Insight

Caveat Sanctions and Export Controls

Increasingly strict global sanctions and export-control regulations add a new layer of potential peril to M&A deals. A guide to expanding due diligence to ensure that malfeasance, whether intentional or accidental, doesn’t end up scuttling the agreement.

School of fish attack shark
CB

Carsten Bormann and Stephan Müller

September 29, 2022 04:30 PM

Comprehensive sanctions packages and constantly changing export-control requirements to enforce national and international foreign and security policy objectives demand from companies a new, sturdier edifice of compliance efforts. At the same time, investors in mergers-and-acquisitions transactions need to broaden their due diligence to include a check of the target company’s foreign-trade compliance and ensure that any risks are appropriately distributed and reflected in the purchase agreement.

Risk Factor Sanctions and Export Control

The sanctions imposed on Russia by the European Union and Western allies are some of the most comprehensive ever levied on a single state. All the same, global geopolitical tensions had been increasing even before Vladimir Putin’s invasion of Ukraine. In this environment, sanctions, the control of exports of critical technologies and screening of foreign investments have become key tools for governments to enforce their security interests. In this context, compliance with legal requirements poses considerable challenges for companies and has become a central component of risk assessment for M&A investors.

European companies must comply with legal requirements at various levels: export controls and sanctions at the European and national levels; American regulations with extraterritorial impact; and political efforts, both Europe-wide and national, that could prohibit adherence to certain sanctions.

The regulations are manifold: sanctions and embargoes against certain states and individuals, export and import restrictions, and licensing requirements for certain products and services, among others. Acts that violate these restrictions are null and void under civil law and, if committed negligently or intentionally, generally constitute an administrative or even a criminal offense. The risks for investors are considerable, as they face severe fines and serious economic consequences if, for example, they are denied access to markets in whole or in part. Due diligence is therefore critical.

Generally speaking, risks exist for an investor if, at the time of the acquisition, there has already been a sufficiently concrete breach of duty by the target company. In a share deal scenario, this means that while the target company remains liable for its past legal violations, the acquirer obtains the shares “infected” with the liability risk. Possible liability risks of the target company that may transfer to the acquirer in a share deal include liability for fines, claims for damages and liability from breaches of contract—e.g., for terminating contracts in violation of the EU Blocking Regulation or the regulatory regime prohibiting EU businesses from complying with certain extraterritorial US sanctions targeting Iran and Cuba. At the same time, continuation of the target company’s business without adequate trade compliance also poses a significant risk.

For example, while German authorities are, within their jurisdiction, generally obliged to investigate and prosecute any violation of applicable sanctions and export-control restrictions, the number of cases in which noncompliance has triggered investigations and the imposition of fines or criminal penalties has, until recently, been rather limited. However, in light of the poor enforcement of EU sanctions by national authorities and the European Commission’s pressure on member states to ensure effective prosecution of sanctions violations, the German Parliament recently enacted a first package of the Sanctions Enforcement Act (Sanktionsdurchsetzungsgesetz), which contains, inter alia, new investigative measures for competent authorities. The federal government expects that all these measures will, in the near future, increase the number of official investigations and prosecution of sanctions violations.

Consequences for M&A Transactions

Considering the complexity and dynamics of legal requirements, the question is therefore not merely whether companies have committed any violations at all. Instead, investors must determine whether potential breaches are substantial and whether target companies have implemented sufficiently capable compliance mechanisms to prevent such infringements going forward.

If compliance violations come to light during due diligence, the acquirer is regularly legally obligated (often under the company’s own internal compliance regime) to ensure that the violations are remedied before assuming responsibility for the target company’s business operations. For instance, the acquirer could obligate the target to stop exporting certain products or to terminate business relationships with certain customers. If compliance systems are inadequate, improvements must be made in the near term.

Risks exist for an investor if, at the time of the acquisition, there has already been a sufficiently concrete breach of duty by the target company."

In addition, provisions can be included in the purchase agreement to appropriately distribute risk. A purchase-price adjustment clause allows the acquirer to change the price at closing to reflect both liabilities from compliance violations and investments in compliance improvement.

If the purchase agreement contains a compliance guarantee, violations can be agreed to be a condition precedent and the buyer granted the right to refuse to conclude the transaction should a violation occur. This measure can be highly effective at ensuring the target’s compliance by the time the deal concludes.

Through a comprehensive guarantee, compliance with international trade regulations can also be secured. However, sellers will routinely attempt to limit the guarantee “to the best of their knowledge and belief” in order to limit damage claims.

Finally, the parties can agree that the seller will indemnify the buyer against certain compliance violations. This is especially relevant in matters that have a significant impact on a company’s value and for which a final assessment is not possible at the time the purchase agreement is completed.

