Due Diligence in Mergers and Acquisistions


    International trade legal compliance issues play an increasingly important role in the review of potential mergers and acquisitions. While other regulatory risks such as environmental compliance have long been taken into account, companies have more recently come to realize international trade penalties can be among the most severe imposed by regulatory agencies.    Trade non-compliance issues discovered only after closing can undermine many of the anticipated benefits of a merger.  


    For exports, the penalties now being assessed by the Bureau of Industry and Security (BIS) of the Commerce Department and the Directorate of Defense Trade Controls (DDTC) are substantial and can be material.  Export violators can be debarred from defense sales, or may have export privileges revoked  altogether.  Further, the agencies typically refuse to settle cases without substantial payments even in cases in which exporters voluntarily disclose errors and worked to establish effective compliance programs  as a part of the settlement process. 

    Often overlooked in the due diligence process is the fact that exports of information or services are also controlled by the BIS and DDTC regulations.   Improper exports of such information or defense services can lead to penalty liability equal to or above the liability which would attach to the export of the actual physical goods themselves.  

    Other countries also have parallel regulation of exports and imports which may raise issues in transactions, and we supervise and coordinate with overseas to ensure consistent and comprehensive worldwide solutions to these trade regulation issues.


    On the import side, failures to correctly post  duties required by outstanding antidumping or countervailing duty orders are increasingly becoming the subject of both civil and criminal investigations.  Given the fact that antidumping or countervailing duties of more than 100% of import prices are  increasingly common, unpaid antidumping duties can quickly mount into the millions of dollars.  US importers and foreign exports may not be aware of potential exposure to unfair pricing because such liability increasingly is being based on one country’s goods being declared subject to high dumping duties because they are using inputs from a country subject to a dumping duty (e.g., a U.K. company using an input from China that is subject to a dumping order).  Yet such duties may be very high.  In addition, the assessment of customs penalties can add multiples of actual liability on top of the unpaid duties depending upon the level of culpability.  Errors in the tariff classification, valuation, origin labeling, and special duty exemption claims  can also easily mount over time to the level of substantial material liability.

    The team of lawyers at Barnes, Richardson & Colburn is experienced in all aspects of import and export compliance issues and regularly work under the direction of M&A counsel.  Many lead counsel M&A firms have top quality international trade regulation capability but may require some specific areas of additional support.  We can assist in providing that support in an efficient and effective manner.

    Below are some specific examples of issues arising during the M&A process where assistance in international trade regulation due diligence proved valuable, or could have proven valuable:

Representation of Company Acquiring an Exporter under BIS Investigation

    On behalf of an acquiring party, we evaluated the potential liabilities faced by an acquisition target as a result of export licensing violations identified in  a government investigation.  We quantified the potential civil and criminal liabilities with a level of certainty which allowed for the transaction to proceed.

Representation of Software Company Being Acquired

    On behalf of a party being acquired, we worked together with outside general counsel to resolve outstanding export compliance violations discovered by the acquiring company’s counsel during pre-acquisition review.  We submitted a voluntary disclosure on behalf of the party being acquired and instituted other remedial actions which had the effect of preserving the acquisition target’s value and providing sufficient assurance to the acquiring company that the transaction was completed.

Representation of Company being acquired under Customs Investigation

    We worked with the outside general counsel of a company under investigation by Customs and Border Protection for undervaluation of imported merchandise.  We presented  explanations of the outstanding issues to counsel for the acquiring party, and developed a remedial plan  which minimized the eventual penalty liability, allowing  the acquisition transaction to go forward.

Representation of Company Acquiring a Defense Contractor.

    On behalf of an acquiring party, we performed an expedited legal compliance review assessing the target’s International Trade in Arm’s Regulations, (ITAR) compliance.  We quantified potential exposure and identified areas of risk and actual  non-compliance which were taken into account in closing the transaction.  After  the acquisition, we submitted voluntary disclosures and assisted in the implementation of corrective  training and procedures.

Companies With Unexpected Import Liabilities

    In addition to deals where we have been retained, we also are  aware of situations where international trade regulation due diligence was not undertaken on a comprehensive basis.   We are aware of recent instances of companies purchasing inputs or goods in good faith and then later finding that U.S.Customs & Border Protection or the U.S. Commerce Department have alleged that the products were “circumventing” a dumping order because they were made from inputs subject to a Chinese dumping order,  or in other cases, were transshipped goods and not the proper origin.  The economic impact of such findings can be severe, and often can exceed the value of the goods.   If the problem has continued for a long period of time and affects a substantial amount of shipments, the effects may be material.  Because the issue of potential circumvention is not always obvious on its face, we have seen several recent instances where sophisticated  companies have overlooked the issue to their detriment.            

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