In recent weeks, the UK's Information Commissioner's Office (ICO) imposed major fines on several prominent companies for data security hacking incidents that resulted in violations of the EU's General Data Protection Regulation (GDPR).
In one of the cases, the buyer was held liable despite the data security incident reportedly taking place prior to an M&A transaction.
This case prompted M&A lawyers to carefully consider the future ramifications of a data protection law violation on M&A transactions and the parties to such transactions.
Extraterritorial impact of GDPR
At the outset, it is important to note that GDPR in certain circumstances may apply extraterritorially outside the EU. For example, it may apply to firms established outside the EU but have processing activities related to (1) the offering of goods or services to data subjects who are EU residents, or (2) the monitoring of the behaviour of such data subjects which takes place in the EU. Businesses in Thailand may be subject to GDPR if they market products or services to EU residents or obtain data in connection with EU residents. For this purpose, the use of electronic channels such as e-booking platforms (commonly used by hotel and airline businesses in Thailand) and e-commerce platforms which are accessible by EU residents may be caught by GDPR. The penalties provided under GDPR are severe and can be up to 4% of the violator's total worldwide annual turnover of the preceding financial year or EUR 20 million, whichever is greater.
Therefore, in addition to the issues under Thailand data protection laws (see below), both buyers and sellers in an M&A transaction should not forget additional potential liabilities under GDPR.
Thailand data protection law position
Thailand has recently introduced the 2019 Personal Data Protection Act, which will become fully effective on 28 May 2020. This Act will apply to the collection, use or disclosure of personal data by a data controller or data processor based in Thailand, irrespective of whether the activity is conducted in the country or elsewhere. It will also apply where a foreign company collects, uses or discloses the personal data of a data subject who resides in Thailand, including when the personal data of such data subject is processed in relation to the offering of goods or services to such data subject.
The Act significantly upgrades personal data protection in Thailand. Among other requirements, the Act:
- provides that any collection, use or disclosure of personal data will be subject to the consent of the data subject, which may be obtained in writing or electronically;
- requires that a statement requesting consent must be provided clearly, separately, using clear and plain language, containing the purposes of the collection, use or disclosure and is subject to withdrawal at any time without detriment; and
- requires an operator to provide proper security measures for the personal data to prevent unlawful loss, use, alteration, modification or disclosure of, or access to, the data.
Violations under the Act may attract both civil and criminal liability. A data subject who is wronged may receive damages in a civil proceeding. Criminal and administrative fines may range from THB 500,000 to THB 5 million. Additionally, a jail term of six months to one year may also be imposed.
A business that is a heavy user of personal data (e.g. a supplier of goods or services to individual customers, a hotel operator, an airline company, a social media platform operator, an insurance firm, a financial institution, a hospital and a medical establishment) should therefore prepare itself for much stricter data protection measures.
What do these developments in data protection laws mean for M&A transactions?
Both the buyer and the seller in an M&A transaction should exercise extra care when managing the risks associated with the target business. In particular, they should assess: (1) whether the data can be transferred at all as part of the M&A transaction; and (2) whether the target has complied with the applicable data protection laws and address any risks of non-compliance between themselves. Both of these are, in our data-driven world, key to pricing as well as risk decisions in an M&A transaction.
While the biggest risks often arise in asset sales (as there will be a change in terms of the data "controller"), there are still some important safeguards that both sellers and buyers should take even in share sales.
While many data protection laws in other jurisdictions (e.g. Singapore) contain helpful exemptions for M&A transactions, this is not the case in all jurisdictions. Further, such exemptions usually only cover due diligence processes, and so do not cover historic liabilities for data security incidents or use of data post-transaction.
In light of the above, buyers (particularly those whose business handles a significant amount of personal data) should conduct not only conventional legal and financial due diligence but also:
- an assessment as to whether the data can be shared during the initial due diligence procedure (whether via data subject consent or an exemption applying, depending on the relevant laws at play) and, more importantly, in the case of an asset sale whether the target has the consent of the data subjects to transfer the data to the buyer;
- an assessment as to what purposes have been notified to, and consented to by, data subjects, and whether these are sufficient for the buyer's needs and ambitions going forward and, if not, the practicality as to whether fresh consent must, and can, be obtained from the data subjects; and
- a review of operational, IT and cyber security to ascertain whether the target is equipped with proper operational, IT and cyber security policies and procedures. With an increased need for such a service, a number of consultants and specialized IT firms have developed such a review service as part of their product offerings.
Warranties and Indemnities
As noted above, violation of data protection law may result in significant fines so the buyer should therefore attempt to require the seller to give representations and warranties specifically confirming, inter alia, that the target business:
- has never had any data security breach incidents or engaged (and does not have the risk that it will engage) in a dispute over a data protection offence;
- is equipped with adequate IT and cyber security mechanisms;
- is properly and regularly audited for its IT and cyber security compliance;
- has in place a proper data protection officer (if required) and data protection policy; and
- fully complies with data protection law.
Depending on the bargaining power of the buyer, in reality, a prudent seller would be quite reluctant to give all such representations and warranties to the buyer.
In addition, if commercially possible, the buyer should require indemnification by the seller for any breach of these representations and warranties, as well as for any failure to comply with data protection law as may have occurred prior to the acquisition.
On the seller's side, whilst in principle any liability that may have been created when the seller exercises the control of the target should be assumed by the seller, the sellers should also clearly define the limit of their liability, whether in terms of amount, duration and/or nature of damages (say, excluding the liability for opportunity loss or reputational damage).
Cyber-Insurance and Warranty and Indemnity Insurance
The buyer should also check the sufficiency of the target’s insurance coverage to protect the business should there be any third party cyber-attacks, including such insurance’s coverage and exclusions. For example, a cyber-insurance enables a policy holder company to alleviate risks and be compensated (which may include, business losses, investigation and lawsuit costs) in relation to cyber-related security breaches (including a data breach and contamination of data).
The seller and/or the buyer may also explore obtaining a warranty and indemnity insurance policy that specifically covers the risk of loss in connection with unknown and unintentional data protection offences as a way to reduce their potential liability (the premium on such a policy may also be shared between the parties). A variety of insurance products for this purpose can be further explored in the regional market.