Private equity firms should conduct robust due diligence on target portfolio companies to avoid inheriting liability for law-breaking prior to their acquisition, according to law firm Foley & Lardner.
Firms are advised to check multinational target companies have been complying with international antitrust, export controls, anti-money laundering and anti-corruption laws. These are all enforcement priorities for the US government, the firm said in a client note.
Companies that manufacture, sell or export goods such as military goods, or technology that can be used commercially and by the military, can create a compliance concern as well as “heightened opportunities to commit legal violations of the strict export control regulations.”
“Inquiry should always be made as to the presence of controlled goods or technical data at the target, with a tailored follow-up inquiry should initial results be positive,” the law firm said.
It added due diligence should be customized to the overall risk profile and the particular risks of a given transaction, avoiding a one-size-fits-all approach. This is especially true of companies that operate in countries that are high on Transparency International’s perceived corruption index.
“Heightened due diligence generally is appropriate when the target has significant ties to such countries as China, India, Russia, much of Latin America, the Middle East and Africa, as well as countries in Europe with a reputation for diminished respect for the law (Italy, Greece and so forth),” the firm said.
Potential changes to US trade policy are also a risk factor for firms that own companies that operate internationally. If they trade with, or are based in, countries under a spotlight such as China, Mexico or countries where there is a trade deficit with the US, international trade risk should be factored in.
Private equity firms should identify whether the target’s business relies on the operation of free trade agreements and whether it could be subject to supply chain disruption if President Trump’s international trade campaign announcements are implemented, the firm said.
It is also important that acquiring firms evaluate whether sales to foreign companies merit a Committee on Foreign Investment in the United States review. Sales of sensitive technology, product lines, technical data or other sensitive interests to a foreign company may prompt national or economic security concerns.