The risk of regulatory changes is a key concern in mergers and acquisitions (M&A) operations, particularly in a political scenario marked by changes in leadership, teams, and supervision of authorities. Regulatory risk in M&A refers to the risk that government authorities may introduce legal changes that delay, modify, or prevent the closure or completion of an M&A operation. This exposure becomes especially pronounced when political environments shift, leading to new leadership that may scrutinize transactions differently than their predecessors, thereby altering the environment for potential deals.
Understanding Regulatory Risk
This risk is not the same for all M&A operations. In regulated industries or those of special interest to authorities, the risk has nuances and requires greater preparation and advice from the companies involved. Preparation is key, and evaluating this risk early in the acquisition process is key. Companies operating in sensitive sectors must recognize that a change in government personnel can trigger a re-evaluation of previously accepted deals, necessitating a robust and proactive strategy to handle these evolving expectations.
Gestionar adecuadamente el riesgo regulatorio implica identificar las autorizaciones y trámites previos al cierre, y anticipar los interrogantes que los reguladores puedan plantear sobre la operación. Having complete financial and legal information, along with detailed market analysis based on recognized methodologies, facilitates interactions with authorities. Furthermore, a full due diligence process must extend beyond financial metrics to include an exhaustive review of the target company’s compliance history, ensuring that all necessary licenses and authorizations are valid and that there are no pending investigations or enforcement actions from regulatory bodies.
Regulatory Review
In regulated industries, such as the financial sector, authorities’ scrutiny is greater and involves analyzing the buyer’s suitability, origin of funds, and financial capacity, as well as their capital structure, corporate governance, conflict of interest management, and level of supervision applicable to their parent company. Regulators pay close attention to the source of acquisition funds to ensure they are legitimate and not derived from illicit activities, while simultaneously examining the governance structures to ensure stability and accountability within the acquiring entity.
As a general rule, M&A operations involving business integration may be subject to prior control of integrations before the Superintendence of Industry and Commerce, which may result in a notification of the operation or a complete prior authorization process. This distinction between a simple notification and a full filing is critical, as the latter requires a much deeper level of engagement and justification from the merging parties to satisfy the supervisory body’s requirements for approval.
When the operation involves a regulated industry, the competition analysis is integrated into the authorization process of the supervisory authority, as occurs with the Financial Superintendence of Colombia. This means that the economic effects on the market are not evaluated in isolation but are instead considered within the broader context of the company’s regulatory standing and compliance with sector-specific laws.
Additionally, when the operation implies a merger between the participating companies, it may require an additional authorization before the competent authority, usually the Superintendence of Sociedades. Although the regime for authorizing statutory reforms such as mergers and spin-offs has been relaxed in Colombia, the requirement for approval from the competent authority usually persists when the operation involves non-related or linked parts, necessitating a careful navigation of these procedural hurdles.
Addressing Regulatory Risk
Regulatory risk is addressed in the operation’s documents by aligning the interests of the parties through specific mechanisms in the purchase agreement: cooperation and information obligations, best-effort standards, specific indemnities, and, in some cases, thresholds or conditions that allow the parties to withdraw from the operation without penalty. These contractual provisions serve as a safety net, ensuring that if regulatory hurdles prove insurmountable, the parties are not left financially disadvantaged by sunk costs or wasted resources.
Establishing clear rules to efficiently assign regulatory risk and responsibilities and obligations of each party is fundamental. This risk cannot be addressed as a problem exclusive to the buyer, as its materialization prevents the operation’s closure, affecting both sellers and buyers. Both parties must actively participate in the compliance strategy, sharing the burden of preparing the necessary documentation and demonstrating the operational benefits of the merger to the authorities.
