The Roadmap to Seamless Regulatory Compliance in Mergers and Acquisitions
A Landscape of Complexity
Mergers and acquisitions (M&A) are not simple undertakings. They carry the high risk of failure and necessitate always and everywhere the careful achievement and maintenance of complying with the law and going through all of the regulatory hurdles required by the assemblage of many forces that care about regulatory compliance—both at the federal level and the state level, in the USA, and in foreign jurisdictions where businesses involved in an M&A may have very significant presences. And regulatory compliance becomes really serious when the M&A in question is going to lead to the formation of a business that will have a very significant presence in the market and will be offering a very significant set of goods and services to customers in the marketplace—because then regulators up and down the line (from both federal and state agencies) are going to start paying a lot of attention to what these businesses are doing. And M&A offers a very big target for such attention by regulatory agencies.
Decoding the Regulatory Maze
The M&A deals we look at are under the supervision and control of a large number of regulatory bodies, and for good reason. They are complex and multifaceted and affect lots and lots of people. Above all, they affect the shareholders of the companies involved, but they also affect the employees of those companies, the customers of those companies, and the suppliers to those companies. And regulatory bodies have to ensure that the deals don’t affect competition in the marketplace.
Antitrust Laws
Antitrust laws are meant to keep companies from monopolizing markets and to ensure that competition—especially innovation—can thrive. When it comes to mergers and acquisitions, antitrust authorities (like the Federal Trade Commission in the United States) scrutinize not just the immediate effects of a merger on competition in a given market but also the effects over time. In the current environment of slowing economic growth and rising inflation, these authorities are especially likely to be unsympathetic to mergers, which they might regard as ways for companies to “consolidate” and cut costs.
Data Privacy and Protection
As data regulations increase worldwide, making sure that all the companies involved in a merger comply with the relevant privacy laws becomes—rather obviously—crucially important. Even apart from the not-insignificant factor of having to pay large fines if you don’t make it comply, the big concern is: how do you build trust with your customers if you’ve just merged with a company that may (or may not) operate by the same standards you’ve set for yourself?
- GDPR in Europe
- CCPA in California
- Industry-specific regulations (e.g., HIPAA for healthcare)
Industry-Specific Regulations
Depending on the industry, M&A transactions may face extra layers of regulatory oversight. For example:
- Financial Services: Basel III, Dodd-Frank Act
- Healthcare: FDA regulations, Medicare/Medicaid compliance
- Energy: Environmental regulations, FERC approvals
It’s vital to comprehend and manage these industry-specific requirements if one is to achieve regulatory compliance in an M&A transaction.
Due Diligence: The Foundation of Compliance
Ensuring compliance with regulations in M&A transactions requires careful and comprehensive due diligence. It enables the acquiring companies to find out potential regulatory compliance issues early in the process and to form strategies to handle them. Without due diligence, the acquiring companies are a bit like the young lady who, in the famous nursery rhyme, “went to the pond to catch a fishy.”: They don’t know what they’re getting into.
Key Components of Compliance Due Diligence
- Document Examination: Target company’s policy and procedures documents and compliance records.
- Personnel Interviews: Communications with key personnel to understand target company’s compliance measures and their effective implementation.
- Compliance Risk Assessment: Identify areas of high compliance risk and potential liability in target company’s practices.
- Regulatory Risk Assessment: Review target company’s past regulatory actions, fines, and/or investigations.
Evaluating the Target’s Compliance Program
When evaluating a target company’s compliance program, take into account these factors:
- Existence and effectiveness of written policies and procedures
- Training programs and employee awareness
- Monitoring and auditing processes
- Leadership commitment to regulatory compliance
- Resource allocation for regulatory compliance functions
Cultural Fit and Compatibility
It’s essential to assess more than the formal compliance structure of the target company; you need to evaluate its compliance culture. Does the company place a priority on behaving in an ethical manner? How are compliance lapses dealt with? Is there a reporting and transparency culture that makes it safe to point out when something’s amiss? Getting a read on cultural alignment or misalignment early in the due diligence process helps spot potential future regulatory compliance problems and makes integration easier.
