Entities can proactively minimize political law risk in a corporate transaction by reviewing the following areas:
- Contributions and PACs
- Pay-to-Play Considerations
- General and Procurement Lobbying
- Gifts and Conflicts of Interest
- Foreign Agents Registration Act (FARA)
- Existing Compliance Structure
Contributions and PACs
Contributions: Federal, state and local laws regulate campaign contributions. Some jurisdictions impose a ban on corporate contributions, while others allow corporate contributions subject to limitations and sometimes disclosure requirements. As part of its due diligence process, an acquiring entity should confirm that the target entity has procedures in place to review and track political contributions to ensure compliance with relevant laws.
Federal Corporate Sponsored PACs: The Federal Election Commission (FEC) governs a maze of laws regulating corporate sponsored PACs. There are also several issues to consider when acquiring an entity with an existing federal PAC.
As of “Day 1” of control—the first full business day after ownership is transferred—the FEC treats the acquired entity’s PAC and the acquiring entity’s PAC as affiliated for purposes of federal contribution limits ($5,000 per candidate, per election). (11 CFR 100.5(g)(4).) This means that after the transaction is complete, the FEC views all the acquired company PAC’s pre-transaction contributions as having been made by the acquiring company.
Prior to completing the transaction, an acquiring entity without a PAC should consider whether it is equipped to handle all the compliance requirements that accompany the maintenance of a corporate PAC and the potential reputational impacts of being designated “politically active.”
An acquiring entity with an existing PAC should consider whether the target entity’s contributions will prevent it from making planned future political contributions, after the transaction. Here, each PAC must amend its Statement of Organization with the FEC to reflect the other PAC as an affiliated committee. This must be completed within 10 days of the transaction. An acquiring entity with an existing PAC must also determine how it wants to structure the two PACs after the transaction: two affiliated PACs subject to a single limit or terminate one of the PACs.
In either case, political law due diligence allows the acquiring entity to contemplate whether gaining an affiliated PAC or terminating the target entity’s PAC before the transaction is more beneficial.
“Pay-to-play” laws and regulations are additional considerations for entities who transact business with state or local governments. They vary widely by jurisdiction, but typically require entities with state or local government contracts to disclose, limit or avoid political contributions to candidates who could be positioned to influence the award of a government contract. These contribution restrictions can extend to contributions by the contracting entity’s parent and subsidiaries, its PAC(s), its executives, and in some jurisdictions, even to family members of covered persons. A single prohibited contribution by a covered person can force an entity to forfeit a government contract and expose it to civil penalties.
If a target entity has contracts with government entity customers, a due diligence review should determine if all applicable contribution parameters have been adhered to and whether there is a process in place for ensuring compliance. If the acquiring entity also maintains government contracts, it should determine whether the target entity’s PAC is registered in any states that will raise pay-to-play concerns.
General and Procurement Lobbying
Lobbying registration and reporting requirements exist and vary significantly at federal, state and local levels. There are typically additional, more stringent rules for procurement lobbying (lobbying to obtain a contract with a government entity). Failure to register and report lobbying activity can result in daily compounding penalties and reputational damage.
Acquiring entities should ensure that all staff and vendors of the target entity have satisfied their registration and reporting requirements.
Gifts and Conflicts of Interest
Federal, state and local laws generally have rules on gift-giving to government officials and employees and recusal requirements for conflicts of interest.
Gifts: Federal, state and local laws generally prohibit gifts to elected officials and government employees, with certain exceptions (including dollar thresholds). Some jurisdictions even bar de minimis gifts, such as a cup of coffee. Acquiring entities should beware of target entities which permit corporate gifts to elected officials and government employees and determine the review and approval process such gifts went through to ensure compliance with applicable laws. Violations of gift restrictions can have severe penalties, particularly for entities lobbying or doing business with the officials of their agencies.
Conflicts of Interest: Conflict of interest rules govern post-government employment revolving door restrictions when government officials join the private sector for lobbying positions, as well as when a current government official simultaneously works in the private sector. Conflicts of interest can arise when the government official’s private interest in a particular matter may improperly influence the performance of their responsibilities and duties as an official. Acquiring entities should review whether the target entity has procedures and guidelines in place for hiring employees leaving public office and for employees who work concurrently in public service (such as on a planning commission or local government board).
Foreign Agents Registration Act (FARA)
The Department of Justice (DOJ) has recently ramped up its enforcement of the Foreign Agents Registration Act (FARA). The statute requires individuals who engage in political and other activities as an agent of a foreign principal to register and continuously file reports with the DOJ. “Foreign principal” is broadly defined to include a foreign individual, company or organization, and the statute includes criminal penalties for noncompliance.
If the target entity has foreign ownership or substantial foreign operations, the acquiring entity should determine whether the target entity’s work benefits a foreign government and examine existing FARA registrations and reports.
Existing Political Law Compliance Structure
Because of the myriad risks discussed above, a prudent due diligence process must examine a target entity’s existing policies and procedures to ensure political law compliance. A politically active target entity should have written internal policies covering all of the above-mentioned areas and regularly conduct internal audits. The acquiring entity should also review whether the target company has been subject to external state or federal audits, inquiries, warnings or complaints, how it responded, and what changes were implemented as a result.
An inadequate or non-existent political law compliance structure is a sign that the acquiring company will inherit political law violations as part of the corporate transaction.
However, don’t end compliance inquires after the due diligence report. Prior to a transaction’s completion is a great time to seek recommendations on areas lacking substantive compliance procedures and how best to remedy or improve those issues going forward.