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By Richard D. Harroch, Jennifer Martin, and Richard V. Smith
Data privacy, cybersecurity, and abstracts aperture risks are important due activity issues in mergers and acquisitions. Post-acquisition analysis of aegis problems, and alike notifiable breaches, is a far too accepted scenario.
According to one report, added than a third (40%) of accepting companies affianced in a alliance and accretion transaction said they apparent a cybersecurity botheration during the post-acquisition affiliation of the acquired company. The best awful publicized archetype of an M&A-related cybersecurity problem was Verizon’s analysis of a above-mentioned abstracts aperture at Yahoo! afterwards accepting accomplished an accretion acceding to admission the company.
This discovery almost scuttled the deal, and ultimately resulted in a $350 actor abridgement in the acquirement amount paid by Verizon, with Yahoo! adapted to pay a $35 actor amends to achieve balance artifice accuse declared by the U.S. Balance and Exchange Commission (SEC) and an added $80 actor to achieve balance lawsuits brought by black shareholders.
This commodity summarizes the growing abeyant risks—legal, financial, reputational, and operational—associated with cybersecurity, and additionally provides applied solutions on how to identify, understand, and abate those risks during the M&A due activity process.
Even for those accepting companies that intend to analyze abstracts aegis issues as allotment of the M&A due activity process, about the attorneys administering such activity do not abundantly accept the accepted cybersecurity blackmail mural or don’t accept the particular risks associated with the ambition company. Added about than not, the attorneys ask a arrangement of routine, privacy-related questions of a aggregation alike back that aggregation does not accumulated or handle chump claimed data.
The focus on privacy, and not aegis added generally, is due in allotment to a accepted abridgement of acquaintance of broader cybersecurity issues, and a hyperawareness of the risks associated with abstracts breaches. To a ample degree, an overemphasis on abstracts aperture risks is not hasty back companies charge about acknowledge breaches of claimed abstracts to consumers, and the media frequently focuses ample absorption on these breaches, abnormally all-embracing ones.
The accessible is alpha to become added aware, however, of the blackmail of added types of advice compromises, including ransomware attacks (in which abstracts is rendered abstract unless a “ransom” acquittal is made), phishing emails (fraudulent emails beatific to ambush recipients into accommodate passwords or added admired information), and the annexation and careful acknowledgment of acute advice for embarrassment and aggravation (consider, for example, the Sony and Democratic National Committee hacks, in which acute emails were fabricated public).
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Moreover, companies accept consistently grappled with the annexation of proprietary advice and barter secrets. While such thefts do not crave notification to consumers, the annexation of admired bookish acreage and barter secrets can accept a adverse appulse on a company, decidedly adolescent startup companies developing new technologies. The accident of admired bookish acreage can decidedly abatement the amount of a ambition aggregation to -to-be buyers. Similarly, the amount of a aggregation can be manipulated by trading on baseborn central information.
In short, bent hackers are resorting to a broader arrangement of techniques to monetize and accomplishment information, and the methods acclimated to admission that advice are added catlike and sophisticated, authoritative it difficult to avert adjoin and ascertain such attacks. For example, through avant-garde techniques acceptance for buried surveillance, attackers can adviser and abduct data, about acute proprietary advice or strategies (business, political, or military), over a continued aeon of time afterwards detection.
But the best austere computer threats do not ambition advice or abstracts at all. The NotPetya malware, a absolutely annihilative attack, destroyed absolute networks and systems for some of the better companies in the world, including Merck, Maersk, and FedEx, and amount companies accepted an estimated $10 billion in damages.
On a abate scale, the abetment of the software acclimated in free vehicles, for example, can aftereffect in claimed abrasion or death. Or a distinct basic allotment in a chump artefact can be acclimated to agitate the availability of a all-inclusive swath of the Internet.
Regulators, customers, and investors accept been quick to acknowledge to these evolving threats. A adjournment by a aggregation in advertent and advertisement a abstracts aperture can aftereffect in cogent accessible criticism of the aggregation as able-bodied as acknowledged exposure, including the accident of abundant fines and abeyant liabilities due to chic activity lawsuits and actor acquired actions. The FTC and accompaniment Attorneys Accepted frequently accompany administration accomplishments apropos to delays in advertisement a abstracts breach, including in several high-profile breaches such as Equifax, Uber, and, best recently, Google . Such analysis is additionally a accident for companies that admission a breached company.
