The share price of International Flavors & Fragrances Inc. (IFF) (NYSE: IFF; TASE: IFF) continued its descent today on the Tel Aviv Stock Exchange (TASE) after plunging 15% on Wall Street yesterday, pushing the company's market cap down to NIS 44.5 billion. IFF, which develops ingredients, flavor essences, and fragrances for the food and beverages industry, published its financial statements and lowered its annual revenue and profit guidance for 2019 as a whole.
IFF, which last October acquired Israeli company Frutarom for $6.5 billion, revealed with its reports that it had been informed that Frutarom employees had made "improper payments" in Russia and Ukraine before the merger between the two companies. IFF stated that its investigations had not yet been completed, but that initial findings indicated that improper payments had been made, and that key executives in Frutarom at the time had been aware of these payments. IFF added that it had found no evidence indicating that these payments were linked in any way to the US. As far as is known, the executives referred to by IFF include Ori Yehudai, CEO of Frutarom until the merger, and Alon Grant, who was CFO of Frutarom during the period involved.
"It is certainly possible that Frutarom's senior management was unaware of the event and these payments, even though IFF reported explicitly in its reports that key executives were aware of this. The information that they published now, although it was in the framework of their reports, could prove to be incorrect or inaccurate later in the investigation," Adv. Lior Aviram, a partner in the Shibolet & Co. law firm and specialist in mergers and acquisitions, told "Globes." Also taking part in the conversation with "Globes" was Shibolet & Co. partner and head of corporate anticorruption compliance Adv. Chaim Gelfand. Aviram and Gelfand have no connection to the people involved in the affair.
"Globes": Do you have any examples of such cases?
Aviram: "Yes. For example, it is possible that a CFO of a large company gets a copy of an e-mail, one of hundreds of e-mails that he gets every day, that ostensibly appears to be fine. The e-mail contains a report on someone who receive some commission for an action that he took, and the CFO might not notice it or might have thought that it was all right. Only in retrospect does it turn out that this was improper. Then the investigation eventually discovers that his conduct was irreproachable."
In recent years, cases of bribery committed overseas by large companies, such as Teva and Shikun & Binui, were revealed. What led to their exposure?
"These offenses are usually not discovered until some who feels injured in some way reveals it - an employee or agent who has been fired, or another party who feels injured and has a reason to take revenge on those involved. Incidentally, since the motives often stem from revenge or other feelings, what is reported is not always the truth or all of the truth, so it is necessary to be cautious."
Gelfand: "Sometimes it comes from a public servant who got the money and was fired, or the bribed person moved to another job and the person who replaced him discovered it. Sometimes they start investigating the public servant who receives the bribe, and the affair moves backwards into the company."
Aviram: "In some countries, which are not necessarily democratic countries, when there is a change of government, people who previously received preferential treatment and are moved aside reveal this, because they have been hurt. These affairs are therefore often untrue and fabricated. We have seen this in quite a few countries, and for this reason also it is correct to exercise great caution and to avoid jumping to conclusions."
Assuming that what was reported is true, why did you not discover these payments during due diligence?
"It isn't easy, because it usually comes under the heading of miscellaneous commissions. A company like Frutarom appears less likely to get involved in something like bribery, because it doesn't work much with governments. As someone who does such deals and in general, the way to discover this is to understand how the acquired company generally behaves - whether there were similar events in the past and how they were handled. Then you have to check whether there were commissions given that were unreasonable. There are companies that are more likely to be involved in such things, such as those whose interface comes in contact more often with governments and government companies in countries known to be questionable. In mergers and acquisitions, the question of due diligence for the purpose of discovering corruption is very, very important, because if such an event is discovered in retrospect, it infects the company making the acquisition.
"Furthermore, when such an affair arises after the deal, it's very difficult to know what happened, because different interests of all sorts of people are involved here. For example, Frutarom's former senior management, compared with key people in IFF. Sometimes a delayed payment hasn't been made yet, and now it is stopped, or bonuses haven't been paid yet, and now they want to stop them for one reason or another. There are, of course, many details that we don't see right now, which will probably become visible as the investigation progresses."
What lies in store for those former Frutarom executives, especially ex-CEO Ori Yehudai?
Gelfand: "In the criminal aspect, the question will be the level of their personal involvement in this affair. In the financial aspect, there are decisions that the acquiring company will have to make. In these matters, especially in US companies, there is no tolerance for the people involve in it. These investigations, incidentally, can take a long time. It could continue for quite a few years."
Aviram: "I have to add that I wouldn't take what has been reported up until now too seriously. We'll know a lot more later, one way or another. It's very hard to predict what will happen to the people and concerns involved."
What damage to the company's activity is possible?
"In a great many cases, especially in companies in widespread international activity, the senior management doesn't know exactly what happened. In many cases, there were local initiatives of which the central management was unaware. Here, too, it's very difficult to predict how it will develop.
Do you think that there is a change for the better in countries in which it was formerly acceptable to bribe government officeholders?
Gelfand: "There are today a great many companies in the world that realize that it's no longer possible to act this way, that you can't do things now that you would have done 20-30 years ago. But a change like this takes a lot of time, because people getting a lot of money are not inclined to give it up easily."
Aviram: "Corporate corruption is part of general corruption. If the general level of corruption in the world declines, then the level of corporate corruption will decline."
Published by Globes, Israel business news - en.globes.co.il - on August 7, 2019
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