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Legal Focus
JULY 2013
The Legal Compliance Challenges in M&A Transactions
To find out more about the legal compliance challenges in M&A transactions, Lawyer Monthly speaks to Maurizio Delfino from Willkie Farr & Gallagher LLP.
Please introduce yourself, your role and your firm.
Willkie Farr & Gallagher LLP have over 600 attorneys in offices located in New York, Washington (D.C.), Paris, Brussels, London, Frankfurt, Milan and Rome. In Italy, Delfino e Associati, Willkie Farr & Gallagher LLP (the “Firm”) was set up in 2000.
M&A activity regarding listed and unlisted corporations, for both financial and strategic investors operating in diverse industries has historically been the core of our practice: we have worked on hostile and friendly takeovers and on some of the most significant cross border acquisitions which took place in Italy in recent years and on a large number of mid-size deals as well, assisting both Italian and foreign clients. In recent years, our M&A activity has also involved the acquisition of distressed and insolvent companies.
A recent report by the Economist Intelligence Unit shows that compliance and governance standards in takeover targets are a major concern for dealmakers as cross-border M&A activity picks up. What are your thoughts on this?
I think that they are right, even though I am not familiar with this report.
Over the past years M&A transactions have become increasingly complex, in parallel with the expansion of compliance requirements. Corporate law requirements have become more complex, but it is compliance which has really made the difference.
Twenty years ago, in Italy, except for special situations, for compliance purposes the main risk areas were tax and, occasionally, antitrust. At one point, environmental compliance became a significant risk. Then, labour and workers’ health and safety issues became an area of serious concern and then again anti money laundering, corruption (both domestic and international), various forms of export control, data protection
and privacy. In parallel, the rules applicable to more traditional areas of compliance, such as the environment, stiffened. Various industries, such as banking, insurance, even the accounting or the legal profession came to be subjected to special rules providing for higher ethical standards and, in parallel, stricter rules of behaviour, sometimes rather complicated to enforce.
At the same time, administrative agencies or the courts were entrusted with the task to enforce the new compliance rules. The mere complexity resulted in conflicting interpretations, not to mention the diverse level of enforcement of certain European regulations in the various European member States. In the case of acquisitions in the field of regulated industries (telecommunications, defence, various financial services) considerations on compliance occasionally play a disproportionate role in the decisions whether or not to proceed, also in the light of the costs (both financial and “cultural”) of post merger integration.
What are the potential risks facing investments expanding into new markets and high risk jurisdictions?
Expanding into new markets normally always brings about risks and opportunities. This is something that a well-organized corporation may handle. It is expansion in high risk jurisdictions which even a well organized corporation may find challenging. Typically, in high risk jurisdictions there is not only a higher likelihood of fraud or corruption practices, but a more general failure to comply with diverse regulations. Bad surprises may result in areas, or locations, or with people or situations which an ordinary due diligence, i.e., a due diligence which did not expressly focus on compliance and related processes, would easily overlook. Corporate compliance should be a primary concern for dealmakers entering cross-border activities in high risk jurisdictions and attentive to their reputation. In some cases, both pre-closing and post-closing due diligence are usually warranted, plus periodical monitoring.