The SEC is additionally dispatch up administration accomplishments adjoin accessible companies that abort to abundantly acknowledge not alone absolute aegis incidents, but risks associated with cybersecurity. Specifically, pursuant to its February 2018 Commission Statement and Guidance on Accessible Aggregation Cybersecurity Disclosures, added accessible statements, and its April 2018 SEC adjustment adjustment with Yahoo!, the SEC has categorical its expectations for administration acknowledgment obligations apropos to cybersecurity incidents.
Such obligations include, but are not bound to, accepting acceptable systems of centralized controls and processes to ensure an adapted akin of risk-management blank of an incident, including acceptable SEC acknowledgment obligations afterward analysis of an incident; alteration or acclimation above-mentioned actual misstatements apropos cybersecurity in accident agency and MD&A disclosures; and instituting trading blackouts, as appropriate.
In fact, the SEC afresh brash nine companies that were victimized by a accepted cyber-related artifice scheme, whereby accounting cadre accustomed afflicted emails purportedly from aggregation admiral or vendors to wire ample sums of money to the perpetrators. Not alone did those nine companies lose over $100 actor in accumulated to the fraudsters, the SEC brash them for abeyant violations of federal balance laws for declining to accept in abode a acceptable arrangement of centralized banking accounting controls.
Finally, abounding awful adapted industries are adapted to accede with specific aegis standards and controls, and to promptly address incidents. For example, pursuant to the Gramm-Leach-Bliley Act, banking institutions are adapted to apparatus advice aegis protections to aegis banking advice and to acquaint their regulators in the accident of crooked admission to such data. The healthcare industry is accountable to agnate requirements beneath the Bloom Allowance Portability and Accountability Act of 1996 (HIPAA).
In added sectors, added acrimonious requirements may apply. For example, as of January 1, 2018, companies that arrangement with the Department of Aegis are adapted to accede with the NIST 800-171 accepted and address any incidents that appulse systems on which government advice is stored or processed. Similarly, activity companies adapted by the Federal Activity Authoritative Commission (FERC) are adapted to accede with Analytical Basement Aegis believability standards; FERC is additionally currently alive on binding cybersecurity adventure advertisement rules.
In addition, vendors, suppliers, and added providers of adapted companies are about contractually adapted to chase these requirements as well, behindhand of their size. Thus, companies targeted for accretion may additionally be accountable to cogent acknowledged obligations apropos cybersecurity. For example, companies that handle acclaim agenda advice through an e-commerce platform, adaptable application, or as a processing bell-ringer are adapted by banks and acclaim agenda issuers to accede with the PCI DSS cybersecurity standards; a abortion to amuse those obligations can aftereffect in cogent fines and alike arrangement termination. Added and added frequently, affairs are acute vendors beyond industry sectors to accede with specific aegis requirements, and to acquaint application ally in the accident of an incident.
Against this backdrop, it is acute that an acquirer because an accretion absolutely investigate and analyze the accurate cybersecurity and abstracts aloofness risks and liabilities airish by the transaction. It is appropriately important that the affairs aggregation ahead cybersecurity and abstracts aloofness issues. Notably, because a affairs aggregation may not alike be acquainted of a above-mentioned or current compromise that may be pertinent to the deal, it is additionally bounden aloft the acquirer to accede added agency of administering due activity in this area.
At a minimum, the acquirer’s due activity analysis should focus on the following:
In the butt of this article, we outline several types of due activity inquiries and procedures that an acquirer may ambition to undertake in affiliation with its analysis of abstracts aloofness and cybersecurity issues. As with any M&A due activity review, the attributes of the analysis and the procedures active should be tailored to the situation. Accordingly, not every account discussed beneath will be adapted for every abstracts aloofness and cybersecurity due activity review.
Initially, an acquirer should appeal and analysis copies of assorted policies, contracts, and added abstracts of the affairs company, including the following:
The acquirer additionally should analysis the procedures the affairs aggregation has put in abode to assure its employee, customer, and business partners’ abstracts and advice as able-bodied as its networks and systems:
The acquirer should be abnormally anxious about accomplished abstracts breaches adjoin the affairs aggregation or intrusions into its computer network.
There are a array of laws that set alternating aegis and aloofness requirements, including notification obligations, the ambit of which depend on the affairs company’s industry breadth or the account or artefact it develops, manufactures, or provides. It is analytical to accept what laws may administer to the affairs aggregation and to analyze whether the affairs aggregation is absolute by and adjustable with accurate laws, regulations, and standards. Bear in apperception that abounding of these requirements may be pushed bottomward by arrangement to subcontractors, vendors, suppliers, and added providers of covered entities, alike back such vendors are not anon regulated.
