ABSTRACT
Corporate boards have several reasons to pay particular attention to compliance oversight in M&A targets. First, companies are liable for compliance failures in their acquisition targets, exposing the company to potentially astronomical costs in investigations, litigation, and criminal liability, plus reputational harm, loss of sales and shareholder value. Second, since issuing sentencing guidelines for organizations in the early 1990s, the DOJ has recognized compliance and reporting systems as a means for corporations to reduce culpability when misconduct is unearthed – guidelines which specify M&A due diligence as part of the company’s compliance effort. On top of this, directors have fiduciary duties generally, and specifically in the M&A context. Further, the board has the duty of oversight which, for Delaware corporations, was enhanced under Caremark to include an obligation to implement and maintain effective compliance systems and to take action in the face of red flags. Yet, with notable regularity, M&A deals go astray after misconduct is discovered in an acquisition target after the deal is done. Subsequent lawsuits, penalties, or settlements, often reach into the hundreds of millions of dollars. One reason such instances continue to arise may be that the penalties on the corporation are not sufficient to influence the directors to take their oversight role in this context seriously. Another may be that the standard of review under Caremark has been without sufficient bite. As a result, the oversight obligation it imposes has been ineffectual in motivating boards to truly engage in M&A due diligence, as Caremark claims have historically led to dismissal after dismissal. But all that may be changing, after five Caremark cases in Delaware have survived the motion to dismiss in the last two years, breathing new life into the director’s obligation to ensure compliance is given its due in M&A due diligence.
Warczak, Patrick, Giving Compliance its Due: Caremark Duties in the Context of Mergers and Acquisitions (November 24, 2021).
First posted 2021-12-11 15:40:37
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