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FinCEN Rule Requires Expanded Customer Due Diligence

The Customer Due Diligence Rule ("CDD Rule") issued by the U.S. Department of the Treasury Financial Crimes Enforcement Network ("FinCEN") will require covered financial institutions to identify and verify the identity of beneficial owners of legal entity customers, subject to certain exclusions and exemptions.

The information that must be obtained from certain individual equity owners and controlling persons includes the following:

  • Name;

  • Street address;

  • Date of birth; and

  • Taxpayer identification number (e.g., Social Security or other government-issued identification number)


In order to verify the identity of such individuals, covered financial institutions may request copies of identification documents (e.g., copy of a driver’s license or passport).

As applied by Aura Solution Company Limited, a beneficial owner includes the following:

  • Any individual who owns 10/25 percent or more of the equity interests of the legal entity customer depending on certain criteria (e.g., customer’s location); and

  • A single individual with significant responsibility to control, manage, or direct the legal entity customer (e.g., CEO, CFO, COO) as determined by the customer


The CDD Rule requires authorized representatives of legal entity customers to provide a beneficial ownership certification each time they open a new account at a covered financial institution.

Covered financial institutions will not have to collect beneficial owner information on most U.S. financial institutions, U.S. publicly traded entities, and government entities.


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Aura’s integrated one-stop solution assist clients for buy-side financial, tax, information technology, compliance and HR due diligence. Organizations also benefit from Aura’s experience with sell-side diligence service offerings, identification of undisclosed risks, highlighting key deal issues, and providing valuable insight on transaction synergies. Aura’s tailors the approach for each individual transaction to maximize value and deliver a quality work product in a timely manner.

Aura’s M&A team has considerable experience advising clients on a full breadth of issues from minor negotiating points to major deal breakers.

Transactions that have been through a comprehensive due diligence process are ultimately the most successful. Determining the effectiveness of processes, infrastructure, systems and financial reporting as well as identifying areas of future capital requirements are essential to conducting effective due diligence and will ultimately allow an organization to maximize value.

Although 2016 saw a decrease in the total number and value of deals in the US compared to 2015, activity increased heavily towards the end of the year. October 2016 saw a record high of $250 billion in transactions according to financial information provider Dealogic, making it the busiest month in terms of deal value in history.

That momentum has continued in the first half of 2017 as US M&A deal values have increased by over 2% year-on-year from 2016, despite a drop in the volume of deals, according to Mergermarket. Aggregate deal values have remained strong over the past year thanks to the increase in the number of ‘mega deals’ entered into in excess of $10 billion. Examples of notable mega deals include British American Tobacco Plc’s $60


billion bid for Reynolds American Inc, Becton, Dickinson & Co’s $23 billion bid for CR Bard Inc and Inc’s $13.7 billion acquisition of Whole Foods Market Inc.

Have any significant economic or political developments affected the M&A market in your jurisdiction over the past 12 months?

While the 2016 US election and Brexit unleashed some uncertainty in the global markets, thus far neither appears to have caused any significant sustained adverse effect on US M&A activity. Political uncertainty may have factored in the decrease in deal volume within the US market, but deal values have remained strong and the number of UK bids for US companies has increased to its highest point since 1999, according to Mergermarket.

Political developments over the past 12 months have also arguably spurred enhanced scrutiny by the US government of Chinese investments in the United States, particularly in the technology industry. On September 13 2017, following a recommendation from the Committee on Foreign Investment in the United States (CFIUS), President Trump issued an executive order blocking the billion-dollar-plus acquisition of a US semiconductor manufacturer by a Chinese government-backed private equity sponsor.

This order comes on the heels of the December 2016 order by President Obama blocking the Chinese acquisition of a US business of a German semi-conductor company. In addition, the US Congress is expected to consider legislation in the near future that would expand CFIUS’ authority to review foreign investments into the United States and require enhanced scrutiny of investments from countries that pose the greatest threats to US national security. 

