This article was written by Jo Ruitenberg and Jim Boynton
The goal posts for executing a deal in the financial services sector have changed. In this difficult regulatory environment, sellers are finding it harder to get their deals away. While regulatory due diligence is nothing new in this sector, risk appetites are particularly low, and buyers are more sensitive than they have been in the past about the extent of the due diligence that they need to conduct in order to obtain their own internal approvals to the proposed acquisition. Underestimating the depth and extent of that need could result in a much bumpier and longer deal process for the seller.
In addition, the Treasurer recently released for consultation a raft of proposals to implement 24 of the Government’s responses to recommendations of the Financial Services Royal Commission final report. Most amendments are proposed to take effect on Royal Assent or 1 July 2020 giving little time for businesses to implement changes once the legislation is passed. See KWM’s recent article on the key takeaways of the proposals: https://www.kwm.com/en/au/knowledge/insights/financial-services-royal-commission-draft-legislation-20200204. Once the changes are passed, close to 90% of the Government’s Hayne changes will have been implemented and this will give the industry more certainty. Buyers will be particularly keen to understand how the business is implementing these changes.
What happens if you don’t address these issues head-on?
More so than in the past, potential buyers want to conduct deep due diligence to understand the business’s past conduct in order to assess any current/potential regulatory and third-party class actions. While this is not new, it has become a particularly sensitive point for foreign buyers.
There will be a natural reluctance from the selling business to providing commercially sensitive information to potential buyers upfront and there will be a desire to provide the information only later on in the process, perhaps in black box to the chosen buyer.
The seller’s deal team needs to manage this against the buyer’s need to assess and get comfortable with the regulatory risk early on before proceeding further with the transaction. Pre-empting this need when preparing the data room can reduce potential disruptions to the business further down the track once everyone is in the throes of the transaction.
If the data room does not from day 1 provide enough information for potential buyers to conduct this aspect of their due diligence, buyers will undoubtedly ask reams of questions in the Q&A process. Requiring your business to address all those questions on a case by case basis rather than holistically will disrupt the day to day operations of the business, particularly if they are dealing with questions from multiple buyers.
Sellers should therefore focus on this issue early by mapping out and collating the relevant primary documentation to provide to buyers on day 1 of the data room opening. This seems like a relatively simple proposition. However, if approval from internal stakeholders (of which there may be many) is required to release the relevant documentation because of commercial sensitivities, this must be factored into the transaction timetable.
Addressing these issues upfront and with sufficient lead time before the transaction commences full flight will assist in minimising deal execution risk while minimising the disruptions to the business that the M&A process will undoubtedly cause.