A company that does not perform adequate due diligence prior to a merger or acquisition may face both 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 of the need to engage in robust pre-acquisition due diligence.
The 2020 Update made even more clear the need for a robust compliance presence in the pre-acquisition phase. It stated, “A well-designed compliance program should include comprehensive due diligence of any acquisition targets, as well as a process for timely and orderly integration of the acquired entity into existing compliance program structures and internal controls. Pre-M&A due diligence, where possible, enables the acquiring company to evaluate more accurately each target’s value and negotiate for the costs of any corruption or misconduct to be borne by the target. Flawed or incomplete pre- or post-acquisition due diligence and integration can allow misconduct to continue at the target company, causing resulting harm to a business’s profitability and reputation and risking civil and criminal liability.”
There are multiple red flags which 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 if there were frequent breach of policies and procedures. Obviously, a target which 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 if there were not regular reports to the Board, it could present an issue for compliance. Conversely, if there were frequent requests to waive policies, management over-ride of compliance controls or no consistent consequence management for violations; it could present clear red flags for further investigation.
Three key takeaways:
- The results of your pre-acquisition due diligence will inform your post-acquisition integration and remediation going forward.
- Periodically review your M&A due diligence protocol.
- If red flags appear in pre-acquisition due diligence, they should be cleared.