Conclusion

In light of the rapidly evolving legal framework for foreign trade, investors need to broaden the scope of their due diligence to analyze a target’s compliance measures comprehensively. M&A buyers must also ensure that potential risks are adequately identified and reflected in the purchase agreement.

Stephan Müller is a lawyer at Oppenhoff and specializes in export control law, sanctions and compliance with a focus on the areas of anti-corruption, money laundering and internal investigations. His advice is particularly sought after in crisis situations. He has special experience in developing and implementing compliance structures. He also advises his clients in permission proceedings or before the administrative courts.

Dr. Carsten Bormann is a lawyer at Oppenhoff and advises and represents national and international clients on all questions concerning public/regulatory law and foreign trade. His work includes, in particular, advice to international companies in the context of foreign direct investment screenings. Further areas of his expertise are export control and sanctions law, with an additional focus on the development and implementation of compliance structures.

Headline Image: ISTOCK/Marrio31

Related Articles

ESG and Stakeholder Capitalism as Tools for Energy Transition


by Javier Cremades

The recent rise of “stakeholder capitalism” shows the way forward to solving today’s energy crisis and working toward a carbon-free future. Are companies and governments up to the challenge?

Trees fill two silhouettes shaking hands

Navigating Rough Waters


by Roberto Ovalle and Sergio Díez

Chile has a solid foundation to welcome and protect foreign investment even in turbulent times. Its strong network of international treaties helps provide stability beyond the political contingency.

Boat weathers rough waters in bottle

A New Spin on Continuing Legal Education


by Sara Collin

Attorney Humira Noorestani is launching a program for continuing legal education, one that she’s dubbed the “Netflix of CLE,” allowing lawyers in the U.S. to explore legal knowledge from prominent lawyers around the world.

Hands emerging from computer and cellphone screens

South Florida’s Legal Renaissance


by Gregory Sirico

What was once only thought of as a destination for vacation may now be the top legal market in the country, attracting talent from around the world.

Blue and orange block sections with gavels and busts

Cyber Coverage Pitfalls


by Robert W. Wilkins

Institutional data breaches are, unfortunately, more common (and more costly) than ever. Cybersecurity insurance can help—but is your firm’s policy really as ironclad as you think?

Digital lock shatters into pieces

Thirteen Years of Excellence


by Best Lawyers

For the 13th consecutive year, “Best Law Firms” has awarded the most elite and talented law firms across the country through a thorough and trusted data review process.

Red, white and blue pipes and writing on black background

To Serve and To Lead


by J. Henry Walker IV

Effective teamwork is more important than ever in the modern law firm, and it’s the almost oxymoronically named “servant leaders” who make it happen. Here’s a primer.

Three people leaving a conference room

Strength in Numbers: When Partnering Up May Be Best in Whistleblower Litigation


by Justin Smulison

Whistleblower claims make headlines when they result in multimillion-dollar settlements. But the journey to the courtroom is characterized by complexity and requires time and resources. Bienert Katzman Littrell Williams partner and The Best Lawyers in America awardee Michael R. Williams discusses when and why partnerships between counsel will strengthen whistleblower litigation.

A Blue Person in the Middle of White People

California Appeals Court Reverses Workplace Arbitration Decision


by Greg Sirico

Labor Code 432.6, a newly proposed set of legislation in California, was recently met with a successful ruling, but state officials are now reversing that decision.

Two people signing documents

Florida Amends Statewide Cybersecurity and Ransomware Act


by Gregory Sirico

A closer look at a Florida act's amendments to strengthen cybersecurity and ransomware requirements across the state.

Blue human figure holding computer with abstract background

New Non-Compete Restrictions To Take Effect in D.C.


by Gregory Sirico

Best Lawyers investigates the Non-Compete Clarification Act of 2022 passed in the District of Columbia.

Woman in black dress pushing a glowing puzzle piece

Hobbling the War Machine


by Shawn C.D. Neylan

Since late spring, the Canadian government has been actively sanctioning business and political entities, as well as numerous individuals, with alleged ties to Vladimir Putin and the Russian military, including some in Belarus. You can’t tell the players without a scorecard—so here’s an overview.

Military tank with prohibited symbol

The Antipodean Advantage


by Gordon Grieve and Tony Britten-Jones

As the pandemic recedes, Australia remains one of the best countries in which to invest. The commercial law experts at Piper Alderman review the country’s advantages when it comes to outside money looking for outsized returns.