Integrating Compliance Cultures
After the agreement is finalized, we can get to the real work of integrating the compliance cultures. This work is quite obviously necessary to maintain regulatory compliance post-transaction. More subtly, it is also critical to realizing the full value of the transaction.
Aligning Policies and Procedures
- Identifying Variances: Pinpoint the variances between the two companies’ compliance programs.
- Best Practice Adoption: Select and implement the most effective policies from each organization.
- Make a Unified Set of Compliance Standards: Create a compliance standard that all three entities can live by.
Training and Communication
An effective method for embedding the new compliance culture is this: develop comprehensive training programs that address all relevant regulatory areas.
Another method I call on is to use multiple training methods. It means don’t stick to one way of training. Vary it. Use a mix of in-person, online, and scenario-based training, to name a few.
I also call on establishments to maintain clear communication channels for compliance-related issues. Seven months after a big launch, it’s not unusual for a program to start losing steam or for anything resembling a new program to be more compliance-like than led by all those fancy training methods above.
Read Also: International Trade Law: Navigating Cross-Border Transactions
Establishing a Unified Compliance Culture
A strong, unified compliance culture necessitates:
- An unequivocal tone from the top
- Consistent and fair enforcement of regulatory compliance standards
- Acknowledgment and reward of those who do the right thing
- Integration of compliance considerations into everyday business strategy and decision-making
Steering Clear of Roadblocks
Regulatory compliance in M&A transactions is like walking a tightrope: it requires careful planning and flawless execution, or else risk falling into a pit of trouble. In this article, we not only give an overview of the sorts of regulatory compliance challenges that M&A deals can encounter but also provide a roadmap to help avoid those pitfalls. To navigate compliance challenges toward a successful deal, it is essential to follow these steps:
- Start early: Begin compliance planning at the earliest stages of deal consideration.
- Be thorough: Conduct comprehensive due diligence and risk assessments.
- Stay flexible: Be prepared to adapt your approach as the regulatory landscape evolves.
- Seek expertise: Engage professionals with the M&A experience to help with the necessary legal and regulatory compliance work.
- Integrate: Focus on creating a unified compliance culture post-merger.
Frequently Asked Questions (FAQ)
What are the most common compliance issues in M&A?
Compliance problems that often arise in M&A include:
- Antitrust violations
- Data privacy breaches
- Inadequate due diligence
- Integrating compliance cultures
- Industry-specific regulations that are often overlooked
What are the best practices for companies to follow to guarantee that due diligence is performed effectively?
To ensure that due diligence is performed effectively, follow these best practices:
- Assemble a team that has members from all functions across the company.
- Develop a due diligence checklist that is truly comprehensive, and not just a rehash of a standard checklist found in due diligence texts and manuals.
- Make sure that ample time and resources are allocated to the effort.
- Engage external experts and consultants to work with the team when necessary to either figure out what is going on or to understand what the team is finding.
- Document what is found, and do it thoroughly.
What role does leadership play in developing a strong compliance culture?
Leadership has a crucial role in:
- Setting the tone from the top
- Allocating resources to compliance functions
- Demonstrating personal commitment to ethical behavior
- Ensuring compliance is integrated into business strategy
How can organizations ensure that they remain compliant during and after integration?
To remain compliant:
- Create a comprehensive integration plan that details how compliance will be achieved and maintained
- Assess risks to compliance on an ongoing basis
- Train, and re-train, all relevant personnel thoroughly and comprehensively on what regulatory compliance means in the integrated environment
- Clarify who is responsible for reporting regulatory compliance and for what kind of reporting that person is to do and when that person is to do it
What could happen if we fail to comply?
We might face:
- Financial penalties and fines
- Regulatory investigations and sanctions
- Reputational damage
- Loss of customer trust
- Decreased shareholder value
- Personal liability for executives and board members
Companies can successfully navigate the complex regulatory compliance landscape of the merger and acquisition of sell-side and buy-side deals by addressing these common issues and following the strategies outlined in this guide. The guide is designed for companies and their advisers, both business and legal, and tries to anticipate what they commonly question. It hits the high spots and offers a comprehensive explanation of the guide’s subject matter.