Perform M&A Due Diligence as Early As Possible, Say Attorneys, Consultants

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By Yin Wilczek

June 24 — In an era of heightened regulatory scrutiny, companies should undertake their mergers and acquisitions due diligence as early as possible, according to consultants and attorneys.

A new PricewaterhouseCoopers report finds that compliance professionals are already tackling compliance-related diligence earlier in the transaction process.

Marcus Thompson, a London-based partner at Ropes & Gray LLP, suggested that if there are internal control or compliance concerns, the acquirer should communicate, very soon after the deal closes, its compliance plan for the new entity.

“Getting that procedure out to the new company” very early in the post-acquisition process “is crucially important,” Thompson said during a June 23 Bloomberg BNA webinar.

M&A Growth 

According to recent surveys, M&A activity is expected to increase in the U.S. and globally this year.

In the meantime, the PwC report, “It's a New Compliance Calculus,” observed that evolving regulations, politics and potential shareholder litigation are impacting the M&A due diligence process. To address these risks, dealmakers are “involving compliance experts and international trade counsel earlier in the transaction process, alongside their financial and accounting diligence teams, tax professionals, labor counsel, integration experts and other specialists.”

The report urged dealmakers to identify a team as soon as possible to address compliance and other matters. Getting “out in front of potential regulatory issues could make the difference between closing a deal and having one fall apart,” it stated. “With compliance playing an increasing role in deal outcomes, companies should begin a dialogue in this important area as soon in the deal cycle as reasonably possible.”

Successor Liability 

During the BBNA webinar, Thompson and Amanda Raad, a partner based in Ropes & Gray's London and New York offices, particularly discussed successor liability under the Foreign Corrupt Practices Act and the U.K. Bribery Act.

Raad noted that the effectiveness of a company's compliance program really matters in the Department of Justice and the Securities and Exchange Commission's decision to impose penalties or successor liability. That means that “what you do from a due diligence perspective is very relevant to your risk,” not just at the beginning of the deal but also after it closes, she said.

Citing the SEC and DOJ's joint FCPA resource guide, Raad recommended that acquiring companies:

• ensure that their code of conduct and compliance policies and procedures are implemented as quickly as practicable in the new entity;

• train directors, officers and employees of the new entity and when appropriate, agents and business partners on anti-corruption laws as well as the acquirer's policies and procedures; and

• conduct an FCPA-specific audit of the new entity as quickly as practicable.


Depending on what their due diligence turns up, companies may not have to perform an FCPA-specific audit, Raad said. “Taking into account the risk of the particular transaction” and “what you are actually able to accomplish during the diligence phase will help inform the decision you make with respect to post-acquisition auditing work.”

The attorneys also noted that if red flags are raised during the due diligence process, companies should investigate the issue immediately after the deal closes. In addition, acquirers should consider—in light of regulatory guidance and local reporting requirements—whether to disclose the matter to the authorities. 

Regulators' Concerns 

Thompson observed that while companies may try to implement an effective compliance program for the new entity, it can be a challenge showing prosecutors or regulators that they have done so. One easy way to satisfy a regulator's concerns is, “on Day 1 or soon after Day 1” of the deal closing, the acquiring company should send out “some sort of communication” from senior management setting out the direction in which it will take the new entity with respect to compliance, he said.

In addition, the acquiring company may develop a compliance plan or road map that explains to the new employees “what's going to happen over the course of the next six, 12, 18 months,” however long it takes to develop a compliance program, Thompson said.

One benefit of such an approach is that it gives the new employees an idea of what is coming and what is expected, Thompson said. The other benefit is that it can go a long way to “calming the nerves of prosecutors.” Regulators are more likely to be understanding if “you can demonstrate your plan and progress as you go along,” he said.

In other recommendations, the attorneys suggested that during the pre-acquisition due diligence process, companies look out for issues such as:

• Has bribery taken place historically?

• Is bribery now taking place and if so, how widespread is it?

• What is the “tone at the top?”

• Does the target company have an anticorruption or anti-bribery program?

• What would be the impact of bribery if discovered after the deal closes? and

• Was there FCPA or Bribery Act jurisdiction over the target company at the time of the bribery?


Risk-Based Due Diligence 

They also suggested that when conducting risk-based due diligence, companies should consider:

• conducting media searches;

• issuing a due diligence questionnaire;

• requesting, reviewing and analyzing documents from the target company;

• conducting a reputational assessment of the target company;

• doing transaction testing or a forensic audit; and

• interviewing legal/compliance/management personnel.


Although that's not always possible, it frequently is very helpful to talk to the target company's employees or management, Raad said. “A lot can be learned from even a simple half hour telephone call from” the management team.

Deal Provisions 

When structuring the deal, the attorneys recommended that companies ensure transaction documents include sufficient legal protections, such as anti-corruption representations, warranties and covenants.

Thompson warned that in some instances, a foreign target company may balk at certain provisions, such as stating in a warranty that it has not previously breached U.S. law. While these may result in “deadlock” in some deals, it is usually possible to “craft language” that will “get both sides comfortable,” he said.

Thompson also noted that banks—because of the recent high penalties imposed over sanctions violations—are taking more interest in the deals. These lenders are exercising more diligence on their own on matters involving the deal, he said.

Post-acquisition, the attorneys suggested that acquirers implement a robust compliance program that includes:

• anticorruption and anti-bribery procedures;

• training;

• a whistle-blower hotline/anonymous reporting framework;

• an anticorruption audit (if not conducted pre-closing) and an ongoing monitoring framework.


To contact the reporter on this story: Yin Wilczek in Washington at

To contact the editor responsible for this story: Ryan Tuck at

The PwC report is available at