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Navigating Data Privacy and Cybersecurity Challenges in M&A Ventures

merger and acquisition ventures

In the rapidly evolving landscape of business, the bedrocks of trust and confidence are firmly rooted in data privacy and cybersecurity. As businesses digitize personal information at an unprecedented rate, the threat landscape has expanded, with cyber-attacks and phishing scams becoming more sophisticated. Governments worldwide respond to these challenges by enacting data privacy and cybersecurity laws, creating a complex regulatory environment that poses risks in various dimensions, including regulatory compliance, public relations, and litigation.

Mergers and acquisitions (M&A) transactions are particularly vulnerable to these risks. Beyond the potential legal liabilities and financial consequences, the impact on a company’s ability to conduct operations, especially for those heavily reliant on data and technology, adds another layer of complexity.

The Technological Lens of M&A

Across multiple industry reviews, 74% of CEOs view technology integration not as a mere cost of doing business but as a source of competitive advantage and growth enabler. CIOs also agree that technology due diligence often uncovers issues or opportunities that have a material impact on deals.

Here, we delve into crucial data privacy and cybersecurity considerations that apply regardless of which side of the M&A table you find yourself:

U.S. State Privacy Laws in M&A

The California Consumer Privacy Act (CCPA), designed to empower consumers and enhance control over personal data, plays a pivotal role in shaping how businesses approach privacy compliance, especially within the context of M&A. This regulatory framework, enforced by proactive authorities like the California Attorney General and the recently established California Consumer Privacy Agency, imposes significant penalties for non-compliance.

CCPA violations can result in substantial penalties, including statutory damages of up to $750 per consumer per incident. For intentional violations, regulatory penalties can escalate to as high as $7,500. This robust enforcement underscores the crucial need for acquirers to meticulously assess the compliance status of target companies during the due diligence process.

For businesses involved in M&A activities, comprehending the relevance of state-specific privacy laws is paramount. The legal landscape varies significantly, considering factors such as the target company’s gross annual revenue and the extent of personal information processed. Navigating this intricate terrain requires a comprehensive review of the legal requirements in each jurisdiction where the target company operates.

CCPA’s Broad Reach and Distinctive Characteristics

The significance of the CCPA is further underscored by its expansive applicability. Any business with an annual revenue surpassing $25 million, engaged in processing personal information of a California resident, falls within its scope. Unlike some state regulations narrowly focused on consumer data, the CCPA extends its reach to cover information collected from B2B partners, employees, and others not traditionally labeled as “consumers.” This broad scope makes privacy laws pertinent to nearly every transaction, regardless of the nature of the data involved.

Strategic Considerations for Acquirers

The intersection of M&A activities and U.S. State Privacy Laws emphasizes the pivotal role of privacy compliance in the due diligence process. Acquirers must go beyond mere acknowledgment of these laws and delve into their specifics, ensuring comprehensive assessments to identify potential legal risks associated with the target company’s operations and customer data.

As the regulatory landscape continually evolves, privacy diligence becomes more than just a procedural step—it becomes an integral component of strategic decision-making in the intricate realm of M&A. Proactive acquirers who recognize the significance of state-specific laws and integrate them into their due diligence processes are better equipped to navigate the complex privacy landscape, mitigate risks, and achieve successful M&A outcomes.

EU GDPR and UK Data Protections in M&A Ventures

Assessing the applicability of the General Data Protection Regulation (GDPR) is crucial for companies with a presence in the EU or UK. For companies engaged in M&A activities, comprehensively assessing the applicability of GDPR is not merely a procedural step but a fundamental aspect of due diligence. The geographic presence of the target company becomes a pivotal factor in determining the extent of GDPR compliance scrutiny.

Non-compliance with GDPR is not without consequences. The regulation imposes stringent compliance requirements, and companies found in violation face penalties of up to 20 million Euros or 4% of their total worldwide annual turnover from the preceding financial year, whichever is higher. This underscores the imperative for acquirers to conduct a thorough evaluation of the target company’s adherence to GDPR regulations during the due diligence process.

