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The importance of products regulatory compliance due diligence

The crop protection and nutrition segments of the chemical industry saw a 40% increase in mergers and acquisitions between 2020 and 2021. According to , these segments are expected to experience more M&A transactions, especially smaller transactions, in the short to medium term.

To prepare for M&A transactions, companies typically conduct rigorous financial, commercial, and operational due diligence activities. However, products regulatory compliance due diligence on the target company's product portfolio often receives less attention despite the high stakes involved.

Conducting thorough products regulatory compliance due diligence may require access to some of the target company's most important trade secrets.

Compliance gaps can result in heavy regulatory fines, loss of sales, and reputation damage for both the acquiring and target companies. Products regulatory compliance is increasingly becoming the foundation for product sales and business profitability, so it should be a key consideration when determining the value of potential acquisitions.

Compliance due diligence for smaller deals

Major industry players have historically focused on manufacturing chemical-based crop protection and nutrition products. However, as government policies and consumer preferences shift towards more organic agriculture, more small to medium-sized companies enter the market with innovative biological plant protection products. In response to declining revenues and shrinking margins, big players are expanding their product portfolios and consolidating their market share through increased M&A activity. For example, , and more recently, , significantly expanding their biologicals platform. By industry standards, these are smaller acquisitions, but products regulatory compliance due diligence still has an important role to play.

Often the strategy for smaller or medium-sized companies is more locally or regionally focused due to their relatively limited resources, meaning these kinds of companies may have less sophisticated regulatory departments and gaps in their compliance programs. They may be unable to meet changing regulatory requirements, and products still under development or in the evaluation stages may not receive regulatory approval in wider global jurisdictions. An acquiring company can leverage the gaps identified during products regulatory compliance due diligence when negotiating the value of the deal. Acquirers can also use the gaps identified to convince the target company that it needs investment for growth, thereby differentiating itself from other competitors looking to acquire the same target.

Compliance due diligence for larger deals

Sometimes a large multinational company will acquire another large competitor. A multinational company may also divest one or more of its business units through sale to another large company or to private equity investors to refocus its corporate strategy. For example, . Borealis also recently announced . In these scenarios, it is expected the sellers will already have compliance programs robust enough to meet changing regulatory requirements in all jurisdictions where they sell. However, the devil is in the details.

There may be products in their portfolios that contain active substances or co-formulants with restricted approval or that are currently approved but likely to be banned in a few years. For example, in the EU a pesticide active substance can be temporarily approved as a "candidate for substitution" under Article 24 of Regulation (EC) No. 1107/2009; its approval may be rescinded when a substitute with a better safety profile becomes available. If products containing such active substances are among the seller's high-sales volume products, an acquirer may face huge reformulation costs. Through products regulatory compliance due diligence, the acquirer may learn of these potential issues and consider them when pricing the deal. It will also allow the acquirer to plan and budget for the activities necessary to resolve outstanding issues when the deal closes.

Hurdles to products compliance due diligence

Confidentiality is a major obstacle. Conducting thorough products regulatory compliance due diligence may require access to some of the target company's most important trade secrets. For example, investigating the regulatory status of active substances and co-formulants in the products may require reviewing confidential sections of the registration documents that also contain details about the manufacturing process. The business risk of allowing an acquirer access to these documents is too high for a seller, especially when the acquiring company and the target are competitors or when both parties are unable to reach an agreement and the deal falls through. To circumvent this, the target or acquirer may employ a third party to review such confidential information and provide recommendations without undermining confidentiality.

Another obstacle more relevant to larger deals is the staggering complexity of products regulatory due diligence exercises. Bigger companies often have large portfolios of products sold in several jurisdictions where they are regulated differently. It may not be feasible to evaluate the compliance of all their products in the time available to complete a transaction. However, a highly skilled team can focus on the most business-critical products and identify the most significant risks and opportunities associated with the deal from a products regulatory compliance perspective.

How Ä¢¹½tv Can Help

Ä¢¹½tv's Chemical Regulation & Food Safety practice has extensive experience conducting products regulatory due diligence for M&A transactions involving crop protection and nutrition companies, on behalf of the acquirer or target. Maintaining the highest level of confidentiality and integrity, we work with our clients to circumvent the hurdles to due diligence. By asking high-level diagnostic questions and applying ad hoc risk assessment models, we can quickly identify compliance issues in key products in the target's portfolio and advise on potential business challenges and opportunities that may be considered during negotiations.