By Blandine CORDIER-PALASSE, Mergers & Acquisitions Magazine
A company's reputation is one of its most important assets. It is also one of the most fragile. Built up step by step, over time and through excellence, a reputation can crumble in a matter of moments. So it's in your interest to do everything you can to protect it.. The aim is to strengthen it in all its activities and with all its stakeholders. But every time a company makes an acquisition, its reputation is put at risk. That's why it's important to plan the necessary due diligence well in advance. The aim is to protect the company from any risk of non-compliance.
For any acquirer, whether an industrialist or a private equity investor, it seems essential to avoid a "bad deal". It risks opening a Pandora's box of bad news. This would damage the company's image and reputation. More generally, it would threaten the economy of the whole group. Very pragmatically, and this is often what has the greatest impact on buyers. Their responsibility may be called into question, including in the case of situations inherited from practices prior to the operation. When it comes to mergers and acquisitions, it is therefore important to be fully aware of all the ins and outs of the target company before accepting its inheritance. Deploying a compliance programme helps to ensure the efficiency of control mechanisms in anticipation of projects, upstream of operations and a posteriori within the company.
Executives and boards of directors therefore need to understand the implications of compliance. It is always simpler to have an in-house compliance policy in place if you want to understand these issues and avoid any inconvenience. In an extremely competitive environment, particularly when making acquisitions, companies and their directors are faced with increasingly difficult strategic decisions. Calling on the expertise of leading specialists upstream is therefore a guarantee of efficiency and speed in dealing with complex but essential issues.
Compliance, a long-term asset that should not be neglected
For a manager, understanding compliance means first of all knowing how to define its scope. The purpose of compliance is to ensure that a company's activities comply with the law. In addition, there are civil and criminal regulations, in particular to prevent and detect wrongdoing. It also includes education on the scope of the applicable rules and, lastly, the implementation of prevention and control procedures. This covers three main areas:
- the fight against corruption: active/passive, fraud, swindling, commissions, money laundering, embezzlement, influence peddling, falsification, distortion of competition, antitrust, insider trading, conflicts of interest, etc. ;
- social risks: discrimination, exploitation, child labour, human rights, harassment, the environment, psychosocial risks, information security, damage to image, etc;
- criminal risks: in particular the personal liability of the director (abuse of power, breach of trust, misappropriation of company assets, etc.) and the moral liability of the company.
Today, company directors - and even more so acquirers - need to be fully conversant with these increasingly complex issues. Regulations have become particularly strict over the last fifteen years, with, for example, the Sarbanes Oxley requirements on internal control and fraud prevention introduced in 2000. All this is in addition to the extraterritorial provisions of anti-corruption legislation. In France, the law of 3 July 2008 and the order of 8 December 2008 transposed the 8th Directive. This legislation has given directors new responsibilities. In particular, they must meet high expectations in terms of ethics. They are required to ensure that risk management procedures are effective. It is normally up to management to put effective procedures in place.
In the United States, compliance is a response to the risk of inheriting the criminal liabilities of a recently acquired company. In France, while the acquirer is not responsible for the acquired company's criminal liabilities, effective compliance should enable the acquirer to avoid being accused of receiving stolen goods. The potential size of the fines and the serious consequences of any breaches are strong incentives to reinforce good practice. A few examples are often better than long speeches. In 2010, for example, the KBR group was fined 800 million dollars for breaches of ethical practices. In 2006, Pierre Levy, the head of Faurecia, was forced to step down following an unidentified bribery pact in a newly acquired subsidiary. These practices predated the acquisition.
Knowing your own Compliance so you can detect any potential acquisition pitfalls early on
Even before embarking on an acquisition, the management team and its board of directors must have clearly defined the strategy of their own structure. They must know the guidelines for their actions and the values to be respected. And, of course, they must be committed to this approach and pass it on to all their teams.
A well-integrated compliance programme saves precious time. It does so when the negotiation or auction process is underway. The concept is to have clearly identified the acceptable and unacceptable areas of concern. Above all, it is important to identify those issues on which it is impossible to compromise. Due diligence will have to take these into account, such as situations involving the corruption of public or private officials, cartel or unfair competition problems, environmental issues, labour law, with the risk of litigation, inspections and reminders of contributions to social security. It will be necessary to take into account many other issues that could jeopardise the economics of the deal.
A proper analysis of the target's compliance must therefore enable the chains of delegation of authority to be audited. It also enables conflicts of interest to be analysed and risks to be mapped. The aim is to ensure the traceability of information. It is also necessary to identify areas of vulnerability and people at risk. Added to this are the mechanisms and the stakes involved. In addition, the economic nature of the risk must be assessed, and the costs associated with the various difficulties quantified.
To disregard these elements, to leave them to one side, to fail to take them into account to the extent of the issues at stake and the underlying dangers, is to decide to live with real swords of Damocles post-acquisition. The liabilities guarantee can be used to reduce the price or rescind the sale on the grounds of a latent defect. At the very least, it will also mean an additional cost and a drop in profitability for the seller. For an investor, the situation will be particularly complicated when a subsequent sale is envisaged. In particular, this will be the case if environmental issues arise, such as soil pollution or a lack of permits. There are now many possible cases of non-compliance.
Besides, what buyer would want to be prosecuted for misuse of company assets or handling stolen goods? Probably none. But how many companies have set up in-house ethics and compliance departments to guard against risky situations? That's what compliance is all about. As an organisational tool, the compliance programme limits risks in line with and at the service of the company's development strategy. Compliance aspects must be taken into account in any merger and acquisition operation. It is becoming as automatic as financial or legal due diligence.
Because it's always better to miss out on that famous 'bad deal' than to see the reputation and image the company has spent years building destroyed in the space of a single press article.
