"Weatherford Woes"

Houston-based oil drilling and oilfield services company Weatherford International Ltd. announced July 23 in its 8-K filing with the Securities and Exchange Commission that it has been notified that the Bureau of Industry & Security and the U.S. Department of Justice are investigating allegations of improper sales of products and services in sanctioned countries.

In the filing, the company said, "We are cooperating fully with this investigation. In cooperation with the government, we have retained legal counsel, reporting to our audit committee, to investigate this matter. The investigation is in its preliminary stages."

The 8-K doesn't reveal what country is involved, but some reasonable guesses can be made. A map published in a Weatherford publication shows three Weatherford offices or locations in Iran. Sudan is another good possibility. A Weatherford Web site ( www.wfordsudan.com ) shows a Weatherford office in Khartoum, Sudan. That Web site just happens to be "temporarily closed for maintenance." The same map that showed three Weatherford locations in Iran also shows three in Sudan.

Weatherford is, of course, not the only U.S. company with operations in Sudan and Iran, both of which are subject to comprehensive sanctions by the U.S. That number has diminished somewhat recently, due to concerns about unfavorable publicity as well as an initiative by the SEC to publish a list of publicly traded companies with business dealings in Sudan, Iran and other rogue states. Even so, there is a distinct possibility that in conducting due diligence on a target company, you or your lawyers may find that the company, like Weatherford, has operations in Iran or Sudan.

So what do you do?

Discovering operations in Iran or Sudan is not a deal killer, but it is cause for concern and further investigation. A foreign subsidiary of a U.S. company can do business in Iran or Sudan provided that it complies with two conditions. First, the foreign subsidiary must be a bona fide subsidiary with business in countries other than Iran and Sudan. In other words, the subsidiary can't simply be a device to evade the sanctions. Second, the foreign subsidiary's operations in Iran and Sudan cannot be under the supervision by the U.S. parent company, by any of its employees or by any U.S. citizens.

Complying with the second condition — isolation of the Iranian or Sudanese operations from control by the U.S. parent and U.S. citizens — is what normally creates a problem. Even something as innocent as U.S. approval of a travel and expense voucher from the foreign subsidiary can raise questions.

What might be seen in one context as simply an effort to increase efficiency by centralizing certain activities in the parent company can, in the context of a subsidiary in Iran or Sudan, be a compliance or due diligence nightmare. Is payroll for the foreign employees managed out of the U.S. office? Does the IT staff in the United States maintain any network or systems in Iran or Sudan? Did they register the Internet address of a Web site for the Iranian or Sudanese operations? Did they design or code that Web site? Did a global procurement office at headquarters arrange for purchase of supplies or services by the Iranian or Sudanese subsidiary? Does the foreign subsidiary use a policies or procedures manual developed by the U.S. office?

On the other hand, complete isolation of the foreign subsidiary doing business in Iran or Sudan is impossible. The parent company may be aware of the subsidiary's results or its marketing plans and may have met or spoken with employees of the subsidiary. No one has suggested that any contact at all between the parent and the foreign subsidiary in Iran or Sudan would violate the rules.

Unfortunately, neither the Department of Justice nor the other federal agencies that enforce the sanctions programs against Iran or Sudan provide clear guidance as to what activities by the parent company with respect to the foreign subsidiary doing business in Iran or Sudan step over the line. Accordingly, any due diligence on the operations of the target company's subsidiaries in Iran or Sudan will require an exercise of judgment by the acquiring company and its lawyers as to whether particular activities of the parent vis-à-vis the foreign subsidiary are problematic.

Some readers are probably wondering: Why not just take a "better safe than sorry" approach and not acquire the operations in Iran or Sudan? Unfortunately, the enforcing federal agencies take a broad view of successor liability. And if the target company in the U.S. was involved in improper control of the foreign subsidiaries activities in Sudan and Iran, divesting those operations will not eliminate that liability. It is perhaps a harsh result, but the only "better safe than sorry" approach is simply not to do the deal.

Clif Burns is a partner in the export controls practice group at Powell Goldstein LLP in Washington.

17 September 2007
TheDeal.com
Copyright 2007, The Deal, LLC. All Rights Reserved