31 Days to More Effective Compliance Programs - Day 28 - Pre-Acquisition Due Diligence in Mergers and Acquisitions

Thomas Fox - Compliance Evangelist
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A company that does not perform adequate due diligence before a merger or acquisition may face legal and business risks. Perhaps most commonly, inadequate due diligence can allow a course of bribery to continue – with all the attendant harms to a business’s profitability and reputation, as well as potential civil and criminal liability. While most compliance practitioners have been long aware of the requirement in the post-acquisition context, the 2012 FCPA Guidance focused many compliance practitioners on the need to engage in See more +
A company that does not perform adequate due diligence before a merger or acquisition may face legal and business risks. Perhaps most commonly, inadequate due diligence can allow a course of bribery to continue – with all the attendant harms to a business’s profitability and reputation, as well as potential civil and criminal liability. While most compliance practitioners have been long aware of the requirement in the post-acquisition context, the 2012 FCPA Guidance focused many compliance practitioners on the need to engage in robust pre-acquisition due diligence.

Multiple red flags could be raised in this process, which might well warrant further investigation. They include if the target has ineffective compliance program elements in their compliance program or a frequent breach of policies and procedures. A target that is in financial difficulty would bear closer scrutiny. Structurally, if the company did not have a formal ethics and compliance committee at the senior management or Board of Directors’ level, this could present issues. From the CCO perspective, if the position did not have Board or CEO access or there were no regular reports to the Board, it could present an issue for compliance. Conversely, if there were frequent requests to waive policies, management override of compliance controls, or no consistent consequence management for violations, it could present clear red flags for further investigation.

Three key takeaways:

1. The results of your pre-acquisition due diligence will inform your post-acquisition integration and remediation going forward.

2. Periodically review your M&A due diligence protocol.

3. If red flags appear in pre-acquisition due diligence, they should be cleared. See less -

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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