Acquirers must delve into the specifics of how the target company adheres to GDPR requirements. This includes scrutinizing data processing mechanisms, evaluating security measures, examining consent protocols, and overall assessing the efficacy of the privacy governance framework in place.

Sector-Specific Privacy and Cybersecurity Laws

The convergence with sector-specific privacy laws introduces a multifaceted challenge that demands careful consideration. Companies engaged in M&A ventures find themselves traversing a complex regulatory maze, where laws such as the Health Insurance Portability and Accountability Act (HIPAA), the Fair Credit Reporting Act (FCRA), the Gramm-Leach-Bliley Act (GLBA), and others shape the contours of compliance. This intricate tapestry of regulations requires not only a broad understanding but a nuanced approach to due diligence.

Each sector-specific law is crafted to address the unique characteristics and challenges of the industry it governs. HIPAA, for instance, is tailored to the healthcare sector, dictating how patient data is handled to ensure privacy and security. FCRA focuses on consumer credit reporting, shaping the rules around the collection and dissemination of consumer information. GLBA, designed for financial institutions, sets stringent standards to safeguard the privacy and security of consumers’ non-public personal information.

The stakes of overlooking or neglecting sector-specific laws are high. Non-compliance can result in a range of consequences, from statutory damages to class action suits and reputational damage and can affect not only the company but also individual executives and directors.

Acquirers must scrutinize Privacy Notices and Transparency

Privacy notices, once viewed as legal formalities, have evolved into critical instruments in the digital landscape. They serve as communication tools between businesses and individuals, outlining how personal information is collected, processed, stored, and shared. In an era where data privacy concerns are at the forefront, individuals are increasingly conscious of how their information is handled, making privacy notices a focal point of scrutiny.

Outdated or absent privacy notices raise immediate concerns for acquirers. In a rapidly evolving digital ecosystem, where technologies, business models, and data processing practices evolve swiftly, a lack of up-to-date privacy documentation can signify a lapse in the target company’s commitment to transparency and compliance. It can also indicate a potential misalignment between stated policies and actual data handling practices.

Scrutiny involves evaluating whether the privacy notices cover all types of data processed, the purposes for processing, the categories of recipients with whom data is shared, and the security measures in place. This comprehensive approach ensures that transparency extends to all dimensions of the business, from customer interactions to internal data-handling processes.

Privacy notices should not be confined to customer-facing interactions alone. They should encompass all aspects of the business where personal information is processed, including interactions with employees, business partners, and other stakeholders. Acquirers need to ensure that the target company’s transparency extends beyond consumer relations to cover the entire data ecosystem within the organization.

Evaluation of Sensitive Personal Information Storage Practices

The handling and storage of sensitive personal information represents a cornerstone of data governance within organizations. In the context of M&A, where data assets are integral components of the transaction, evaluating how a target company stores sensitive data becomes a strategic imperative. Sensitive information may encompass a spectrum of data, including personally identifiable information (PII), financial records, health data, and any other data requiring heightened protection.

Beyond standard cybersecurity practices, adherence to privacy laws may impose additional obligations related to the handling of sensitive information. Laws such as the General Data Protection Regulation (GDPR), the Health Insurance Portability and Accountability Act (HIPAA), or sector-specific regulations may stipulate specific requirements for the storage and protection of certain types of sensitive data. Acquirers need to ensure that the target company is not only compliant with these laws but also has mechanisms in place to adapt to evolving regulatory landscapes.

Cybersecurity Protocols and Insurance

The merging of IT infrastructure, data repositories, and digital processes necessitates a thorough examination of the target company’s cybersecurity measures. The evaluation of cybersecurity protocols and insurance coverage is not only a risk mitigation exercise but also a key aspect of strategic decision-making in M&A. Acquirers armed with a comprehensive understanding of the target company’s cybersecurity posture can make informed decisions about the overall risk profile of the transaction. This includes factoring in potential cybersecurity risks in deal negotiations and post-acquisition integration planning.

