Austria: Corruptive Behavior In Public Procurement Procedures As A Deal Breaker For Mergers And Acquisitions Transactions?

In light of the economic significance of public procurement and the respective volume of public expenditure in Europe (public sector spending accounts for approximately 20% of EU GDP) it is a well-established and unsurprising fact that public procurement proceedings are particularly vulnerable to corruption. Transparency International has identified public procurement as one of the key problems across the EU.

Companies that are involved in corruptive behaviors in the context of or in relation to a public procurement procedure must expect painful sanctions under the public procurement law and heavy criminal penalties. However, due to the long-lasting consequences of the respective sanctions and penalties, any possible involvement in corruptive behaviors in procurement procedures is also very likely to have a substantial impact on the results of potential M&A or sales activities involving the respective legal entity.

Painful sanctions under criminal law

Corruption in public procurement proceedings can be treated as criminal matters if they involve (i) as an agreement restricting competition in a procurement procedure (sec 168 b of the Austrian Criminal Code, "ACC"), (ii) fraud (sec 146 et sequ of the ACC), or (iii) bribery.

Sec 168b of the ACC prohibits certain forms of bid-rigging, i.e. rendering a tender or conducting negotiations based on an unlawful agreement aimed at inducing the contracting party to accept a certain tender. Fraud (sec 146 et sequ of the ACC) comes into play if the public prosecutor can prove that an agreement restricting competition caused damage to the contracting authority. Both bid-rigging and fraud may result in heavy sanctions: sec 168 b offences can be penalized with a maximum imprisonment of three years, fraud with up to ten years.

Corruption also occurs when an employee of the contracting authority uses his or her power or influence for personal gain; for example, by accepting a bribe in exchange for revealing sensitive information on the bidding process and/or granting a tender. The ACC differentiates between the rather stringent anti-bribery provisions that apply to the public sector and those for the private sector. In most public procurement proceedings, the anti-bribery provisions for the public sector will apply, as the contracting authority is either an Austrian national, local, or municipal government, or a corporation that is either (i) controlled by the Austrian Court of Auditors or a comparable foreign control organ, or (ii) directly or indirectly owned, run or controlled by a national or foreign government. Bribery is punished with imprisonment of up to ten years.

In this context, one should also note that the Law on the Responsibility of Legal Entities ("Verbandsverantwortlichkeitsgesetz", "VbVG") provides that a legal entity can be held criminally liable for all criminal offences (i.e. breach of trust, an agreement restricting competition in a procurement procedure and all forms of bribery) committed by its employees and decision-makers. Such criminal liability relates directly to the entity itself and not to its owners. Therefore, a change of the entity's shareholders does not eliminate or alter the criminal liability of the entity for criminal conduct that took place before the change in shareholders.

Mandatory exclusion from tender procedures

Any such criminal conviction of a natural person, e.g. the director of a company or the company itself, constitutes a high risk for the company being "blacklisted" at tenders under public procurement law: Pursuant to the Austrian procurement law ("PPL"), companies shall be excluded from participating in award procedures in case a legally binding judgment covering certain offences (such as fraud, breach of trust, private corruption, or bid-rigging) has been rendered against the tenderer or – in the case of legal persons – against natural persons in its managerial body (sec 68 para 1 (4) PPL). Even if no final and binding judgment has been rendered, contracting authorities remain free to exclude a company from procurement procedures if they can demonstrate by any appropriate means that the respective company (or its decision-making staff) has violated principles relating to ethics, dignity, and professional conscientiousness, such as violations of competition rules, antitrust rules, or of intellectual property rights.

The above-mentioned exclusion grounds (sec 68 PPL) are mandatory and the affected companies are excluded from taking part in procurement procedures, independent of whether they intend to participate as bidder, subcontractor, or jointly with other (reliable) bidders.

Legal chain reaction

As a result, corruptive behavior in public procurement procedures can cause a (legal) chain reaction with dramatic consequences for the involved company or companies: Firstly, the company and its employees are very likely to be subjected to painful criminal penalties. Secondly, any such legally binding judgment or substantial evidence for a respective offence constitutes a very high risk for the company being – at least temporary – "blacklisted" in public procurement procedures.

Consequences for M&A transactions

It goes without saying that the potential risk of being temporally excluded from public procurement procedures may have a substantial negative effect on the company's future business and turnover (depending on the company's business sector and clients). For M&A transactions respectively vendors due diligence processes, particular attention has to be paid to the possible involvement of the target company in corruptive behavior in public procurement procedures and any such risk should be red-flagged.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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