The Red Flag Group®

Avoiding successor liability

Avoiding successor liability

Companies are constantly looking to consolidate their positions or expand into new markets mainly through mergers, acquisitions or joint ventures. Whatever the reason may be, understanding the background of the target prior to transacting plays a crucial role in minimising exposure to potential liabilities and risk.

Although laws relating to successor liability may differ from one jurisdiction to the other, there are numerous incidents where companies have been found liable for unknowingly failing to assume liabilities associated with a target because the seller deliberately concealed vital information required to make informed business decisions or no thorough due diligence performed.

The worst mistake a buyer can make is failing to identify potential liabilities and risks associated with their target. Buyers have an obligation and the right to know their target inside out and be able to identify any potential areas of concern. This same principle applies when consumers are buying groceries in a supermarket. They normally check the contents of the product and may want to know how the product was produced before buying. Thus, whether you are merging or acquiring assets of a prospective target, it is important to consider certain crucial steps to ensure that you don’t take over the liabilities and risks that can damage your reputation, affect your business or even get you fined for violating legislation such as the FCPA if it involves corruption and bribery.

The importance of conducting thorough due diligence including a deep dive background check prior to a merger or an acquisition enables the buyer to identify different areas of concern and remediate or stop the deal if the issues can’t be remediated.

Things to consider

Knowingly or unknowingly, failure to assume your target’s responsibility shouldn’t be an option. It can lead you into legal, business, financial, integrity and reputational liabilities. Before merging or acquiring a target, consider the following to minimise associated risks and avoid successor liability:

  • perform thorough due diligence on the target and the seller, if any, to understand why they are selling the business, and whether there are any obscure liabilities they are trying to avoid.
  • review all information related to the target’s ownership, financial transactions, books and records, compliance framework, client data, environmental, social and governance policies and third party contracts (especially governmental contracts). This is to ensure that target is not indirectly state-owned, linked to Politically Exposed Persons or engaged in questionable governmental dealings – a risky area for corruption and bribery.
  • check the jurisdictions and industries the target is or was doing business at as certain countries and industries are traditionally high risk. The seller may be trying to push over liabilities to you because their operations in a certain country/industry was involved in corrupt conduct.
  • set up a subsidiary to acquire the target to minimise direct liability on the parent company. Ensure that you are indemnified against potential liability by the seller unless you legally agree to assume such liabilities.
  • the merger or an acquisition is done and must conform to international and local competition laws. Relevant competition authorities must approve the transaction in accordance to applicable laws and regulations. It wouldn’t make business sense to acquire an entity or be stopped from merging because of monopolistic competition.
  • protect your investment by giving your newly merged or acquired organisation a trusted credential to prove your commitment to corporate ethical behavior by certifying against an internationally recognised ISO 37001 Anti-Bribery and Anti-Corruption standard that harmonises global anti bribery best practices.

The baseline to understanding liabilities associated with a target is through proper, thorough deep dive due diligence. The due diligence you perform on the target must correspond with your intended investment. The more you plan to invest, the higher due diligence we recommend you perform. Reach out today to see how The Red Flag Group can help you meet your due diligence needs and avoid successor liability.