October 25, 2022

Due Diligence: Political Law Compliance

A target’s compliance with laws governing political involvement is an area that doesn’t typically get a lot of attention during M&A due diligence, but this Pillsbury memo says that’s a big mistake, because compliance shortcomings with respect to federal, state or local political laws can result in serious legal and reputational consequences.  This excerpt discusses the potential fallout from failing to comply with applicable “pay-to-play” laws:

“Pay-to-play” laws and regulations are additional considerations for entities who transact business with state or local governments. They vary widely by jurisdiction, but typically require entities with state or local government contracts to disclose, limit or avoid political contributions to candidates who could be positioned to influence the award of a government contract. These contribution restrictions can extend to contributions by the contracting entity’s parent and subsidiaries, its PAC(s), its executives, and in some jurisdictions, even to family members of covered persons. A single prohibited contribution by a covered person can force an entity to forfeit a government contract and expose it to civil penalties.

If a target entity has contracts with government entity customers, a due diligence review should determine if all applicable contribution parameters have been adhered to and whether there is a process in place for ensuring compliance. If the acquiring entity also maintains government contracts, it should determine whether the target entity’s PAC is registered in any states that will raise pay-to-play concerns.

Other potential political law compliance issues addressed by the memo include PACs & political contributions, general and procurement lobbying, gifts & conflicts of interest, and foreign agent registration.

John Jenkins