Trade controls and M&A: how to preserve the value of your transaction?

The substantial risk associated with the expansion and enhanced enforcement of trade controls has a direct impact on due diligence in cross-border M&A transactions. The failure of the buyer to focus his due diligence on potential violations of international trade laws and regulations by the target, may have a serious adverse impact on the value of the transaction.

Governments enforce laws and regulations to promote their national security, foreign policy, and economic interests, including those related to exports, imports, and trade sanctions, but also to combat bribery and corruption. US and EU
trade regulations and sanctions are a case in point. Companies, therefore, find themselves increasingly exposed to multiple trade control regulations. The US in particular, tends to see these regulations as a common mosaic that calls for integrated enforcement. As a result, companies also face a growing multiplicity of penalties applied by different national regulations.

International trade due diligence aims to minimize these risks. First, it is critical in controlling the risk of successor liability. A buyer can be held liable for the violation of trade laws and regulations committed by the target. Only if the buyer is able to adequately establish the vendors' violations, can it take appropriate remedial action to cover the potential costs. Secondly, a trade-focused due diligence helps to ensure that the acquisition is valued correctly. Apart from being exposed to liability for past actions of the target, inadequate trade due diligence also puts the buyer at risk for other reasons. These include - but are by no means limited to:

• the loss of revenue streams from countries subject to trade sanctions;
• the termination of key employees, agents, business partners or contracts as a result of corruption;
• the loss of governmental exporting or contracting privileges; and
• potential delays with the transition of licenses and authorizations

What does this mean for business?
Buyers in cross-border M&A transactions should be aware of the substantial risk involved in the violation of trade regulatory matters by the target. They should conduct a trade-focused due diligence that includes specific requests with respect to export and import controls, trade sanctions, and anti-corruption and anti-boycott regulations. In addition, buyers should demand general information from targets about their compliance processes and procedures, their implementation of those processes and procedures, as well as about past disclosures, investigations and penalties regarding trade regulatory matters.