Hengeler Mueller survey: Compliance due diligence in M&A transactions is becoming increasingly institutionalised

12. August 2019

Compliance due diligence (CDD) in the context of M&A transactions is becoming increasingly important. This is the main finding of a joint survey of executives and managers responsible for M&A and compliance at blue-chip companies and investors in the German market conducted by Hengeler Mueller together with the chair for Private Law, Corporate and Financial Law at the University of Frankfurt's House of Finance.

84% of respondents confirm that compliance-related liability risks have increased in importance for acquirers over the last few years, while another 11% say that there has been a significant increase. In parallel, the significance of CDD in M&A processes has also grown according to 85% of respondents.

Classic compliance areas are in the centre

The main CDD topics relate to classic areas of compliance such as competition law, corruption, money laundering and sanctions/embargoes. But data protection and product compliance are also of significant importance. In addition, environmental protection and human rights are seen as relevant concerns.

The factors determining whether and how a CDD review is conducted are diverse, ranging from knowledge of previous compliance violations or doing business in high-risk countries to business dealings in the US, activities in regulated industries or the number of clients from the public sector. In the course of CDD implementation, a predominantly traditional set of instruments is used - most commonly questionnaires, followed by interviews or expert sessions. The use of technology, which is well-established in internal investigations (e-discovery, artificial intelligence), is rarely deployed in CDD.

Diverse consequences, no tendency to transaction abandonments

Most frequently, acquirers respond to the discovery of compliance risks with specific contractual provisions (e.g. indemnities and warranties). Identified risks can also result in additional due diligence reviews being conducted, or further compliance measures being taken after an M&A transaction is completed. Less frequently mentioned were purchase price reductions, purchase object limitations or terminations of negotiations.

All survey results can be found at www.hengeler.com/en/cdd-survey.