This week, I am running a five-past podcast series on the assessment of ethics and compliance in the mergers and acquisition (M&A) context. The podcast series was sponsored by Affiliated Monitors, Inc., (AMI). Today I want to finish my short blog post series by tying oversight to an independent integrity monitor in the M&A context. I visited with Don Stern, Managing Director of Corporate Monitoring & Consulting Services, and Rod Grandon, Managing Director of Government Services, of AMI.

Stern believes the best time to bring in an independent is “as early as is practicable”. By doing so there can be preliminary discussions with senior management about the process, sometimes at the Chief Executive Officer (CEO) level and at other times with the Chief Financial Officer (CFO). From these initial meetings an independent monitor could be a part of the acquirer’s team assembled for the project. He also noted there would probably be a due diligence room with documents made available for the acquiring company to review under a nondisclosure agreement (NDA). That could be meetings where teams from one company meet with teams from the other company. Stern reminded us that M&A work to some extent is “a fire drill, as everyone’s working very hard in compressed time schedules, trying to do a lot in a very short period of time.” This means at times issues pop up which may require the companies to further negotiate the terms of an escrow or other risk management protection for the buyer.

A key is the independent nature of the monitor. Part of it is that they have no stake in the outcome, no stock to vest or other remuneration. Also, it is natural for the target company’s employees to have their guard up as they are more than a little wary about anybody coming in and asking a question. Stern said, “I find that people open up, I’m more willing to be forthcoming when somebody’s outside either company comes in and is asking the questions really in a non-threatening way. The independent monitor is just looking for the facts. I find that we are able to get more information than I think we would otherwise get if we were not independent.”

Rod Grandon had two interesting observations as to why mergers fail from the cultural perspective. The first was the unintended consequences of rapid growth, not taking the time to digest and integrate, leaving a gap and lack of understanding of what was expected of the workforce. The second was the problem of completely unforeseen events popping up through complaints to lawsuits to further discovery events.

The first area focuses on the unintended consequences of rapid growth. Grandon said, “many times I have seen companies, particularly smaller companies that have tried to grow very rapidly through acquisitions and mergers. In doing so, the focus was always on the finance and really never on the people’s side or human element. The acquiring entity never takes the time to get it right in terms of ethics and compliance. A cultural compatibility is absolutely critical for the success of the successor entity. Without that what frequently happens or the workforce is demoralized because they do not feel like they’ve been part of the process.”

Grandon continued, “the fact is no one from the acquiring entity listened to them so they really don’t understand the corporate direction. Suddenly many of the employees find themselves in a much more permissive environment than they had before. Maybe in the lack of appropriate leadership and guidance. The risk factors really tend to spin out of control very quickly if there’s not a good plan and a good understanding of what is going on in that transaction and that’s what leads to these unintended consequences.”

The second issue is the ‘pop-up problem’, “which is something, even with reasonably effective diligence, the parties missed. Now you are months down the road post transaction or perhaps even years down the road and a lawsuit pops up. These pop-up problems in many cases have been identified. If the companies would have taken the time to do that deeper dive into that ethics and compliance realm and to understand what the workforce has seen and experienced, these issues may well have been forestalled. It just simply has never surfaced up to senior management or senior leadership levels.”

This tied into Stern’s point in the post-acquisition phase where he emphasized the need to have a plan in place. Obviously, this is important if the government ever comes knocking but equally important for the newly acquired (former target) employees. He said that if you have a plan in place it can help you avoid “some of those problems because people expect there will be training in week three and there will be focus groups in week four, etc.”

We concluded with a discussion of what you should do if a Foreign Corrupt Practices Act (FCPA) or other problem comes up in spite of robust pre-acquisition due diligence. Stern said that it is important to stop the illegal or even unethical conduct as quickly as possible. This has become more important because of the recent addition of the Safe Harbor for M&A to the FCPA Corporate Enforcement Policy. This has incentivized companies to not only remediate but also self-report.

This new FCPA Safe Harbor for M&A re-emphasizes how powerful a tool an independent monitor can be in the M&A context. Stern ended his remarks by noting that the Department of Justice (DOJ) certainly sees it as good practice to have a third party independent involved on both the company side and the reporting side, if required. All of this lends credibility to your ethics and compliance program. If your company finds itself under scrutiny from a M&A transaction, you can take some comfort in the strategies outlined in this series.

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at
© Thomas R. Fox, 2018