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Litigation Risks in M&A and Regulatory Compliance

Litigation Risks in M&A and Regulatory Compliance

May 8, 2024

Litigation Risks in M&A and Regulatory Compliance

According to an article by Womble, Bond, Dickinson, litigation risks in M&A transactions and regulatory compliance activities are seldom isolated events. By analyzing litigation trends and data, the article says that companies and their legal departments can anticipate and circumvent many potential risks. Proactive risk assessment, conducted at the outset rather than as an afterthought, is crucial to maximizing its benefits.

In M&A transactions, assessing litigation risks during due diligence stages helps uncover legal liabilities that could jeopardize the transaction or pose financial and reputational risks post-transaction. Recent slowdowns in global M&A activity, attributed to various factors including geopolitical instability, have heightened the likelihood of disputes, particularly regarding material adverse change clauses and post-closing adjustments.

Effective due diligence entails reviewing the target company’s legal, financial, and compliance records, including ongoing litigation and regulatory compliance history. Once risks are identified, proactive measures such as requiring issue resolution before closing or negotiating indemnities become paramount.

In regulatory compliance matters, understanding litigation perspectives aids in navigating regulatory complexities. While initial lawsuits may be unavoidable, proactive measures can prevent future litigation by addressing compliance issues promptly. Staying abreast of regulatory changes is imperative, as compliance and litigation issues often share common roots.

Precise drafting of contracts is essential to mitigate risks in M&A and regulatory compliance and prevent disputes. Clear provisions regarding price adjustments, indemnities, and representations minimize ambiguity and ensure alignment of parties’ rights and obligations. Detailed indemnification clauses allocate post-closing liabilities effectively.

Understanding dispute resolution mechanisms is integral to structuring M&A agreements. Provisions for mediation or arbitration can offer efficient alternatives to litigation. Well-defined pre- and post-closing covenants clarify actions required before and after transaction completion, reducing conflicts and potential litigation.

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