Mergers and Acquisitions (M&A) are complex transactions where two companies either merge or one acquires another. While these deals can bring growth opportunities, expand market share, or diversify portfolios, they also come with substantial legal and regulatory requirements. Compliance plays a key role in ensuring that both parties adhere to relevant laws and regulations throughout the entire process.
In any M&A, non-compliance can lead to penalties, litigation, or even the collapse of the deal. Therefore, understanding the compliance obligations, particularly those under corporate, antitrust, labor, and environmental laws, is important.
This article will explore the compliance aspects of M&A, key legislation, and common challenges.
Acquiring Company’s Due Diligence
Due diligence is the first and most vital step in M&A compliance. The company acquiring the other must thoroughly review the financial, operational, and legal standing of the target company. This process identifies potential risks, including compliance-related risks, that could affect the transaction.
Here are the key areas where the acquiring company must exercise due diligence:
Corporate Structure
Make sure the target company complies with all corporate governance rules, including the Companies Act 2006 (UK) and the Delaware General Corporation Law (US).
Regulatory Compliance
Confirm if the target company adheres to industry-specific regulations, like healthcare laws for pharmaceutical companies or financial regulations for banks.
Contracts and Litigation
Review contracts to verify if the target company complies with relevant laws and analyze any ongoing or potential litigation risks.
Tax and Financial Reporting
Check whether the target company complies with tax laws like the Internal Revenue Code (US) or the UK’s Finance Act. This is important because inaccurate financial reporting can lead to severe penalties.
Due diligence in the above-mentioned areas can guarantee that the target company is complying with the required laws and legislation, thereby reducing the chances for the deal to fall through. It also helps the acquiring company avoid unexpected liabilities.
Antitrust Laws and Regulatory Scrutiny
One of the biggest compliance concerns in M&A transactions is antitrust law. These laws prevent market monopolization and promote fair competition. Failure to comply with antitrust regulations can result in blocked transactions or heavy fines.
Some key antitrust laws are:
Sherman Antitrust Act (1890)
This U.S. legislation prohibits monopolistic behavior and regulates mergers that could harm competition. Under this law, any merger or acquisition that reduces competition can be challenged by the Federal Trade Commission (FTC) or the Department of Justice (DOJ).
Clayton Act (1914)
This U.S. Act is a key amendment to the Sherman Act. It directly addresses M&A transactions by prohibiting acquisitions that may reduce competition or create a monopoly.
Hart-Scott-Rodino Antitrust Improvements Act (1976)
Another U.S. law that requires companies to file a pre-merger notification with the FTC and DOJ for transactions over a certain size. This law’s provisions provide regulators the option to review the deal for any anti competitive issues.
Competition Act 1998
Similar to the US, the UK also has robust competition laws. The Competition and Markets Authority (CMA) reviews mergers that may impact competition in the UK market.
Competition Act (Chapter 50B)
The Competition and Consumer Commission of Singapore (CCCS) regulates mergers and acquisitions. The CCCS has the authority to impose fines, block mergers, or require specific remedies like divestment if the transaction reduces competition. Mergers that proceed without clearance can later be investigated, leading to post-completion sanctions.
EU Merger Regulation (Regulation (EC) No 139/2004)
Transactions that meet the specified turnover thresholds must be notified to the Commission before completion. The review process ensures that mergers do not create or strengthen a dominant position that would reduce competition within the EU’s single market. The Commission can approve, prohibit, or conditionally approve deals based on compliance with antitrust regulations.
Competition Act (R.S.C., 1985, c. C-34)
The Competition Bureau reviews mergers to assess whether they would result in a substantial lessening or prevention of competition in any market in Canada. The Bureau can seek to block transactions through the Competition Tribunal and impose remedies like divestitures to keep the markets open and competitive.
Competition and Consumer Act 2010
Mergers that are likely to substantially lessen competition in any Australian market must be notified to the ACCC, although this is voluntary. The ACCC can block mergers or approve them with conditions to mitigate competitive harm.
Non-compliance with these laws can derail a merger or acquisition. Additionally, the FTC or CMA may impose fines, block the deal, or require divestitures to restore competition.
Corporate Governance and Shareholder Rights
In M&A deals, corporate governance issues may arise, especially concerning shareholder rights. Compliance with corporate governance rules ensures that the transaction is conducted transparently and with the interests of all stakeholders in mind.