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According to Mergermarket, the following sectors represented more than 75% of the deals announced in North America in the first quarter of 2017:

  • energy, mining and utilities (28.4%);

  • consumer products (28.3%);

  • pharmaceuticals/biotechnology (11.2%); and

  • financial services (7.7%).

According to reports and surveys completed by KPMG and Deloitte, many practitioners expect:

  • technology, energy, mining and utilities and pharmaceutical/biotechnology to experience the most overall M&A activity in 2017; 

  • an increase in deal size and volume, divestitures and middle market activity; and

  • a continued focus by insurers on good M&A opportunities.

  • Are there any proposals for legal reform in your jurisdiction?

  • While Congress has yet (as of September 18 2017) to pass any legislation on healthcare reform, Trump has proposed to repeal the Affordable Care Act and limit the amounts that drug manufacturers can charge for their products. If enacted, these legislative changes may have a chilling effect on the pharmaceutical, medical and biotechnology industries. Trump, and Congress more generally, is also seeking large-scale tax reform. In addition to proposals to lower income tax rates, this includes the possibility of mandatory taxation of the offshore earnings of US multinationals (although at a preferential tax rate), as well as a decrease in the repatriation tax rate to allow future earnings held overseas to be brought back to the United States at a lower tax cost. If enacted, these reforms could materially impact M&A activity in the US market. However, the exact contours and the likelihood of any such reforms, including the timeline for approval by congressional leaders, remains open-ended.

  • Legal framework

  • Legislation

What legislation governs M&A in your jurisdiction?

A mixture of state and federal law governs M&A transactions in the United States. In particular, corporate governance rules (which are driven by, among other things, an entity’s jurisdiction of incorporation/formation and its organisational documents),


tax law, executive compensation rules, antitrust law and state and federal securities laws often drive deal structuring decisions and negotiations, as dealmakers seek tax efficiency, securities law compliance and necessary third-party approvals.

The applicable state law(s) in an M&A transaction typically depend on the jurisdiction of incorporation and the entities’ principal place of business. Applicable state laws


(when read together with the entities’ organisational documents) typically address corporate governance and M&A issues, such as ‘blue sky’ securities laws, board and stockholder voting requirements, fiduciary duties and various filing requirements.

Federal laws and regulations that may apply in M&A matters include the following (and related regulations):

  • the Internal Revenue Code of 1986;

  • the Hart-Scott-Rodino Antitrust Improvements Act of 1976;

  • the Securities Act of 1933;

  • the Securities Exchange Act of 1934;

  • the Investment Companies Act of 1940;

  • the Committee on Foreign Investment in the United States; and

  • industry or sector-specific laws.

Stock exchange rules may also be implicated in transactions involving public companies. 


How is the M&A market regulated?

The M&A market is regulated through a series of laws and regulations, the applicability of which will depend on:

  • the nature of the transaction (including its structure and size);

  • the parties; and

  • the types of asset involved (including whether the target is a public company – that is, a company traded or listed on a public exchange).

While exchanges play less of a role in regulating M&A in the United States than in other jurisdictions, they impose requirements that may have implications on the mechanics of M&A for public companies.

One of the key regulatory agencies is the Securities and Exchange Commission (SEC). The SEC supervises and oversees numerous participants in the US publicly traded securities markets. Its primary role is to protect investors, maintain fair, orderly and efficient markets, and facilitate capital formation.

Are there specific rules for particular sectors?

Yes – for example, transactions dealing with companies in the healthcare, telecommunications, hazardous waste, aerospace and defence, investment management, communications and transportation industries – just to name a few – may be subject to specific federal and state regulations. 

Types of acquisition

What are the different ways to acquire a company in your jurisdiction?

In a deal involving private companies (ie, companies not traded or listed on a public exchange), three common acquisition structures are as follows:


What due diligence is necessary for buyers?

Diligence is not mandated, but buyers typically conduct extensive due diligence before executing a definitive agreement. Diligence typically covers business, accounting, tax and legal review.

The depth and breadth of diligence can vary greatly among buyers and transactions and depends on numerous factors, including factors related to a buyer’s appetite for risk, timing and costs.