The afterward is a non-exhaustive account of potentially applicative laws for allegorical purposes (appropriate aegis or aloofness admonition should be consulted in any accurate M&A due activity investigation):
The acquirer will appetite to anxiously analysis any activity or authoritative inquiries affecting the affairs company:
Cybersecurity due activity additionally may crave the application of added “invasive” abstruse methodologies alien in the acceptable M&A due activity context. The afterward added accomplish are decidedly important to accede back the agent or the client are in awful adapted and/or analytical basement industries, for government contractors, or breadth post-acquisition notification of above-mentioned breaches may be required.
If such measures cannot be taken above-mentioned to acquisition, an acquirer charge accede such assessments above-mentioned to affiliation of networks and systems to ensure that any absolute infections, malware, or compromises do not advance to the acquirer’s environment.
Cybersecurity due activity has become added important for M&A transactions. Savvy acquirers accept the abeyant for cogent liabilities consistent from a affairs company’s abortion to appropriately analyze and handle above-mentioned abstracts breaches or added cybersecurity incidents. Less frequently discussed is how a above-mentioned cybersecurity adventure may appulse the amount of a affairs company, such as back admired bookish acreage has been baseborn or back binding acknowledgment of an adventure post-acquisition after-effects in cogent reputational accident and absent business.
Similarly, a abortion to accede with acknowledged and authoritative requirements may crave a client to advance cogent assets to accompany a affairs aggregation into acquiescence and to abate aloofness and cybersecurity risks.
A absolute and anxious due activity analysis of the affairs company’s cybersecurity and abstracts aloofness bearings is analytical for an acquirer to appraise the risks and liabilities it may booty on by authoritative an acquisition, and whether such risks are accordant to accurately assessing the amount of the ambition company.
Copyright © by Richard D. Harroch. All Rights Reserved.
A agenda of acknowledgment to Sam Casciato, an IT and cybersecurity architect at Talix, Inc., for his accessible acknowledgment on this article.
About the Authors
Richard D. Harroch is a Managing Director and All-around Head of M&A at VantagePoint Basic Partners, a ample adventure basic armamentarium in the San Francisco area. His focus is on Internet, agenda media, and software companies, and he was the architect of several Internet companies. His accessories accept appeared online in Forbes, Fortune, MSN, Yahoo, FoxBusiness, and AllBusiness.com. Richard is the columnist of several books on startups and entrepreneurship as able-bodied as the co-author of Poker for Dummies and a Wall Street Journal-bestselling book on baby business. He is the co-author of the afresh appear 1,500-page book by Bloomberg, Mergers and Acquisitions of Privately Held Companies: Analysis, Forms and Agreements. He was additionally a accumulated and M&A accomplice at the law close of Orrick, Herrington & Sutcliffe, with acquaintance in startups, mergers and acquisitions, and adventure capital. He has been complex in over 200 M&A affairs and 250 startup financings. He can be accomplished through LinkedIn.
Jennifer Martin is accomplice in the Silicon Valley appointment of Orrick, Herrington & Sutcliffe LLP, and a affiliate of the firm’s Cyber, Privacy, and Abstracts Innovation practice. She advises audience on best practices for mitigating cybersecurity risks beyond industries, including counseling on cybersecurity affairs acquiescence and resiliency on an industry-by-industry basis; managing cogent aegis incidents and accouterment cross-disciplinary adventure acknowledgment planning; drafting bartering arrangement agreement and requirements for purchasers and vendors; and administering cybersecurity due activity in M&A transactions. She has focused on cybersecurity from the legal, technical, and activity perspectives for about 20 years from government, in-house, and clandestine convenance and consulting perspectives. Read her abounding contour on Orrick.com.
Richard V. Smith is a accomplice in the Silicon Valley and San Francisco offices of Orrick, Herrington & Sutcliffe LLP, and a affiliate of its All-around Mergers & Acquisitions and Clandestine Equity Group. He specializes in the areas of mergers and acquisitions, accumulated governance, and activist defense. Richard has brash on added than 400 M&A affairs and has represented audience in all aspects of mergers and acquisitions affairs involving accessible and clandestine companies, accumulated governance, and activist defense. He is the co-author of the afresh appear 1,500-page book by Bloomberg, Mergers and Acquisitions of Privately Held Companies: Analysis, Forms and Agreements. Read his abounding contour on Orrick.com.
This commodity was originally appear on AllBusiness.com. Read all of Richard Harroch’s articles.
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