The M&A landscape continues to see significant movement. Although 2020 has, not surprisingly, seen a drop in M&A values and volumes, the market still saw activity totaling $309.2 billion and covering some 2,634 deals in Q2 2020. Corporate mergers, acquisitions and divestitures raise a number of issues ' from differences in culture to governance and compliance challenges, to the obstacles inherent in reconciling divergent technologies. One area where they have a particular impact is entity management. An organization might go overnight from operating in a handful of jurisdictions to a myriad of local and national rules and regulations. You might suddenly have responsibilities in regions where you have no previous legislation experience and best practice know-how. Whether you are the target or the instigator of M&A activity, the due diligence involved will mean significant work before you sign the deal. The process will bring into sharp focus some of the entity management issues you may see post-acquisition; issues like data management, structure and governance. Ineffective entity management therefore has significant implications both before, during and after any M&A.
What is Entity Management?Defining entity management can be challenging. Legal entity management ' the processes involved in managing an organization's regulatory compliance, administrative maintenance, governance and record-keeping ' is complex, involving numerous departments, systems and responsibilities. It is this complexity that causes legal entity management to be a sticking point for many firms; keeping track of compliance matters across entities and geographies can be multi-faceted and difficult. Get entity management right, and not only do you reduce the risk of regulatory breaches and associated problems; you reduce the need for remedial action, the risk of fines, the negative reputational and commercial implications ' and you can enjoy real return on investment. Best practice entity management can deliver cost savings via ease of gathering, filing and publishing the correct compliance data the first time around. Reducing the time spent to identify and fix filing mistakes avoiding fines and penalties arising from missed deadlines and incorrect filings will save time and money in the long run. In tandem, this organization-wide efficiency enables your people to focus on creating business value rather than fixing compliance mistakes not just in one jurisdiction but potentially hundreds. In an M&A situation, all these risks are amplified. The stakes are higher; the consequences of poor entity management are greater, and the potential gains larger.
What Entity Management Challenges Does a Merger Create?The issues created by potential M&A activity are many and varied:
Due DiligenceEntity management is in the spotlight long before any M&A deal concludes. Adequate due diligence is a pre-requisite, but can be thrown off-course by a lack of information. For pre-M&A due diligence, organizations need all charter documents, bylaws, minutes, consents and documents approving any stock and options grants. They need a list of all jurisdictions in which a company is doing business and proof of qualification where needed. They require a list of owners/shareholders, officers, and directors (including past officers and directors) and company organizational structures/charts. No small task. The inability to lay your hands on information required for due diligence can scupper a deal before it's even off the ground. An organization receptive to M&A approaches should make themselves 'transaction ready,' enabling a potential acquirer to understand what they're buying. In a demerger scenario, high-quality data makes it easier to see which entities should be divested or retained.
Entity Rationalization/ReorganizationOnce the deal's completed, the merged organization typically gets on with some house-keeping. Some of today's corporate behemoths are the product of years of M&A activity ' which without rationalization would create complex, unwieldy structures that defy best efforts at building consistent systems, processes and cultures. Rationalization and reorganization therefore tends to follow any merger or acquisition. This can lead to redundancies ' a significant process in itself ' along with all other necessary steps in creating a simplified legal structure. A well-organized structure streamlines operations, allowing functions to focus on priority areas and leverage potential efficiencies. While entity reduction has clear benefits, the process of moving from one structure to another is a major piece of work that poses its own challenges.
Corporate Governance and ComplianceThe corporate governance challenges created by M&A are, not surprisingly, significant. During the due diligence process, corporate governance and compliance processes, systems and records provide essential information for the buyer. Once the merger has taken place, the challenges of integrating different compliance and governance approaches begins. Each firm will have its own compliance technology and systems. You'll have to decide which one of these to continue with; a process that will involve auditing the current options and deciding which one best meets the needs of the new business. As noted above, M&A may result in your organization operating in new territories. Fragmented approaches to regulatory compliance make it difficult to get a clear picture of your risk in different geographies, increasing the chances of errors or omissions: difficulties in retaining control over governance in different jurisdictions are identified as a sign of suboptimal entity management. You may have inherited outdated manual compliance processes that need to be brought up to date. Bringing all your new entities into one efficient compliance/governance process takes time, but needs to be a priority.
Looking at the PositivesOf course, not all the implications for entity management of mergers are negative. Preparing your organization for M&A can bring benefits beyond the ease of due diligence or the ability for an organization to be easily absorbed into another. By being prepared, you can reap these benefits, and lessen the impact of the potential challenges. Better entity management not only smooths your M&A journey, but can:
- Allow your Legal team to better support other business functions. Improving your entity management information gives your Legal department the data they need to partner with Tax, to drive corporate structure efficiencies. It enables Legal to support the Finance team to benchmark organizational practices. A holistic approach expedited by better entity management has benefits across the entire business.
- Improved reporting to the Board, allowing board members to make more informed decisions.
- As a result, the board can give assurance to Compliance and Governance teams that business decisions are taken based on comprehensive facts, therefore improving risk management.