What information is available to buyers?

The information available to the buyer typically depends on whether the seller is a private or public company.

For private companies, publicly accessible data is often limited. Therefore, information is typically supplied by a seller in response to a diligence request list prepared by the buyer’s counsel.

Public companies must disclose various categories of information to the public. Therefore, certain documents of a public company can be obtained via the Securities and Exchange Commission’s (SEC) website (, including:

  • financial reports;

  • organisational documents;

  • certain shareholder information; and material agreements and event

US securities laws generally prohibit a public company from intentionally disclosing material non-public information. Any material non-public information that is unintentionally disclosed must be publicly disclosed promptly. One exception is that a company may provide such information to persons who expressly agree to keep the disclosed information confidential.

In addition, under US securities laws, individuals are generally prohibited from trading on material non-public information.

Accordingly, targets will typically require buyers to execute a confidentiality agreement which, in the public company context, will often include a standstill that prevents a potential buyer from acquiring target securities, other than in a transaction approved by the target’s board of directors. It is usually only in this context that public targets will provide information to potential buyers.


How is stake-building regulated?

Stake building is regulated through a combination of state and federal laws. Acquisitions of more than 5% of any class of a target’s equity securities that are registered with the SEC must be disclosed through the SEC within 10 days of acquisition. Some of the applicable rules also require disclosure updates on certain changes in investment intent.

Moreover, acquisitions resulting in holdings exceeding certain dollar thresholds may require both the buyer and the target to make antitrust filings with the federal government. Further, generally, all transactions undertaken by the bidder in a public company’s securities that occur during the 60-day period before the commencement of a tender offer must be disclosed through the SEC.

State statutes may also affect a buyer’s ability to stakebuild. For example, the Delaware General Corporation Law, subject to certain exceptions (which in a negotiated transaction are usually easy to comply with), prohibits an owner of 15% or more of the outstanding voting stock of a corporation from engaging in a business combination for three years after acquiring the 15% stake.

In addition, stakebuilding in certain industries – such as banking, insurance and gaming – may require regulatory approval.


Preliminary agreements

What preliminary agreements are commonly drafted?

Among the most common preliminary agreements are confidentiality agreements and letters of intent.

Letters of intent A letter of intent typically contains basic terms pertaining to the proposed transaction and often lays the groundwork for commencing negotiations before drafting the definitive agreements. Generally, a letter of intent contains a number of non-binding clauses (eg, proposed structure of the transaction and process) and a few binding clauses (eg, exclusivity, confidentiality, standstill and dispute resolution).

Letters of intent are generally not used in connection with the acquisition of public companies because of the desire to avoid triggering disclosure requirements.

Principal documentation

What documents are required?

The documents required for an M&A transaction depends on the nature and structure of the transaction. Such documents may include:

  • an acquisition agreement;

  • in the case of a public transaction, certain disclosure based documentation (eg, a proxy statement or Schedule TO);

  • a shareholder, investor rights or joint venture agreement;

  • a transition services agreement;

  • employment agreements; and

  • other ancillary agreements (eg, escrow agreements, paying agent agreements, bills of sale, assignment agreements, letters of transmittal and stock powers).


Which side normally prepares the first drafts?

The buyer often prepares the first drafts, except in an auction context.

What are the substantive clauses that comprise an acquisition agreement?

Generally the substantive clauses that comprise a private M&A acquisition agreement include:

  • transaction mechanics (eg, asset purchases, stock purchases and mergers);

  • purchase price and other related provisions (eg, adjustments to purchase price, purchase price allocations, method and timing of payment, earn-outs and escrow arrangements);

  • representations and warranties;

  • covenants (interim and post-closing);

  • closing conditions;

  • indemnification (in private M&A deals);

  • termination (which may be coupled with break fees); and

  • general provisions relating to notices, confidentiality, assignment, expenses, governing law and dispute resolution.


What provisions are made for deal protection?

