Regulatory compliance in M&A is a critical aspect of the entire process. Getting approval for mergers is a complex, time-consuming process, which is why you’ll compile the necessary information before executing them.
Not checking the boxes can result in unnecessary and expensive delays that can be easily avoided. Anticipating potential regulatory hurdles will help you navigate them more effectively. Work with your legal team to understand the regulations relevant to your particular business vertical.
Since the US has a federal government system, mergers fall within the dual jurisdiction of the state and federal governments. Dealmakers must follow the regulations of the individual state where the seller’s company is incorporated.
The Ultimate Guide To Pitch Decks
Regulatory Compliance in M&A Starts With These Organizations
The Securities and Exchange Commission (SEC) oversees the sales and transfers of securities and assets. Any issues relating to competition revert to the Federal Trade Commission (FTC). And the Antitrust Division of the Department of Justice (DOJ).
To get approval for the acquisition, the company may have to divest certain assets or agree to certain terms and conditions. That’s how you’ll comply with anti-trust laws.
If you intend to transact an overseas M&A deal, you’ll get approval from the Committee on Foreign Investments in the U.S. (CFIUS). This organization identifies and manages any risks to American national security resulting from foreign investment in local companies.
On the flip side, say you intend to acquire a foreign-based company. In that case, you’ll comply with the foreign direct investment laws and regulations applicable in that country.
Relevant Federal Agencies Monitor Different Business Sectors
Similarly, M&A transactions in any of the regulated industries must comply with the laws and regulations laid down by the relevant federal agencies.
For instance, say your intended transaction is within the medical or healthcare sectors. Accordingly, regulations laid down by the Health Insurance Portability and Accountability Act (HIPAA) will apply to the merger.
Here’s another example. Complying with environmental protection laws per the National Environment Policy Act is a critical part of business operations. Before entering into an M&A deal, you’ll conduct the necessary due diligence to explore the targeted company’s environmental impact.
Next, you’ll discuss what can be done to remedy the practices to acquire approvals before finalizing the deal.
Similarly, dealmakers entering into M&A transactions in sectors like insurance, power, and utilities must comply with relevant agencies. The same goes for banking, airlines, telecommunications, and media. Both state and federal agencies oversee M&A activities.
See How I Can Help You With Your Fundraising Efforts
- Fundraising Process : get guidance from A to Z.
- Materials : our team creates epic pitch decks and financial models
- Investor Access : connect with the right investors for your business and close them
Structuring M&A Proposal Agreements & Timelines
Dealmakers finalize M&A deals by drawing up a purchase agreement or contract that outlines asset disposal. This contract will contain the terms for acquiring or selling privately owned businesses according to relevant state laws. You’ll ensure regulatory compliance in M&A with the documents.
Procedures typically depend on the number of entities that participate in the deal. For instance, there can be just two parties to the transaction in a bilateral negotiation or multiple parties. That is if the seller has multiple offers from potential buyers. The complexity of the agreement varies accordingly.
The procedures can take longer in the case of a larger company that has an entire portfolio of assets for transfer. Each phase and documentation takes more time, and it is not unusual for three months or more to elapse.
This is the time frame from the distribution of the information memorandum and the execution of the definitive transaction documents. Interestingly, a bilateral deal can take longer since the dealmakers are not under pressure from competing entities to complete execution.
Here’s how the workflow progresses:
- The first step involves drafting an information memorandum that includes complete details of the business and its assets. You’ll also draft a purchase agreement and other sale documents. This phase takes anywhere from six to eight weeks.
- During the “round one” phase, potential buyers indicate their interest in buying the company and then start their due diligence. This could take around four weeks.
- During the “round two” phase, potential buyers present offers and markups in the transaction documents. This can take another four weeks.
In the ensuing two weeks, sellers undertake detailed negotiations with one or more buyers until they arrive at a deal.
Federal and State Agencies Oversee the Entire Process
The purchase agreements and other transaction documents are designed according to the corporate laws in the state where the target company is incorporated. Most states permit acquirers to merge the target company with the buyer’s company or one of its subsidiaries.
Dealmakers must make sure to meet the statutory merger requirements to execute this transaction. They must also ensure that the shareholders in the targeted company have received fair payment for their shares.
Typically, mergers must get approvals and recommendations from the targeted company’s board of directors. You’ll also need approvals from the majority of the shareholders owning equity in this company.
Regulatory compliance in M&A also extends to managing human resources, securing data, and transferring titles to the company’s properties. Several states have anti-takeover laws in their corporate statutes. Here are some of the factors to consider:
- Acquirers can approach the targeted company’s shareholders and ask for their approval for the merger. However, they must comply with the federal rules and regulations on proxy statements under the Exchange Act.
- Buyers can offer shareholders securities in exchange for their approval. However, they must comply with the registration mandates of the Securities Act of 1933 unless exempted.
- State laws oversee the fiduciary duties the target company’s board of directors has toward the shareholders when approving the sale.
- State laws have anti-takeover statutes, such as control share acquisition statutes or business combination statutes. These laws may restrict the shareholders in the acquiring company from voting or conducting independent business with the purchased company.
Federal and State Agencies Expect Buyers to Conduct Due Diligence
The Criminal Division of the Department of Justice (DOJ) expects acquirers to do their due diligence when evaluating targeted companies. The meticulous manner in which they conduct this exercise indicates the level of their commitment to corporate compliance.
The March 2023 Evaluation of Corporate Compliance Programs also says that proper due diligence indicates how companies enforce compliance in their internal operations. And if they regularly take the necessary steps to correct any errors and misconduct.
