RESTON, Va. (March 26, 2019) – Social, political and privacy issues have become increasingly relevant factors in M&A due diligence according to a special report released today by compliance research firm, Intelligize. The report, The Impact of Social, Political and Data Privacy Issues on M&A Transactions, utilizes public company filings and transaction documents available in Intelligize’s M&Aapplication to examine and visualize the growing significance of three discrete factors – cybersecurity risk, the #MeToo movement and foreign investments in the United States. “Both acquirers and targets are beginning to accept that these risk factors, each of which has become somewhat of a sociopolitical lightning rod, are and likely will remain critical components of M&A due diligence,” said Rob Peters, a senior director at Intelligize and one of the report’s co-authors.”
Where in the past, company representations regarding sexual harassment or misconduct were nearly unheard of, the #MeToo movement’s role in finally holding prominent executives, celebrities and other public figures accountable for inappropriate behavior has triggered a considerable increase in sexual harassment and misconduct disclosures – most prominently during the last half of 2018. Of the more than 1,200 2017 M&A transactions analyzed by Intelligize, only one included a representation relating to allegations or settlements of sexual harassment or misconduct. Fast forward just one year and approximately the same number of 2018 transactions yielded 45 such representations.
“The #MeToo movement cannot be underestimated as a critical feature of due diligence in an M&A transaction,” said Ken Yerkes, chair of the Labor and Employment Department at Barnes & Thornburg LLP, who handles employment issues related to M&A transactions. “It is a corollary of the general push for diversity and inclusiveness, which also is a highly salient consideration in M&A transactions. Clearly, a company’s reputation for tolerating sexual impropriety can undermine its brand and lessen market value.”
Intelligize’s report also details a spike in due diligence related to cyber risk in M&A deals, as data breaches of companies like Marriott, Yahoo!, Equifax, Anthem and countless others have placed public companies on high alert. The number of deals with transaction documents containing cyber risk clauses has risen steadily since 2014 (from 12.8% of transaction volume to 32.8%).
“Cyber should be treated much like any other business risk in the context of an M&A transaction,” said Craig A. Newman, chair of the data security practice at Patterson Belknap Webb & Tyler LLP in New York. “Cyber issues can have a direct impact not just on a company’s valuation or stock price, but on the nature and depth of the risk assumed by an acquirer, particularly since some types of cyber vulnerabilities often take weeks or months to surface. What was once an ancillary issue on an M&A diligence checklist is now squarely in the top 10.”
Intelligize also found that an expanding range of industries– no longer primarily manufacturing – are navigating risks related to foreign investment during M&A due diligence. While the Committee of Foreign Investment in the United States (CFIUS) has long played a role in ensuring that mergers don’t result in foreign powers gaining disproportionate control over U.S. commerce, the continued rise of China as a world economic superpower in recent years has made it an ever more important tool. Since 2014, 167 targets with assigned SEC Standard Industrial Classification (SIC) codes have announced deals with M&A transaction documents that mention CFIUS in their representations or covenants.
“Given its tremendous influence – and the caliber of its composition which includes officials from the departments of Defense, State, Justice, Commerce, Energy and Homeland Security, all led by the Secretary of the Treasury – CFIUS operates in the shadows for all intents and purposes,” Peters said. “CFIUS’s investigations can effectively kill deals, and there is strong reason to believe that we may see further expansion of the agency’s powers in the near future.”
EDITOR’S NOTE: The charts contained in this report may be reprinted by any media outlet with credit given to Intelligize as the source.
Intelligize is the leading provider of best-in-class content, exclusive news collections, regulatory insights, and powerful analytical tools for compliance and transactional professionals. Intelligize offers a web-based research platform that ensures law firms, accounting firms, corporations and other organizations stay compliant with SEC regulations, build stronger deals and agreements, and deliver value to their shareholders and clients. Headquartered in the Washington, DC metro area, Intelligize serves Fortune 500 companies, including Starbucks, IBM, Microsoft, Verizon and Walmart, as well as many of the top global law and accounting firms. In 2016, Intelligize became a wholly-owned subsidiary of LexisNexis®, a leading global provider of content-enabled workflow solutions designed specifically for professionals in the legal, risk management, corporate, government, law enforcement, accounting and academic markets. For more information, visit www.intelligize.com.
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