Houston associate Céline Gerson authored an article for the July 13 edition of the Houston Business Journal titled, "Marriages Gone Bad: A Close-Up Look at Mergers and Acquisitions."
According to Gerson: "Mergers and acquisitions are generally consummated in the hopes of realizing an economic gain. The buyer's strategy to obtain potential revenue enhancement, cost reductions, lower cost of capital, or strategic benefits may be shattered a few years or even months after the completion of the transaction when it discovers that it purchased significant liability. All too often, one critical factor is overlooked: The presence of a complex array of federal laws that regulate international business transactions—the so-called U.S. export controls."
Gerson explains the "basics" of U.S. export controls—their purpose, on what criteria they are based, which government agencies are involved in their enforcement and the enforcement mechanisms.
According to Gerson, "If the target company engages in any international operations, the traditional due diligence template used in mergers and acquisitions is often not sufficient, and the due diligence should include a review of the target company's potential violations of export control laws." Gerson advises that there are five key components to ensure a successful marriage:
- Understand and evaluate the target company's policies, procedures and internal controls relating to compliance with U.S. export controls.
- Review sample export control records (shipping documentation and export licenses).
- Review details of international sales transactions.
- Identify gaps and potential risks and assess any potential fines and penalties.
- Obtain appropriate representations and warranties as to the target's compliance and include indemnification by the seller in the event of breach.
Gerson concludes: "Inheriting export control violations will adversely affect the valuation of a target company and revenue projections going forward. Conducting thorough due diligence, including investigating any potential U.S. export control violations, will ensure that a company knows the facts about a partner before tying the knot."