Comprehensive regulatory due diligence is critical and non-negotiable for any Mergers & Acquisitions (M&A) transaction. Any failure to identify hidden compliance issues can leave firms liable for significant regulatory penalties or sanctions, as well as potentially cause unforeseen liabilities or incur costly mistakes. Understanding this key area of risk is important for all growing firms, even those not currently considering M&A. Integrating the awareness of these risks at an early stage in the firm’s maturity will develop an “internal readiness” that prepares growing firms for any future M&A activity while also strengthening core governance and compliance processes.
Key Compliance Risks in Strategic M&A Transactions
During an M&A transaction, there are several key compliance risks that firms are likely to encounter. Preparing for these risks in advance will enable a more secure and streamlined M&A process. A comprehensive examination of a firm’s reporting history will highlight historical reporting inaccuracies, records of regulatory fines for poor transaction reporting practices and any incorrect interpretations of reporting requirements that have resulted in errors. The due diligence process will also uncover any issues caused by poor data governance and lack of internal controls, as well as identify any outstanding or undisclosed regulatory investigations for non-compliance. These issues all present significant potential hidden liabilities and can often serve as a signal for deeper, organisational inefficiencies.
Navigating Compliance Risks through Intelligent Due Diligence
The key compliance risks that firms will face throughout the strategic M&A transaction process will require a structured due diligence process combined with robust internal frameworks. Firms should first consider their internal readiness to ensure compliance functions can be integrated and that there is sufficient capacity to incorporate the new entity. The next priority is then to focus due diligence on the most significant risks, such as financial crime, including Anti-Money Laundering, consumer protection standards and data privacy. Firms are required to assess the governance, culture and internal auditability to understand compliance requirements and then structure the deal based on any issues identified during this process. The outcomes of this process will have a direct effect on how the deal is structured and so should be approached carefully and in the correct order. Firms may decide to include warranties or indemnities to mitigate the risk presented by these outcomes. Bringing the potential M&A transaction to the attention of the regulators at an early stage will also help to avoid any unexpected delays in regulatory approval and build trust with regulators through transparency and communication.
Legal Due Diligence for Mergers and Acquisitions
Comprehensive legal due diligence is an essential part of the process for M&A transactions and should consider the overall financial health of the organisation based on corporate structure, governance documentation and current contractual obligations or Intellectual Property rights. Firms should also check for existing legal matters involving HR matters, Environmental, Social and Governance issues and any current or pending legal matters that could impact the value or reputation of the firm post-acquisition. The process of M&A requires careful and diligent compliance, which should be second nature for mature financial services firms. An effective M&A strategy mitigates risk, utilises data to inform a valuation and builds the foundation for a smooth integration process. Firms that commit to adopting these policies and committing to a state of internal readiness will be best prepared for any future M&A requirements, as well as being more attractive to investors. Is your firm M&A-ready from a compliance perspective?
Get in touch with Novatus Global to develop robust due diligence processes and build investor confidence.