In transactions where the target is a public company, common deal protections include:

  • no-shops (frequently with a fiduciary out);

  • matching rights;

  • force-the-vote provisions;

  • support agreements;

  • top-up options (unless unnecessary as a result of legislation); and

  • break fees.


What It Is?

Due diligence is the careful, thorough evaluation of a potential investment, whether on a corporate or individual level.


How It Works?

For individual investors, due diligence often means studying annual reports, SEC filings, and any other relevant information about a company and its securities. The objective is to verify the material facts related to the purchase of the investment, as well as to understand whether the investment fits an individuals return requirements, risk tolerance, income needs, and asset allocation goals.

An individual's due diligence might include reading the company’s last two or three annual reports, several recent 10-Qs, and any independent research they could find. In doing so, they would develop a sense of where Company XYZ is headed, what market factors might affect the stock’s price, and how volatile the stock is. This in turn might give them guidance about whether the investment is right for you, and if so, the size and timing of their investment.

In a merger scenario, due diligence often involves a team of people specially tasked with reviewing and verifying every aspect of an investment in another company. In many cases, this team might include lawyers, accountants, and investment bankers.

Simplifying Due Diligence With Thoughtful Planning

The goal for sellers and buyers alike should be to enter the due diligence process confidently, assured that any potential problems have been identified and addressed well in advance.

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Due diligence can be an arduous process for business owners, potential buyers and their respective advisors. Nonetheless, conducting thorough and detailed due diligence is a critical step in the sale process in order to:

  • Determine a value for the company, including potential synergies

  • Understand the pre- and post-closing operational steps that will be needed to integrate the company into the buyer's business operations

  • Identify any "red flags" in the business that may impact the purchase price, contract terms or the buyer's willingness to move forward with the transaction


Thoughtful planning and preparation by both buyer and seller prior to beginning the sale process will go a long way to ensure an efficient due diligence review, maintain an open exchange of information among buyer and seller, and avoid last-minute surprises that may threaten to derail the transaction.


In a typical due diligence process, the seller shares a substantial amount of information about his or her business with one or more potential buyers, some of whom may be the seller's competitors. Buyers, understandably, would like sellers to provide them with as much information as possible. Sellers, on the other hand, may be reluctant to respond to each and every diligence request from a potential buyer for several reasons:

  • Certain information may cast the seller's business in a negative light

  • Sharing highly confidential information with competitors may give them a competitive advantage in the market if the deal ultimately falls through

  • Information shared with potential buyers may leak out into the public domain

  • Compiling the information will distract the seller's management team from performing day-to-day business operations


A well-run due diligence process strikes a balance that provides potential buyers with the information they need to properly evaluate the business while addressing the seller's concerns about sharing too much.

Sellers should be as cooperative as possible and recognize that any problems with their business will eventually come out in due diligence. Few things are more devastating to a transaction than a buyer discovering an unexpected issue late in the sale process. In addition to the challenge presented by the problem itself, buyers may feel put off by what is, at best, a crucial oversight by the seller and, at worst, a lack of candor. Buyers may begin to wonder what other issues have yet to be uncovered and either lower their bid price accordingly or walk away from the deal altogether.

Buyers, on the other hand, should be respectful and reasonable in their diligence requests and the time they require from management, recognizing that managing a due diligence process places a significant burden on the seller's employees. The buyer's diligence request list should be organized, prioritize items that are critical to the buyer moving forward and indicate which items may require time with the seller's management team. To assuage the seller's concerns about divulging highly confidential information about the business (e.g., customer lists, pricing details or employee compensation) early in the sale process, buyers may consider agreeing to a specific timeline where the seller provides certain information to the buyer only after specific transaction milestones are achieved (e.g., letter of intent signed or first phase of diligence completed).


