Acquiring a company also means assuming its risks, in legal, financial and reputational terms. This means that legal legacy issues and questionable business practices are also transferred.

Legal due diligence is a proven component of M&A transactions and is often supplemented in practice by tax due diligence.

But what does compliance due diligence have to do with transactions and why is it suddenly so important?

Compliance encompasses adherence to legal regulations, internal company guidelines and ethical standards.

Compliance due diligence (“CDD”) is therefore a structured review process that serves to identify and assess compliance risks at the target company in the context of a transaction and to derive appropriate measures. For a long time, compliance due diligence was considered an optional element (“nice to have”). In the meantime, however, this image has changed significantly: In view of stricter sanctions regimes, legal requirements such as the Supply Chain Act and increasing ESG requirements, CDD has become a regulatory must.

Anyone preparing M&A transactions responsibly today can therefore no longer rely exclusively on traditional legal due diligence. CDD focuses on those areas that are often neglected in traditional legal due diligence - in particular topics such as anti-corruption, money laundering prevention, antitrust and competition law, sanctions, export control, data protection law and more.

It is checked whether the target company has violated compliance-relevant regulations, whether control mechanisms exist and whether they are actually implemented. This can be particularly crucial for cross-border transactions (especially with regard to the USA) and for deals in high-risk countries or high-risk sectors such as the pharmaceutical industry.

Why timely action is crucial:

1. Early recognition: Red flag reports quickly uncover critical issues and help to decide whether to continue or abandon
2. Negotiating power: If you know deficits, you can negotiate price or guarantees with confidence; and
3. A documented CDD forms the basis for entrepreneurial decisions in line with the business judgment rule and can protect managing directors from personal liability.

The findings from the CDD enable targeted contractual hedging.

Typical measures include

1. Guarantees, indemnification clauses;
2. escrow models;
3. rights of withdrawal in the event of critical findings; and
4. purchase price adjustments in the event of structural risk.

Vendor CDD provides a clear negotiating advantage for sellers, as it is designed to identify and eliminate potential weaknesses within the company in good time and prepare the company for an external audit in the best possible way. Active preparation prevents potential purchase price discounts.

Anyone who wants to successfully structure transactions in an increasingly regulated environment can no longer avoid careful compliance due diligence.