US SEC settlement further articulates the extent of governance responsibilities for minority owners

A new settlement released by the US Securities and Exchange Commission (SEC) expands on the extent to which minority owners may be accountable for the compliance failures of the entities in which they hold a minority interest. Last month, the SEC announced the details of its settlement with Eni S.p.A. (Eni), a multinational oil and gas company based in Italy, for alleged violations of the Foreign Corrupt Practices Act (FCPA). The purported misconduct involved nearly €200 million in payments to an intermediary via sham contracts in order to obtain contracts from Sonatrach, Algeria’s state-owned oil company. The recent settlement with Eni is notable for its lack of allegations of a US nexus. The SEC enforced its case for violations of the accounting provisions, rather than the anti-bribery provisions, of the FCPA, based on the fact that Eni’s American Depository Receipts (ADRs) are traded on US exchanges. But more notable is the fact that the improper payments allegedly were made by Saipem S.p.A. (Saipem), an entity in which Eni owned only a 43 percent interest.

The provisions of the Securities Exchange Act of 1934 (Exchange Act) outlining the governance responsibilities of minority owners “require only that the issuer proceed in good faith to use its influence, to the extent reasonable under the issuer’s circumstances, to cause such [minority-owned entity] to devise and maintain a system of internal accounting controls consistent with” the obligations placed on the issuer itself. Section 13(b)(6). Compliance professionals at companies owning minority interests often struggle with implementation of this vague requirement, but they have generally understood it to require the use of reasonable efforts, within the limits of their influence, to ensure that their minority-owned businesses are operated in accordance with controls that are similar to those of the minority owner. The SEC’s settlement with Eni sheds additional light on what, in the SEC’s view, constitutes “good faith” and “reasonable” use of “influence” by a minority owner. In this case, Eni apparently required Saipem to “maintain [Eni’s] own internal controls policies,” including “adopting Eni’s directives of transparency, traceability, and anti-bribery compliance.” However, Saipem’s CFO at the time allegedly participated in the Algeria intermediary scheme, and Saipem’s due diligence, contract approval, payment controls, and internal audits allowed the sham engagement with the intermediary to take place. In addition, Saipem’s CFO continued his participation in the scheme when he subsequently became the CFO of Eni. These deficiencies led the SEC to conclude that Eni failed in its duty as a minority owner because the controls at Saipem were “not adequately implemented and were ineffective.”

The SEC determined that Eni “failed to proceed in good faith to cause Saipem to devise and maintain sufficient internal accounting controls” based on two conjoined factors: (1) that Saipem’s accounting for the intermediary fees was inaccurate and (2) that the CFO of Saipem participated in the scheme and continued to do so upon joining Eni as CFO. Whether the SEC would have reached this same conclusion absent one of these factors—in particular the fact that, whilst at Eni, the CFO undermined Eni’s efforts to “proceed in good faith” by his furtherance of the scheme, on which the SEC placed special emphasis—is not clear. In the case, the SEC described Eni as a “controlling minority owner”—a premise which does not appear to have been contested by Eni- and Saipem’s financial results were consolidated into those of Eni. These also could be distinguishing facts. However, at a minimum, this settlement makes clear the risks of minority investing by companies subject to SEC jurisdiction¹:  Minority shareholdings often limit the owner’s ability to truly determine compliance processes and controls, but this settlement indicates that liability may still arise for the minority owner in such circumstances.  
 
When coupled with the recent decision in Stoyas v. Toshiba Corp., 896 F.3d 933 (9th Cir. 2018) (see our legal update, US securities law liability for securities issuers outside of the United States in a post-Toshiba environment), the dangers of minority ownership enunciated in the Eni matter should be closely examined by non-US companies, as the Toshiba decision indicates that even unsponsored ADRs may trigger SEC jurisdiction.

A thank you to Law Clerk Eddie Skolnick for his contributions to this article.