In order to be as prepared as possible for the diligence phase of a sale process, sellers should conduct their own "business preparedness assessment" aimed at identifying and addressing potential issues in the business and assembling and reviewing the documentation and information that potential buyers may request during the due diligence process. To conduct a thorough business preparedness assessment, sellers should:

  • Develop a detailed due diligence request list that anticipates documents in key business categories (e.g., finance, employees, real estate, intellectual property) that potential buyers may request during the sale process

  • Annotate the due diligence request list to identify documents that can stand on their own versus documents that may require conversations with the seller's management team to explain them

  • Assemble an internal diligence team made up of key members of management who have access to documents on the due diligence request list (or know who to ask), possess a thorough understanding of those documents, and can articulate their purpose to a buyer

  • Identify any potential red flags that a buyer may encounter as part of the diligence process and ensure that by the time the sale process commences, the seller has either eliminated the red flag, mitigated its impact on the business or has a detailed explanation for why the red flag exists and how the seller is addressing it

  • Compile diligence materials into a well-organized packet that can be provided to potential buyers (ideally electronically)


 Due Diligence Documentation:

  • Financial statements for the past three fiscal years and year to date

  • Current strategic plan and five-year forecast

  • Budget for the current year and next year

  • Summary of terms and covenant of existing indebtedness

  • Copies of material contracts

  • Copies of employment agreements

  • Description of employee benefits and compensation

  • Description of major capital projects for the last three years

  • Commitments for pending and proposed major capital projects

  • Description of owned and leased real estate and any past or current environmental issues

  • Description of any pending or threatened litigation or regulatory proceedings



Buyers must ensure they have the right team of advisors to help their internal team conduct a thorough due diligence review. The buyer's team of advisors should consist of experts capable of evaluating each of the key strategic, financial and operational facets of the seller's business. The team may include:

  • One or more CPA firms for accounting and tax review

  • An investment bank to help review the company's financial forecast as well as historical and projected financial performance

  • Industry consultants to review the company's business model in light of anticipated industry trends and growth

  • Legal counsel (M&A, local counsel, tax, environmental, etc.)

  • Environmental consultants (for businesses that own or lease real property)

  • Consultants for employee-specific issues (employment contracts, employee compensation and benefits, labor unions, etc.)



Too often, transactions are delayed or even terminated as a result of a poorly run diligence process. Confidential information is leaked, the seller's management team is overburdened, the buyer is frustrated at the lack of information from the seller or the process simply drags on too long.

Establishing and communicating a few basic ground rules at the onset of the diligence process can go a long way toward making due diligence as productive and efficient as possible for both parties. Key features of a well-run diligence process include:

  • Clear rules for who is part of the buyer's and the seller's diligence team, who receives and sends information among team members, and how the confidentiality of the information exchanged will be preserved

  • An understanding among deal-team members that the buyer and his or her advisors are not to contact members of the seller's management team without the seller's prior knowledge and consent

  • A due diligence point person, selected by the seller from among his or her management team, who has access to key decision-makers and can oversee the diligence process for the seller

  • A detailed log that records responses to each due diligence request and any follow-up requests

  • Periodic status update calls among key members from both the buyer and the seller's teams



Planning in advance for the diligence process will pay dividends to both the buyer and the seller over the long run, including a smoother process with less distraction for the seller's management team, increased likelihood that the transaction is successful at the right value and on the right terms for both parties, and a good working relationship established between the seller's and the buyer's management teams going forward.



  • Financial projections not substantiated by reasonable assumptions

  • Revenue dependent on one or a few key customers

  • Incomplete or unorganized books and records

  • Commingled personal and business expenses

  • Pending or threatened litigation

  • Environmental issues with company property

  • Numerous financial irregularities (e.g., one-time charges or gains)

  • Excessive inventory on balance sheet

  • Significant capital expenditures required to achieve financial projections

  • High debt burden relative to cash flow

  • No formal corporate governance decision-making framework

  • Employee flight risk/No succession plan

  • Unfavorable contract terms with key suppliers

  • Outdated technology systems

  • Unfavorable industry trends

  • Insufficiently protected intellectual property

  • Pending or ongoing regulatory issues or proceedings

  • Inadequate insurance coverage

  • No long-term business strategy

  • Rising or volatile raw material costs

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