Introduction
With data playing a pivotal role in business operations, ensuring data privacy compliance has become a key focus in mergers and acquisitions (M&A). Understanding a target company’s data privacy practices is essential for legal compliance and assessing potential risks and costs. This blog post aims to guide you through the essential data privacy questions to ask when conducting due diligence for M&A transactions. Our focus is on what to look for and how to quantify the financial implications of data privacy issues. By the end of this post, you will understand why data privacy due diligence is a vital component of the M&A process and how it can safeguard investments and enhance value.
What is due diligence?
From a potential buyer’s perspective, due diligence is a thorough review to understand the value of a purchase. In an M&A context, this involves assessing various aspects of the target, including financial health, legal compliance, human resources, customer and vendor contracts, technology, and intellectual property — anything that might impact value. Risk impacts value significantly, so it is critical to identify compliance gaps.
This process usually involves considering the positive and negative impacts on value. As part of evaluating the negative impacts, it is important to identify what the target company has failed to do or what might have been done to them (such as in the case of a data breach). Conversely, positive impacts come from work already done, reducing the buyer’s need to invest further time, effort, and resources. For instance, a comprehensive privacy policy and a robust record of processing activities (RoPA) indicate a strong data privacy posture, adding value.
A seller’s compliance with applicable data privacy and security regulations can be pivotal and sometimes a deal breaker for certain M&A transactions, especially when the personal information collected by the seller is one of the main assets being acquired by a potential buyer.
The buyer and seller should be aware of data privacy and security considerations they may encounter during an M&A transaction.
The potential buyer should ask due diligence questions and seek information from the seller that is designed to:
Identify what personal information is collected by the seller. The buyer should understand the extent to which the seller collects, stores, uses, discloses or otherwise processes personal information, including from whom the personal information is collected (including website and mobile app visitors, customers, employees and business representatives); the nature of the personal information being collected; and the countries where the collection, storage, disclosure or other processing of personal information occurs.
Evaluate the seller’s privacy policies and other disclosures across all media platforms. The buyer should evaluate whether the seller’s privacy policies and related disclosures comply with applicable laws and best industry practices and adequately disclose how the seller collects, uses, stores and discloses personal information. Note that depending on the seller’s industry and the states/countries in which its business operates industry-specific and/or location-specific privacy and data security laws and regulations may apply to the seller’s business.
Evaluate the existence of information security policies and procedures. In addition to reviewing privacy policies and disclosures, the buyer should review the seller’s information security policies and procedures to determine whether the seller has appropriate procedures to address its handling and use of the personal information collected. This may include a review of policies and procedures that address (i) data encryption, (ii) employee remote-working arrangements, (iii) access to and control of personal information, (iv) business recovery and continuity, (v) data breach and security incident response, and (vi) data retention. The buyer may also want to review the results of audits of the seller’s information security safeguards and procedures.
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