A surprising 40% of merger and acquisition deals fail to deliver their expected value. Hidden legal issues often cause these failures.
Standard legal due diligence covers basic concerns. Many critical legal issues in mergers and acquisitions stay hidden until it's too late. The process goes beyond traditional contract reviews and compliance checks. Today's M&A landscape presents complex challenges that experienced professionals might miss.
The evolving business environment brings new legal concerns. These range from cryptocurrency regulations and remote work implications to unexpected intellectual property risks. This piece explores these hidden legal challenges that could affect your M&A transaction. You'll learn to spot potential pitfalls before they derail your deal.
Hidden Compliance Landmines in Modern M&A
Our experience with mergers and acquisitions shows that compliance problems often hide beneath the surface and can derail deals at crucial moments. Let's get into three major compliance areas that catch dealmakers off guard.
Cryptocurrency and Digital Asset Regulations
Cryptocurrency regulations create unique challenges in modern M&A deals. The regulatory landscape for digital assets stays fragmented and keeps evolving. Companies must direct their efforts through complex requirements like anti-money laundering (AML) protocols and know-your-customer (KYC) obligations.
Cross-Border Data Transfer Restrictions
Data transfer compliance has become vital in cross-border M&A transactions. Companies need to address these key compliance requirements:
- Data protection impact assessments
- Standard Contractual Clauses implementation
- Cross-border transfer mechanisms
- Data breach response protocols
Companies must review whether targets have done proper privacy impact assessments and managed to keep adequate data governance policies.
Environmental Social Governance (ESG) Requirements
ESG considerations are now vital factors in M&A transactions. Studies show that better ESG performance relates to higher annual returns by up to 3.8%, which leads to a compound effect of 20% to 45% over five to 10 years. More than half of organizations (57%) now measure ESG with clearly defined metrics, up from 39% two years ago.
A strong compliance program tells buyers that a company manages risks well. We recommend a full review of compliance systems during due diligence, as overlooking these vital elements can hurt deal success and lead to poor business outcomes.
Unexpected Employee-Related Legal Challenges
Employee-related legal challenges have created a major change that can affect mergers and acquisitions. Three critical areas need to be addressed.
Remote Work Legal Implications
Remote operations bring complex legal considerations to M&A transactions. Studies show that remote work increases cybersecurity risks when employees access sensitive information from unsecured networks. So, companies must address:
- Data protection protocols
- Home office reimbursement policies
- Cross-border tax obligations
- Virtual workplace compliance
Gig Economy Worker Classifications
Worker classification has grown more complex in modern M&A deals. The US Department of Labor's final rule makes it harder for companies to classify workers as independent contractors. States like California, Illinois, Massachusetts, and New Jersey have adopted the stringent "ABC" test for worker classification.
International Employment Law Conflicts
Cross-border M&A transactions face unique employment challenges. The EMEA region's failed deals show that 36% collapsed due to labor and employment laws. Companies must handle visa requirements for sponsored employees, especially when dealing with H-1B and L-1 visas tied to specific employers.
Our experience reveals that employment law issues across different jurisdictions can substantially affect deal success. French law requires works council input for deals above certain thresholds. Early identification of these challenges and thorough due diligence can help ensure successful transactions.
Overlooked Intellectual Property Risks
IP due diligence investigations show that intellectual property risks in M&A deals are often hiding in plain sight. Let's get into three most important areas that just need careful attention.
Open Source Software Compliance Issues
Open source software (OSS) creates unique challenges in modern M&A deals. OSS brings many advantages, but its misuse leads to severe consequences. Companies face hefty penalties and even full product recalls when they violate OSS licenses. Companies must also assess:
- Proper OSS management systems
- License combinations and component architectures
- Creation of complete Bills of Materials (BoM)
Social Media Asset Ownership
Social media assets get minimal attention in purchase agreements, which seems surprising given their value. Many deals overlook everything in social media ownership. A recent California case showed these ownership problems when an employee kept control of a company's Twitter account that had over 17,000 followers.
Trade Secret Protection Gaps
Trade secret protection is a vital part of M&A transactions. Strong deals can fall apart without proper safeguards. Recent cases highlight these risks clearly. A pharmaceutical company sued an employee who uploaded over 12,000 confidential files to a personal Google Drive account.
The difference between employee know-how and trade secrets creates another challenge. Courts recognize that separating these two elements can be complex. Trade secrets must be information that "a person of ordinary honesty and intelligence would recognize was the property of their old employer".
A full picture of these risks should include:
- Non-disclosure agreements with employees and contractors
- Industry-standard security controls
- Source code protection measures
- Confidentiality obligations
Silent Deal Killers in Due Diligence
Our technology due diligence shows that silent deal killers often lurk in overlooked technical details. A careful analysis has identified three critical areas that need immediate attention.
Legacy Technology Compliance Issues
Technical debt has become a major roadblock in M&A transactions. Outdated applications and poor code quality create substantial operational risks. These problems drive up maintenance costs and limit scalability, which reduces the target company's value.
Hidden Cybersecurity Vulnerabilities
Our assessments reveal cybersecurity weak points in several forms:
- Insufficient vulnerability and patching processes
- Inadequate network configurations
- Unsecured web applications serving as entry points
Cybersecurity breaches can devastate a company's operations. The 2017 Equifax data breach cost over USD 1.40 billion in security upgrades and legal expenses. Research shows that 74% of companies hit by breaches traced them back to unsecured third-party system access.
Undisclosed Third-Party Dependencies
Third-party risk management is a vital component of M&A due diligence. Our investigations suggest that protection should include expiry rights when vendors' products or services fail or become insecure.
We alleviate these risks through comprehensive evaluations of:
- Data storage practices and system updates
- Vendor agreements and continuous monitoring protocols
- Incident response plans and cyber insurance coverage
Conclusion
Successful M&A transactions need careful attention to hidden legal challenges that basic due diligence often misses. Our largest longitudinal study identified key areas that need extra scrutiny - from evolving cryptocurrency regulations to complex ESG requirements that shape deal outcomes.
The rise of remote work and gig economy has created new legal complexities. Intellectual property protection now goes beyond traditional patents into social media assets and open-source software compliance. Third-party dependencies and cybersecurity vulnerabilities pose substantial risks that could derail promising deals.
These hidden legal challenges point to a vital reality: due diligence must go beyond conventional checklists. Companies that spot and tackle these emerging issues early have the best chance to execute successful M&A transactions. Smart dealmakers use legal due diligence as a strategic tool to uncover and solve potential deal-breakers before they surface.
The legal landscape will become more complex as technology advances and regulatory frameworks evolve. Dealmakers who are proactive and maintain resilient compliance programs will be better positioned to direct the intricate world of modern M&A transactions.