The terms mergers and acquisitions are often used interchangeably, however, they have slightly different meanings.

Legally speaking, a merger requires two companies to consolidate into a new entity with a new ownership and management structure (ostensibly with members of each firm). The more common distinction to differentiating a deal is whether the purchase is friendly (merger) or hostile (acquisition). In an acquisition, a new company does not emerge. Instead, the smaller company is often consumed and ceases to exist, with its assets becoming part of the larger company.

While these deals can bring growth opportunities, expand market share, or diversify portfolios, they also come with substantial legal and regulatory requirements. Compliance plays a key role in ensuring that both parties adhere to relevant laws and regulations throughout the entire process.

In any M&A, non-compliance can lead to penalties, litigation, or even the collapse of the deal. Understanding how to identify and handle regulatory compliance risks is essential for any company involved in M&A. Therefore, the key types of regulatory compliance risks will be broken down, along with strategies to effectively manage them, in order to improve M&A practices.

Three Main Types of Regulatory Compliance Risks

Regulatory compliance risks in M&A can be categorized into three main buckets: substantive risk, procedural risk, and other risks. While each category is distinct, they are interrelated, and all require attention throughout the deal process.

1. Substantive Risk

Substantive risk involves the antitrust issues that arise from a transaction. These risks are primarily about whether the merger or acquisition will harm competition in the market. For example, are the companies direct competitors? If so, the deal could significantly reduce competition, leading to higher prices or less innovation. Here are key points to consider:

Horizontal Issues: if the merging companies compete in the same market, assessing market concentration is essential. A lower number of competitors increases the likelihood of regulatory scrutiny.

Vertical Issues: Even if the companies don’t compete directly, if one is a supplier or distributor for the other, the deal could still impact competition by limiting access for other companies in the market.

The goal in managing substantive risk is to evaluate whether the merger could lead to monopolistic behavior, price increases, or reduced competition. To mitigate this, companies should engage antitrust counsel early to assess the likelihood of regulatory challenges.

2. Procedural Risk

Procedural risk refers to the regulatory filings required to complete a transaction. In the U.S., for example, deals above a certain threshold must be reported under the Hart-Scott-Rodino (HSR) Act to the Federal Trade Commission (FTC) and Department of Justice (DOJ). Similar filing regimes exist in countries around the world, including the European Union, Canada, China, and Brazil.

Failure to comply with filing requirements or mismanaging the timing of regulatory approval can delay or even prevent the deal from closing. Managing procedural risk involves:

Understanding the filing requirements in all relevant jurisdictions.

Ensuring timely submissions of all required documents.

Factoring potential delays into the deal timeline, especially when a second request for additional information from regulators is expected.

3. Other Risks

In addition to substantive and procedural risks, there are other compliance risks to consider:

/Gun Jumping: This occurs when the buyer starts exercising control over the target company before receiving regulatory clearance. Gun jumping can lead to hefty fines, as seen in high-profile cases in the U.S. and Europe.

/Sensitive Information: During the pre-closing period, companies must avoid sharing commercially sensitive information, such as pricing strategies or customer lists, to prevent antitrust violations.

Best Practices for Managing Regulatory Compliance Risks

Now that the types of risks have been outlined, practical strategies can help manage them effectively during an M&A process: 

1. Early Engagement with Antitrust Counsel

Engaging with antitrust counsel from the moment a potential deal is considered essential. They can assess substantive risks early, especially if there are horizontal overlaps or vertical relationships between the companies. Identifying potential antitrust issues upfront allows for more informed decisions on whether to pursue the deal or adjust its structure to mitigate risks.

2. Proactive Regulatory Filings

For deals that trigger HSR or similar filing requirements, it’s crucial to manage the filing process proactively. Consider submitting filings based on a Letter of Intent (LOI) or Memorandum of Understanding (MOU), even before the final agreement is signed. This can help reduce delays and keep the deal moving forward.

For complex international deals, engaging with regulatory agencies early helps present the narrative and explain why the deal won’t harm competition. The earlier the engagement, the better the ability to  manage the agencies’ expectations and avoid unexpected obstacles.

3. Gun Jumping Prevention

Avoiding gun jumping is fundamental. This means ensuring that the buyer doesn’t assume control of the target company’s operations before the deal is cleared. Keeping sensitive information separate, using clean teams to review confidential data, and avoiding any actions that could be interpreted as exercising control before the official closing are essential for maintaining compliance and protecting the integrity of the deal.

4. Compliance Due Diligence

Due diligence is essential to ensure that the target company isn’t involved in illegal activities that could create compliance risks post-merger. This includes looking for any evidence of cartel behavior, corruption, or ongoing government investigations. A thorough compliance review helps  avoid inheriting regulatory liabilities.

5. Detailed Integration Planning

Planning for integration is critical, but it must be done carefully to avoid gun jumping risks.  preparing for integration is possible, but implementing those plans can only occur after the deal closes. This involves setting up “clean rooms” where sensitive data can be reviewed without influencing day-to-day business operations. Additionally, having a detailed integration plan ready for Day 1 post-closing is essential for a smooth transition.