undertaken by PBS&J International, Inc., one of our subsidiaries with revenue of $4.3 million in fiscal year 2008 and $3.9 million in fiscal year 2009, in certain foreign countries (the “International Operations”). Initial results of the investigation suggest that FCPA violations may have occurred. However, the investigation does not suggest that any violation extends beyond the International Operations or that members of our executive management were involved in illegal conduct. We have voluntarily disclosed the possible violations, the investigation, and the initial findings to the Department of Justice and to the Securities and Exchange Commission, and will cooperate fully with their review. The FCPA (and related statutes and regulations) provides for potential monetary penalties, criminal and civil sanctions, and other remedies. We are unable to estimate the potential penalties that might be assessed for these FCPA violations and accordingly, no provision has been made in the accompanying financial statements.”

The events at PBSJ over the last two weeks are intriguing and its a head-scratching question why so many companies, like PBSJ, voluntarily disclose initial results of a yet to be completed internal investigation which merely suggest that the FCPA may have been violated.

For a recent non-FCPA, yet related, NY Times article on disclosure issues, see here.

In its recent SEC filings (here and here), the company announced that it was unable to file its Annual Report due to an FCPA internal investigation “in connection with certain projects undertaken by PBS&J International, Inc., one of the Company’s subsidiaries, in certain foreign countries.”

The filing indicates that:

“The Company is unable to determine at this time (i) whether the results of the internal investigation will indicate that its internal controls over financial reporting were not operating effectively, (ii) the impact, if any, such internal investigation may have on the Company’s annual report on internal control over financial reporting that the Company is required to include in the Form 10-K, or (iii) the effect, if any, such internal investigation may have on the Company’s financial statements to be included in the Form 10-K.”

According to the filing:

“The Company has self-reported to the Securities and Exchange Commission (the “SEC”) and the Department of Justice (the “DOJ”) the circumstances surrounding this internal investigation. Should the SEC or DOJ decide to conduct its own investigation, the Company will cooperate fully.”

PBS&J International, Inc.’s “previous international assignments have extended to nearly every corner of the world” and its “recent global pursuits have centered on prominent projects in the Middle East, North Africa, the Caribbean, Central and South America, Europe, and Australia” – according to the company’s website (see here).

While it is increasingly common for a company to disclose such FCPA issues (see here for prior posts on voluntary disclosure), it is rather unusual for the FCPA disclosure to prevent the company from otherwise meeting its disclosure requirements under the securities laws.

For local media coverage of PBSJ’s disclosure (see here).