Don’t Overlook These Key Compliance Considerations
When participating in a transaction, there are many steps to consider and take to seamlessly carry out a sale. Allocating resources and effectively communicating are key for successful due diligence, the process prior to finalizing an M&A transaction.
co-authored by Dave Pilotto
During Due Diligence
Mergers and acquisitions involve a substantial amount of compliance-related due diligence on all sides of the deal. Before committing to a transaction, all parties should carefully review relevant compliance matters. To successfully close an M&A deal, it is critical that all parties involved—including in-house counsel and your outside legal advisors—have a full understanding of the compliance programs to be inherited or developed as part of the transaction.
Identification
Early in the acquisition process, a company’s compliance professionals and in-house attorneys should connect with the outside counsel team to provide appropriate access to due diligence materials. Proper sharing of information will enable all stakeholders to identify key compliance-related issues and then perform the necessary risk/reward analysis to evaluate:
- The nature of the acquirer’s and target company’s businesses
- Public vs. private reporting matters
- The size and terms of the deal
- The regulatory landscape of the industries involved
Relevant compliance issues can then be dealt with efficiently and in order of importance. This information needs to be developed jointly by the stakeholders who will have primary responsibility for compliance tasks and then factored into decisions affecting the scope of the due diligence review and, potentially, the terms of the transaction.
Confidentiality
Acquisitions generally start with confidentiality agreements and letters of intent. Confidentiality agreements require a buyer to keep the seller’s information private. While letters of intent contain non-binding provisions that describe certain anticipated terms of a potential transaction, they also often contain binding provisions on exclusivity. These exclusivity provisions prohibit a seller from shopping the potential transaction to others for a stated time frame.
While confidentiality and exclusivity are important, few organizations have the internal resources necessary to monitor these tasks. This is an opportunity for your outside legal team to act as compliance officers and provide value. On the buyer’s side, make sure that everyone who is exposed to due diligence knows it is confidential and subject to a confidentiality agreement. On the seller’s side, make sure that everyone on the deal team knows the terms of exclusivity and terminates all inappropriate communications with other potential buyers.
Employment
Many companies have employee-related compliance programs in place. Usually run by HR directors, these programs are designed to ensure that terms of employment and employee benefits not only comply with applicable laws but also meet any commitments and expectations of employees. A basic compliance program for employees could involve their classification as exempt or nonexempt. When undertaking diligence on a target company’s employees, be sure that your outside counsel team reviews information on employee classification with the HR director. Spotting potential misclassification issues at an early stage can save money and time in the future and can also help clean up any errant misclassifications that happened internally.
Managing IP Assets
Many companies have both external and internal intellectual property compliance programs. Regardless of how a target company’s IP is managed, it’s important to evaluate whether any of the following compliance programs would be beneficial for the acquiring organization:
- Developing a procedure to integrate the target’s IP into existing programs
- Identifying possible changes to the existing IP compliance programs based on the nature of the target’s IP
- Monitoring third-party activity to discover any third parties infringing on IP
- For companies with significant licensed IP, monitoring compliance with each license agreement, including the length of each license, the territory granted by each license and the different media in which each licensed piece of intellectual property can be used
- For companies with significant software assets, identifying and monitoring the use of open source software to better understand title to owned software, the scope of licensed software and possible infringement issues
Additional Compliance Concerns
The dollar amount of the acquisition and the size of the parties involved also inform compliance issues. Certain transactions are reportable to the U.S. Federal Trade Commission (FTC) and the Antitrust Division of the U.S. Department of Justice (DOJ) under the Hart-Scott-Rodino Antitrust Improvements Act of 1976. Reporting must occur before the transaction closes, and the parties are required to observe a waiting period to allow for antitrust review by the FTC and DOJ. Premerger notification filings with the FTC and DOJ often happen immediately after the definitive purchase and sale agreement is executed to start the clock on the waiting period or request for early termination of the waiting period, as applicable.
The nature of the business informs compliance issues as well. Stakeholders that do business with, or get business from, foreign officials or governments are likely to have programs to address compliance with the Foreign Corrupt Practices Act of 1977 (FCPA). These FCPA-related programs include establishing codes of ethics and compliance policies aimed at preventing violations, detecting questionable behavior and demonstrating a commitment to compliance specifically and good ethical practices generally. Part of compliance-related due diligence is to request this information, get it to the right people on the compliance team and ensure that the end goal is met – to help modify existing compliance programs or develop new ones to deal with the “must do” items.
M&A transactions can be exciting and lucrative for all parties involved, but a favorable end result requires careful attention to many compliance-related issues. Having a well-informed team of in-house professionals and outside legal advisors who communicate effectively can make the difference between closing a great deal or creating a world of problems. From adhering to confidentiality and managing IP assets to accounting for foreign policies and other unique aspects of the businesses involved, addressing the considerations outlined above will help ensure a smooth and successful transaction.
Mitchell Roth, Managing Partner at 