Accordingly, you’ll identify any misconduct or risk of misconduct in the targeted company’s policies and procedures. You’ll hire qualified, trained, and accredited teams who have adequate experience working in their relevant spheres to conduct the scrutiny.
Keep in mind that in fundraising or acquisitions, storytelling is everything. In this regard, for a winning pitch deck to help you here, take a look at the template created by Silicon Valley legend, Peter Thiel (see it here) that I recently covered. Thiel was the first angel investor in Facebook with a $500K check that turned into more than $1 billion in cash.
Remember to unlock the pitch deck template that is being used by founders around the world to raise millions below.
Objectives of Regulatory Compliance Due Diligence
Remember that regulatory compliance in M&A is an integral part of the process. Aside from finding discrepancies in compliance, you must also work out how to remedy the errors pre-acquisition. The due diligence process you conduct has several objectives:
- Identifying any non-compliance issues can effectively lower the seller’s asking price.
- You’ll accurately evaluate the value of the IP and product technology the company owns, along with its weaknesses.
- Your teams will explore the possibility of improving and enhancing the products and designs for a better product-market fit.
- The legal team can examine and validate ongoing contracts, registrations, agreements, and licenses the company has entered into.
- You’ll list the warranties and indemnities of the target company.
- You’ll isolate potential opportunities for investment.
- Checking the company’s history and reputation and how the overall market perceives the brand
- Pulling background information about the board of directors and top executives for their past behaviors and conflicts of interest.
- Looking into ongoing litigation or regulatory non-compliance investigations against the target company that can influence its value or the M&A deal.
- Exploring the potential relationships shareholders and owners may have with any entities or third parties connected to non-compliance issues.
- Examining any risk factors associated with the geophysical area and geopolitical environment
This list gives you an overview of the key objectives behind due diligence for compliance. However, you’ll also include any other areas relevant to the particular industry where you work. Customizing the due diligence per the type of business you intend to acquire is also a smart move.
Knowing how to navigate the due diligence process is a valuable skill in every aspect of the startup, entrepreneurship, and exit strategies. Check out this video where I have explained how to conduct it thoroughly.
Regulating Agencies Examine Several Criteria Before Awarding Approvals
The Department of Justice and the Federal Trade Commission are likely to examine the long-term impacts of M&A deals. This impact could be on the consumers and smaller competing brands. When considering a company for acquisition, you might want to anticipate their concerns and plan for them.
Dealmakers must also analyze how the authorities define the business landscape and the potential remedies they may require. You’ll work out how to address their concerns and comply with their directions. If regulatory compliance in M&A can make the deal non-viable, you’ll reconsider the merger.
Your legal team and M&A advisor will advise that you use SMART project management practices to manage the M&A. Whatever regulatory compliances you adopt should be specific, measurable, attainable, relevant, and time-bound. Here are some of the commitments:
- The surviving company or acquirer will maintain a specific level of customer service
- The merged company will maintain or raise employment numbers in the specific region
- Acquirers will make investments to promote and build the region’s infrastructure.
- Customers will continue with the contracts and agreements they had with the acquired company. Switching to contracts with the buyer’s company will not be mandatory.
- Acquirers must preserve a pre-determined number of job functions in the target company.
- Regulators may specify the regions and states where buyers must preserve the jobs.
- They may also determine a fixed capital the acquirers will invest in the company after buying it out.
Requirements like these are designed to protect the customers’ and employees’ interests. Agencies also attempt to protect competing companies in the vertical and ensure that suppliers and vendors get fair treatment. Preventing predatory pricing structures is also an objective.
Expected Penalties for Regulatory Non-Compliance in M&A
Regulatory compliance in M&A is not only critical to get approval for the transaction but also to secure both companies. Non-compliance can lead to several repercussions, including reputational, financial, and legal.
This is why dealmakers should retain the services of trained legal teams to guide the entire M&A process. Failing this compliance can result in federal and state agencies levying fines and penalties.
You also risk criminal proceedings and a damaged reputation that can affect the company’s functions and performance. Not to mention credibility among stakeholders, long-term profitability, and growth. As for the fines and penalties, they depend on the type of non-compliance, specific industry, and severity of the violation.
At any time during the M&A process, dealmakers who discover any non-compliance should come forward voluntarily. They should report them to the DOA and discuss the steps to take to avoid civil and criminal liability. And what they can do to minimize the consequences.
Reporting to the Office of Inspector General (OIG), Federal Trade Commission (FTC), Office for Civil Rights (OCR), and FDA could also be mandatory.
Managing Regulatory Compliance in M&A
Since M&A transactions must comply with a whole range of regulations, planning for the relevant agencies’ concerns is advisable. Dealmakers can start by researching the laws applicable to their specific industry and cover the possible commitments they must make.
Proactively addressing the many laws and compliances raises your chances of getting approval soon. Also, remember that political, taxation, and environmental conditions can result in changes to laws and policies. This is why you’ll do the necessary research to find out about the latest updates.
Deploying AI and technology to facilitate such deals and regulatory compliance in M&A gives you an edge. You can manage KPIs, workflows, and integration progress on a single dashboard. Dealmakers can monitor the progress against the key objectives and ensure compliance in various jurisdictions.
AI can also assist you with information about the applicable laws and penalties for non-compliance. You’ll receive alerts each time a risk emerges so you can take the necessary steps to address it. That’s how you can ensure that the M&A progresses smoothly and you acquire the approvals quickly.
The information provided above is by no means exhaustive, and it is crucial to remember to check for updated directives. Always rely on legal assistance to help you with regulatory compliance in M&A.
You may find interesting as well our free library of business templates. There, you will find every single template you will need when building and scaling your business completely for free. See it here.