The presence and adequacy of cybersecurity insurance coverage are integral components of risk management. Cybersecurity insurance helps mitigate the financial impact of data breaches, cyberattacks, and other security incidents. Acquirers need to scrutinize the target company’s insurance policies, examining the coverage scope, limits, and any conditions or exclusions that may impact the overall risk profile.

The Intersection of AI Solutions

AI has evolved from a futuristic concept to a strategic asset for businesses, offering transformative capabilities in automation, decision-making, and operational efficiency. In the context of M&A, where the integration of technology is a key consideration, the target company’s use of AI becomes a focal point for acquirers. Strategic importance lies not only in understanding the technology but also in comprehending the potential risks and opportunities it brings to the transaction.

The use of AI often involves the processing of vast amounts of data, raising privacy considerations. Acquirers must assess how the target company’s AI systems handle personal and sensitive information. This involves scrutinizing data collection practices, ensuring compliance with relevant data protection laws, and evaluating the transparency of AI algorithms. Privacy diligence is crucial to avoid potential legal and reputational consequences associated with mishandling sensitive data.

Understanding the uniqueness of AI algorithms, proprietary datasets, and innovations in machine learning is essential for assessing the target company’s competitive advantage. Additionally, the risk of IP disputes or challenges should be evaluated, ensuring a smooth transition of AI assets during the M&A process.

Due diligence of Security Incidents and Litigations

The discovery and disclosure of details regarding past or present security incidents constitute a crucial aspect of data privacy and cybersecurity diligence in M&A. Acquirers must delve into the nature of these incidents, including the type of information affected and whether personal information was compromised. Understanding the extent of the impact on the target company’s operations and revenue is essential for assessing the magnitude of the incidents.

Acquirers should evaluate the target company’s adherence to regulatory requirements concerning security incidents. Many data protection regulations mandate the timely notification of individuals or regulatory authorities in the event of a security breach. Scrutinizing the target company’s compliance with these notification requirements is crucial, as failure to adhere to regulatory obligations can result in additional legal and financial consequences.

Security incidents often trigger legal actions, investigations, or litigations, especially when personal information is involved. Acquirers should inquire about any ongoing or past legal proceedings related to data breaches. This involves understanding the nature of the legal actions, settlements, and potential financial liabilities. Litigations may arise from customer complaints, regulatory inquiries, or class-action lawsuits, and a comprehensive review is essential for assessing the legal risks associated with the target company.

Integrating Due Diligence for Success

Privacy and cybersecurity diligence often unveil hidden issues that can impact deal negotiations. Beyond a target company’s disclosure of breaches, acquirers must assess compliance with laws and potential gaps in privacy policies. In cases of non-compliance, post-closing remediation becomes imperative, and a well-executed diligence process gives acquirers a strategic advantage in addressing these gaps.

The responsibility of an acquiring company for the privacy shortcomings of the company they acquired depends on the specific terms of the acquisition agreement. In general, the acquiring company is responsible for the privacy practices of the acquired company only after the deal is closed and the two companies are integrated. However, if the acquired company has any legal obligations or lawsuits, the acquiring company should study them thoroughly before the acquisition.

It’s important to note that the GDPR can hold an acquiring company responsible for the faulty, false, or lax security practices of the company it acquires. Therefore, it’s crucial for the acquiring company to conduct a thorough due diligence process before the acquisition to ensure that the acquired company is compliant with all relevant privacy laws and regulations.

Our team of industry-leading experts specializes in guiding companies through the complex terrain of data privacy and cybersecurity matters. We provide efficient assessments of post-acquisition remediation needs, ensuring the seamless integration of privacy and cybersecurity practices into the acquiring company’s global operations. From managing pre-existing security incidents to offering comprehensive evaluations of their impacts, our expertise ensures a strategic and informed approach to M&A transactions in an era dominated by data and technology.

Clarip’s Data Privacy Governance Platform ensures transparency with users and compliance with all consumer privacy regulations. Clarip takes data privacy governance to the next level and helps organizations reduce risks, engage better, and gain customers’ trust!

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Mike Mango, VP of Sales
mmango@clarip.com