Inside Straight: Compliance Due Diligence

By Mark Herrmann

It takes a big man to ignore a small issue.

A lawyer who lacks self-confidence feels compelled to run down every issue, make every argument, and depose every witness. After all, if you choose to make an educated guess about the importance of a tangential issue, or whether to omit a plausible (but likely losing) argument from a brief, or whether to incur the cost of deposing a just-barely-relevant witness, all may be lost. You might lose the case, and the recriminations would never stop. Better to leave no stone unturned than to leave yourself at risk of being second-guessed.

That’s one reason to hire lawyers with a little self-confidence. They’re willing to take intelligent risks where it makes sense to do so.

Which brings us to the topic of today’s post: Compliance due diligence.

If your company’s considering an acquisition, you can simply outsource the entire compliance due diligence process. Hire Big Firm, ask it to handle due diligence, and wait for the results. No muss, no fuss.

And, at the end of the day, no deal.

No deal, but lots of legal expense.


Because Big Firm may not be the right choice to do compliance due diligence, and it almost surely isn’t the right choice to do the job in an unfettered way. The big kahuna partner who’s responsible for your client relationship isn’t likely to get his or her hands dirty with a mere due diligence project, so the project gets punted to a more junior person. Even that junior person doesn’t want to lead the project, so the project gets punted to the senior-most person unable to avoid it. That person may well lack self-confidence.

The self-doubting supervisor decides that there’s only one way to undertake due diligence: Assume that every possible issue confronting the target company is potentially a deal-breaker; investigate each issue to the ends of the earth to eliminate any possible problems. That’s what makes the due diligence process unbearably expensive: No end is too loose to be ignored, so the firm ties them all up.

When all of the loose ends can’t be nicely tidied, report back to the client that the acquisition is just too risky: The target company is filled with compliance questions that can’t be answered and landmines that might explode. Thus, outsourcing due diligence to a large firm often causes your client to incur huge cost and be told that a deal should not be completed.

If you don’t want to do a deal, then hire the biggest firm you can find, put no restraints on the project, and ask the firm to handle due diligence.

If, on the other hand, you’re actually interested in doing a transaction, then put someone at the helm who’s sufficiently confident to ignore small issues. That might be you, or it might be someone else in your law department, or it might be an outside adviser with some gumption.

The person at the helm can then exercise real judgment. Certain areas are unlikely to contain significant compliance issues, so you can devote fewer resources to investigating those areas. Some perceived risks are insignificant or unlikely to materialize, so you need not scrub them to a fare-thee-well. And some risks are real and potentially problematic, so you’ll have to exercise judgment: Is it worth doing the transaction despite the compliance risk, or should your client tank the deal?

But the answer to that question is not always, “Tank the deal.” That’s the conservative advice, and it’s the advice that someone lacking self-confidence may give, but it’s not always right. Life involves risk.

So how do you handle compliance due diligence? Narrow the issues before you ask Big Firm (or any firm) to help. Focus Big Firm’s investigation on the relatively few major issues that actually require scrubbing. And talk to your outside counsel before anyone makes a final recommendation to management, so that you can assess risks intelligently and make a self-confident assessment whether to proceed.

Source: abovethelaw


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