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This alert from Squire Patton Boggs points out the increasing risk that US export control and sanctions laws present to both US and non-US targets — meaning increased successor liability and post-closing business continuity risks in the M&A context — as a result of US agencies using export control restrictions and economic sanctions as national security tools. The alert recommends a risk-based due diligence strategy on export controls and sanctions compliance depending on factors like the target’s industry, the applications for its products/services, its reliance on distributors or other business partners, activity in or with high-risk countries and the strength of the target’s compliance functions and provides a list of typical due diligence requests plus common representations and warranties that address related risk.

If a particular risk is identified, the alert says the acquirer may want to consider one or more of the following:

– Voluntary Self-Disclosure (VSD) – A VSD to the relevant US authority could be an option to address identified instances of potential violations (i.e., not just for high-risk areas, but for specific transactions). VSDs for potential violations are looked upon favorably in M&A and can result in reduced penalties or none at all. A VSD could be required before closing, which is best to mitigate an acquiror’s risks, but could create transaction timing issues. If submitted after closing, the VSD does not create timing issues for the transaction but would result in the acquiror assuming the risk of any penalties. This option is often used in conjunction with indemnity and insurance tools – see next bullets.

– Special Indemnity Agreement – This is a negotiated line-item indemnity to resolve potential violations identified in diligence. A special indemnity agreement could address the risk of penalties arising from a post-closing VSD strategy or, depending on the relevant statute of limitations, provide cover for the acquiror in case an investigation is launched.

– Representations and Warranties Insurance (RWI) – RWI products would protect the acquiror when violations are discovered post-closing in violation of a representation and warranty. This insurance product can be costly and also imposes a level of pre-closing diligence obligations that, if issues are identified, could result in exclusions from the coverage.

To sum it up — the alert encourages buyers to be more proactive on this issue — both in due diligence and in transaction planning/drafting.

Check out our “National Security Considerations” Practice Area where we post related resources.

– Meredith Ervine