November 10, 2022
The Board’s Role in Managing M&A Regulatory Risk
As regulators in the U.S. and abroad ramp up their scrutiny of potential M&A transactions, this Skadden memo addresses the need for directors to take on a bigger role in assessing and mitigating the regulatory risks associated with a deal. This excerpt discusses the board’s role in ensuring that the risk of a blocked or abandoned transaction is appropriately evaluated:
To ensure that the fundamental risk of non-approval is properly assessed and mitigated, boards should focus on pre-signing preparation, careful negotiation of contractual risk-sharing provisions and a flexible post-signing strategy to obtain approvals.
First, the board must insist that management, with the help of outside advisers, conducts a probing analysis that goes well beyond traditional competition measures such as horizontal overlaps and combined market shares, which might have sufficed in the past. The analysis should consider the parties’ documents and the expected reactions of customers, suppliers, employees, industry groups and competitors, because those could factor into regulators’ decisions.
The parties need to fully understand the relevant authorities’ current enforcement priorities, and any novel antitrust doctrines that key officials espouse. In cross-border deals, they will also need to evaluate the impact on national “industrial policy.” That will include any connection to highly sensitive or favored industries and other policy goals that regulators may pursue as part of their review. Today those could include climate change, data privacy, employment and even wealth distribution.
The memo says that this is the time when the board and management also need to consider the circumstances in which it will make sense to litigate with regulators. The results of the analysis should be summarized & presented to the board a sufficient time in advance to permit the directors to raise questions and request appropriate follow-up work. The memo also says that the board should continue to be updated as more is learned during the deal process and as regulatory risk is allocated in the negotiation process.
– John Jenkins