The Companies Act 2006 in the UK governs most aspects of corporate governance. For example, Part 13 of the Act deals with shareholder rights, including the requirement for shareholder approval for M&A. Similarly, in the US, state laws like the Delaware General Corporation Law require companies to follow specific procedures to protect shareholder interests.
Here are the key corporate governance provisions to consider:
- Board Approval – M&A deals require approval from the board of directors, which must act in the company’s best interest.
- Shareholder Voting – In many jurisdictions, shareholders must vote to approve large-scale transactions. This protects minority shareholders from being disadvantaged.
- Fiduciary Duties – Directors must comply with fiduciary duties, including the duty of care and duty of loyalty, when negotiating and approving a deal.
Failing to comply with corporate governance requirements can lead to legal challenges from shareholders, who may argue that their rights were violated or that the transaction was not conducted in the company’s best interest.
Labor and Employment Law Compliance
M&A transactions can cause changes in the workforce, such as redundancies, transfers, or changes in employment terms. Acquiring companies must understand and comply with the prevailing labor and employment laws to avoid legal disputes, maintain employee morale, and ensure a smooth transition.
Below are the important labor laws that can impact M&A:
Transfer of Undertakings (Protection of Employment) Regulations (TUPE) 2006
This UK regulation protects employees when a business is transferred to a new owner. Under TUPE, the terms and conditions of existing employment contracts must be preserved, and employees must be consulted before the transfer.
Worker Adjustment and Retraining Notification (WARN) Act (1988)
WARN is a U.S. law that requires employers to provide 60 days’ notice to employees in the event of large-scale layoffs or closures related to a merger or acquisition.
Failure to comply with labor laws can result in legal claims from employees, unions, or labor regulators. Companies must carefully plan any workforce changes and consult with all stakeholders before making major changes. The acquiring company must also stay on top of notification requirements under each law.
Data Privacy and Security Compliance
In our world of data, M&A transactions involve the transfer of sensitive data, including personal information, from one company to another. This data transfer can attract data protection laws and hence, the acquiring company must adhere to them to avoid regulatory penalties and reputational damage.
Here are the legislations that govern data security and compliance.
General Data Protection Regulation (GDPR)
Companies that process the personal data of EU residents must comply with GDPR. This includes conducting data protection impact assessments and ensuring that personal data is transferred securely during the M&A process. Non-compliance with GDPR can result in hefty fines, up to €20 million or 4% of global turnover, whichever is higher.
California Consumer Privacy Act (CCPA)
Similarly, companies that do business in California and handle large amounts of personal data must comply with the CCPA. This law gives consumers the right to know how their data is used and requires companies to implement security measures when transferring data during M&A deals.
When handling data, companies must ensure that any data-sharing agreements, such as those between the buyer and seller, comply with applicable laws. Missteps in data privacy compliance can expose both parties to severe legal and financial consequences.
Environmental Compliance
Environmental laws are also important in M&A deals, particularly for companies operating in industries with a high environmental impact like manufacturing, energy, and construction. The acquiring company must assess the target company’s environmental compliance record to avoid inheriting liabilities.
Some aspects to consider are:
Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA)
Also known as the Superfund Act, CERCLA holds companies responsible for cleaning up hazardous waste sites. An acquiring company could be held liable for environmental contamination caused by the target company, even if the contamination occurred before the acquisition.
Environmental Protection Act of 1990
This UK law mandates companies to prevent environmental harm, including pollution. Non-compliance can lead to fines, cleanup costs, and reputational damage.
The acquiring company must do an environmental audit to identify any potential liabilities. If issues are discovered, the acquiring company may seek indemnities from the seller to cover potential cleanup costs.
Thus, these are the different compliance areas that an acquiring company must look into before signing an M&A deal.
Final Thoughts
Compliance in Mergers and Acquisitions is a multi-faceted challenge because it involves intense scrutiny of antitrust laws, corporate governance rules, labor regulations, data privacy requirements, and environmental obligations. There are legislations and agencies that oversee M&A transactions to prevent reduced competition or unfair trade practices. All the parties involved must comply with these laws to avoid costly legal battles, regulatory fines, or the collapse of the deal.