Man pointing to cave wall

It’s Official: Options for Challenging “Official Marks” in Canada


by Jamie-Lynn Kraft and Philip Lapin

“Official marks” are a strangely obscure corner of Canadian intellectual-property law. What are they, what explains their strength and what can a business owner in search of a trademark do to challenge them?

Two griffins on royal crest

Growing Canadian Business Abroad


by Didier Culat

Canadian entrepreneurs looking to expand their businesses beyond the geographic confines of their home dominion must consider a vast range of questions to ensure they’re fit to branch out. Here’s a quick primer.

Green arrows rising with Canada in backdrop

Latinflation


by Alejandra Daroch, Domingo Russi and Jaime Carey Astaburuaga

Long a beacon of economic stability in South America, Chile has been buffeted lately by the global rise in inflation. Can a key element of its monetary policy help it weather the storm?

Waves crashing into lighthouse

Trending Articles

The Best Lawyers in Spain™ 2023


by Best Lawyers

Announcing Spain's recognized lawyers for 2023.

Flag of Spain

Announcing the 2023 The Best Lawyers in America Honorees


by Best Lawyers

Only the top 5.3% of all practicing lawyers in the U.S. were selected by their peers for inclusion in the 29th edition of The Best Lawyers in America®.

Gold strings and dots connecting to form US map

The Best Lawyers in Chile™ 2023


by Best Lawyers

The results include an elite field of top lawyers and firms in Chile.

White star in blue box beside white box with red box on bottom

Thirteen Years of Excellence


by Best Lawyers

For the 13th consecutive year, “Best Law Firms” has awarded the most elite and talented law firms across the country through a thorough and trusted data review process.

Red, white and blue pipes and writing on black background

The Best Lawyers in South Africa™ 2023


by Best Lawyers

Best Lawyers proudly announces lawyers recognized in South Africa for 2023.

South African flag

The 2023 Best Lawyers in Portugal™


by Best Lawyers

Announcing the elite group of lawyers recognized in Portugal for 2023.

Green and red Portuguese flag

Announcing The Best Lawyers in Peru™ 2023


by Best Lawyers

Honoring our awarded lawyers for 2023 in Peru.

Red and white stripes with green leaf symbol

Best Lawyers: Ones to Watch in America for 2023


by Best Lawyers

The third edition of Best Lawyers: Ones to Watch in America™ highlights the legal talent of lawyers who have been in practice less than 10 years.

Three arrows made of lines and dots on blue background

The Best Lawyers in Spain™ 2022


by Best Lawyers

The results include an elite field of top lawyers and firms.

The Best Lawyers in Spain™ 2022

Famous Songs Unprotected by Copyright Could Mean Royalties for Some


by Michael B. Fein

A guide to navigating copyright claims on famous songs.

Can I Sing "Happy Birthday" in Public?

IN PARTNERSHIP

Rewriting 𝙃𝙀𝙍𝙨𝙩𝙤𝙧𝙮 One Verdict at a Time


by Justin Smulison

Athea Trial Lawyers was formed only a year ago by several prestigious lawyers seeking justice for their clients, and together they are making history.

Six female lawyers sitting in office

Announcing the 2022 Best Lawyers® in the United States


by Best Lawyers

The results include an elite field of top lawyers listed in the 28th Edition of The Best Lawyers in America® and in the 2nd Edition of Best Lawyers: Ones to Watch in America for 2022.

2022 Best Lawyers Listings for United States

Strength in Numbers: When Partnering Up May Be Best in Whistleblower Litigation


by Justin Smulison

Whistleblower claims make headlines when they result in multimillion-dollar settlements. But the journey to the courtroom is characterized by complexity and requires time and resources. Bienert Katzman Littrell Williams partner and The Best Lawyers in America awardee Michael R. Williams discusses when and why partnerships between counsel will strengthen whistleblower litigation.

A Blue Person in the Middle of White People

What the Courts Say About Recording in the Classroom


by Christina Henagen Peer and Peter Zawadski

Students and parents are increasingly asking to use audio devices to record what's being said in the classroom. But is it legal? A recent ruling offer gives the answer to a question confusing parents and administrators alike.

Is It Legal for Students to Record Teachers?

Announcing the 2023 The Best Lawyers in Canada Honorees


by Best Lawyers

The Best Lawyers in Canada™ is entering its 17th edition for 2023. We highlight the elite lawyers awarded this year.

Red map of Canada with white lines and dots

Announcing the 2022 "Best Law Firms" Rankings


by Best Lawyers

The 2022 “Best Law Firms” publication includes all “Law Firm of the Year” recipients, national and metro Tier 1 ranked firms and editorial from thought leaders in the legal industry.

The 2022 Best Law Firms Awards