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This Skadden memo discusses the increasing level of corporate political engagement and the increasingly complex legal environment surrounding corporate political activities. It points out that potential buyers must ensure that their due diligence investigation of a prospective target includes an assessment of the target’s political activities and the risks associated with them.

This excerpt provides an overview of some of the risks associated with corporate political activities and the laws that may be implicated by them:

With increased political engagement comes increased risk. A target’s political law missteps can result in reduced profits, costly investigations, and, in some cases, a material impact on valuation. Higher-risk companies include those that are, or may soon be, highly regulated and those with significant government contracts, large government relations or public policy operations, or politically active management or owners.

Unlike antitrust, tax, and environmental diligence, however, political law vetting is not yet standard in M&A practice, creating blind spots that can prove costly after closing. The relevant bodies of political law span several areas, including anti-corruption, pay-to-play, campaign finance, lobbying, gifts and entertainment, government conflict of interest, and government procurement.

The legal consequences for a violation of these laws can, in some cases, be severe. Under strict liability pay-to-play laws, a political contribution by a company or a covered director or employee — or even their spouse or child — can trigger an automatic ban on government contracts in that jurisdiction, in some cases for several years.

The memo goes on to provide guidance on how to vet political risks involved in a target’s business and how to structure a transaction to mitigate those risks if they potentially significant.

– John Jenkins