By Sanday Chongo Kabange, The Red Flag Group®
In June 2019, Japan introduced new guidelines aimed at minimising conflicts of interest that arise from cross-shareholding during mergers and acquisitions (M&A). The new guidelines will also strengthen the powers of independent directors in listed companies intending or are in the process of a merger or an acquisition. The new guideline are expected to help uplift corporate governance standards in Japan.
The recent increase in Japanese outbound M&A activity is making the work of compliance practitioners harder because of different regulatory and legislative systems. Japan’s regulatory system is not as developed as the United States or Australia, and its judicial system is based on civil law. These differences create challenges for compliance teams that aren’t familiar with Japan’s complex compliance landscape. Additionally, the ongoing regulatory reforms, including the introduction of new M&A guidelines are another pain point for compliance due to limited local insights, expertise, knowledge and experience.
Japan is one of the top markets for clients because of its stable economy, liberal business environment and strategic geographical location in the region, making it a good market for inbound and outbound investments. Japan’s outbound M&A transactions will continue to rise with more reforms in its legal, legislative and regulatory systems to match international standards.
Know your due diligence obligations
Any investment has associated risks. Some of these risks can’t be easily identified through simple check-the-box due diligence. For this reason, both acquiring companies and targets must know their legal, regulatory and legislative obligations before signing off on any transaction. The pitfalls of not knowing your obligations pre and post M&A may result in many compliance and integrity issues including but not limited to;
- failure to finalise the deal (or close the transaction)
- loss of business
- reputational damage
- product boycotts (or recalls)
- denied entry into new markets
- community resistance (local protests and demonstrations)
Knowing your obligations may help you minimise your exposure to risks and avoid unnecessary costs that may arise. Both parties should have tactical transitional plans that adequately address any potential issues that may affect a good business deal.
Due diligence should be appropriate to the risk presented
Apart from M&A associated risks that can be identified through standard due diligence, some risks may be difficult to detect and remediate because of vested interest and inappropriate degree of due diligence. For instance, you may opt to conduct due diligence on your own (in-house) which may raise a conflict of interest because you are a party to the transaction. Equally, the credibility and results of in-house due diligence may be queried by skeptics. Furthermore, while conducting due diligence in-house, you may miss out certain crucial environmental, social and corporate governance checks and assessments, which are increasingly becoming a standard when undertaking due diligence in your key stakeholders.
Therefore, it is highly advisable to acquire due diligence from an external service provider. The value of sourcing due diligence externally is that there is no conflict of interest and the results are considered independent and credible. An external due diligence provider may advise the appropriate level of due diligence based on independent risk assessment and your tolerance. An external due diligence partner will also allow you access to pre and post M&A advice and offer practical steps you may take to avoid risks. And finally, processes can be documented to show the level of due diligence taken to mitigate risks for all parties.
We can help
M&A activities represent a significant commitment by your investors and improper due diligence is commonly left undone before the transaction is made. Protect your brand, reputation and investments with The Red Flag Group’s team of experts, enriched proprietary data, and technology for improved business outcomes. Visit www.redflaggroup.com or email us email@example.com to learn more about our due diligence solutions.
Compliance challenges for foreign corporations in Japan and Japanese companies abroad
Webinar: What to consider when conducting pre-M&A third party due diligence
Recurring third party due diligence
Webinar: Pre M&A Third Party Due Diligence