The general counsel is a crucial player in modern governance and business operations, especially in times of uncertainty such as these. The GC can help their companies to be more agile and more strategic when considering opportunities for market expansion, mergers or acquisitions.
And there are plenty such opportunities right now. The COVID-19 pandemic has hit businesses around the world particularly hard, with both government-enforced shutdowns and changing consumer behavior impacting revenues. The virus disrupted deal making, writes Marc Bain for Quartz, as it “roiled financial markets and left firms trying to stabilise their businesses”.
Once the situation settles and a way forward emerges from the murky depths of the pandemic, it’s likely those well-capitalised players and private equity groups will snap up companies left vulnerable by the crisis – and at bargain prices, too. British fast fashion retailer Boohoo has already noted it has its eye on struggling rivals.
Deal activity is likely to increase as the year progresses, and as M&A activity picks up again, it’s predicted that a number of themes will emerge:
- Buyers will become more assertive
- Some companies will emerge weaker, leading to forced sales to realise cash or allow for an exit
- The volume of opportunistic, stressed or distressed M&A opportunities will increase
- The record levels of capital held by private equity houses will need to be deployed, with it likely to be for bolt-on acquisitions to protect portfolio companies
- Smaller listed companies may want to go private as a way to reduce their regulatory burden; depressed share prices may take the choice out of their hands
As companies review their internal organisational structure, aiming to make things more lean and efficient in a period of uncertainty, there may also be an increase in divesting of non-core units and/or bringing production closer to home by acquiring local competitors. Plus, COVID-19 introduced an additional layer of complexity for global expansion: every government is handling the pandemic in different ways, but all are looking to protect local markets first and foremost.
The Role of the GC in Mergers and Acquisitions
With the markets in a state of flux, M&A activity becomes more risky – even if the target is struggling to keep up. It’s here that the general counsel plays a crucial role.
Traditionally, the GC has tended to be more reactive, only stepping up when called upon in a crisis or once the business strategy has been decided. Yet more and more GCs desire to play a more significant role in such decisions, including when M&A activities are on the table.
Gartner for Legal & Compliance research found that those GCs considered “personally effective” – that is, those who focus on performance, influence and impact, acting as more than the lead attorney – spent 48% more time on strategy and 43% more time on offering business guidance than non-effective GCs. They were also 50% better at identifying emerging risks and 78% more likely to make proactive legal investments, compared to 35% of all GCs – both important skills when looking at mergers and acquisitions.
“Today’s general counsel faces more complex corporate risks – with less clarity about what risks to take, who owns a particular risk and if the company should tackle it at the enterprise level or at the regional or jurisdiction level,” Gartner writes. “As GC, you are often the best positioned to ensure new risks have governance frameworks with clear owners and accountability. This doesn’t imply owning a particular risk, but it does suggest spearheading and ensuring efficient governance of emerging issues.”
Preparing for M&A Activity
And so the general counsel must ensure that – whether buying or selling – the organisation’s house is in order before M&A activity kicks off. Preparation is key to a successful M&A, helping to eliminate or minimise possible issues in a future deal.
The GC should lead this spring clean by doing due diligence now, not later, including:
- Checking all licenses are up to date
- Checking all taxation matters are compliant
- Conducting a comprehensive audit of all entities
- Checking all the books and records are up to date
- Creating a list of all debt, inventory, assets and liabilities
- Getting employee and benefit matters in order
- Ensuring insurance coverage is handled
A central source of truth for all entity data can make this preparation and audit process much more streamlined and straightforward; with modern entity governance processes in place, any interested parties can get a real-time view of the state of the entity in question. These centralised records can also help the GC to advise the board on potential areas of growth within the legal structure, such as a market with no presence, and on areas the organisation can consolidate to help drive that growth.
These are among the more finite details needing attention, but the general counsel needs to also be among the leads for the acquisition strategy and planning. They should lead on valuation analyses, negotiations, due diligence, contracts and closing the deal. In short, the GC is not a reactive player here; they have a proactive and crucial role in the M&A activity.
The Risks of Getting It Wrong
Without getting the house in order, organisations run the risk of the M&A deal going sour. McKinsey estimates that around 70% of mergers do not achieve their expected “revenue synergies”. Boards can get so carried away with the excitement of the deal that they forget about day-to-day operations needing attention.
There’s also the issue of integrating two businesses, with two different compliance processes and two different cultures. These issues are not something that can be addressed overnight, and need careful attention.
“More M&A deals fail because of unresolved cultural issues than anything else,” Annabel Jones, human resources director at ADP, told Risk Management Magazine. “Merging two businesses comes down to culture – it’s about bringing together two different groups of people. All the strategy, consolidation and efficiency gains you hope to achieve will only work if the people voluntarily and enthusiastically become one.”
But more than this, taking on another business means taking on its reputation, its legal history and its regulatory history. Without due diligence into the full background of the M&A target, organisations risk finding themselves at the mercy of the markets and the media later down the line for something they inherited.
This is why the general counsel needs to be among the leads on M&A activity. By getting the internal house in order through entity management software and a single source of truth, the legal and compliance department can help to minimise the risk of these deals, whether they’re the target or the buyer.
Through defining their executive role and championing good entity governance – complete with a central source of truth for all entity data – the general counsel can help their organisation to capitalise on the opportunities in the post-COVID markets, and keep an eye on safe and secure expansion.
Diligent’s entity management software helps to create a single source of truth for entity management, ensuring the right information gets to the right people at the right time and in the right format. This approach to entity governance can better position the general counsel to lead strategic M&A activity, and play that crucial proactive role in driving organisational growth.
A single source of truth is critical to any strategic growth initiative. See why in our white paper, “Driving Strategic Growth with a Centralized Corporate Record.”