France: Cyber-Security In Corporate Finance

The ICAEW has partnered with a task force, including the Law Society, the London Stock Exchange, the Takeover Panel and the Confederation of British Industry, to publish a guide on 'Cyber-Security in Corporate Finance' for 2014.

Cyber security is a hot topic in the context of the EU Cyber Security Strategy and the proposal for a Network and Information Security Directive (see our previous client alert). Such developments are a manifest response to what GCHQ's Sir Ian Lobban has termed 'industrial espionage on an industrial scale.'  Undoubtedly, threats to cyber security are increasing on an unprecedented scale, in terms of diversity and technical complexity, with the magnitude and tempo of attacks rising exponentially, posing a real threat to many businesses. The Department for Business Innovation and Skills' 2013 Information Security Breaches Survey has revealed the severity of this threat, with companies experiencing 50% more security breaches on average compared with 2012, while 93% of large organisations have suffered a security breach in the past year. The average cost to a large organisation resulting from a security incident has proven to be as high as £850,000.  Figures show the majority of security breaches in large businesses are caused by attacks from outsiders. This being said, 36% of some of the worst security breaches are caused by internal staff acting without appropriate awareness of security policies in place. While 81% of respondents reported that senior management place a high priority on security, the study has shown that businesses do not necessarily translate increased expenditure in IT budgets into effective security defences. Statistics reveal that 42% of large organisations do not provide any on-going security awareness training to their staff, and 26% have not briefed their board on security risks in the past year, with only 23% carrying out any form of risk assessment. Overall, the results indicate that companies are struggling to keep pace with the steps required to tackle the intensification of security threats.

It is undisputed that information is a valuable asset, which businesses should strive to protect. The ICAEW reiterates that the corporate finance community in particular is seen by those with malicious intent as a 'deep seam of information waiting to be mined.' In corporate finance, there is a heightened risk of cyber-attack owing to the number of parties involved in a transaction, as well as the volume and highly sensitive nature of commercial information shared as part of the deal process. This could include strategic information on the timing of proposed transactions, bid prices and finance terms, IP, customer and supplier data or other valuable financial information. Threats in corporate finance can come from a variety of sources, including organised crime networks seeking to profit fraudulently; for example, seeking to make stock exchange gains from information obtained before a transaction is officially announced. Equally, competitors may seek exposure to any information to gain a commercial advantage in deal negotiation. It is important to realise that the threat can be external from hackers or hacktivists, or could equally stem internally from the reckless act of an employee with inadequate training or deliberately abusing his or her right of legitimate access to the company network. Transactions are a prime target, particularly at the time of an impending deal, and the ICAEW guide provides exemplary case studies of this. Ultimately, a security breach could have a material impact on the value of a business and could affect whether a transaction is even worth proceeding.

The ICAEW guide urges companies to assess potential threats to their critical information assets and put in place adequate measures to prevent any incident that may compromise the value of those assets. The Seventh Principle of the Data Protection Act 1998 specifically requires companies to take appropriate technical and organisational measures against unauthorised or unlawful processing of personal data to prevent accidental loss or destruction of, or damage to, personal data. The ICAEW therefore reiterates that risks to information security must be treated in the same way as any other financial or business risk, with the ultimate responsibility for cyber security resting at board level.

The ICAEW guide provides a useful series of questions for organisations to consider and provides suggested steps to take at the various stages of a corporate finance transaction to help reduce cyber security vulnerabilities.

In the initial early stages, when deciding whether to 'push the button' on a corporate transaction, this process inevitably involves a great deal of information-gathering by senior management and strategy advisers. This very process can risk alerting others of an imminent transaction. To keep the profile of the transaction low and protect the integrity of any information gathered, the ICAEW recommends:

  • Investigate any potential heightened industry-specific cyber security risks
  • Limit the number of individuals initially involved to senior management and the core deal team only
  • Appoint an independent IT team to monitor security of data central to the transaction
  • Map out information and process flows, and consider separating deal data stores from the usual IT system
  • Create separate secure server access with password protection for each deal
  • Appoint one individual within the organisation to be responsible for information being shared
  • Reduce the number of people with IT access to the deal server to those strictly necessary
  • Tighten procedure on deal code names, to ensure no real transaction names are disclosed
  • Review working practices to encourage a culture of secure information management and incident reporting
  • Implement an incident response and management plan which identifies how to isolate any threat; includes a comprehensive list of affected parties to notify; specifies circumstances for notifying enforcement authorities or announcing the incident to the public; and provides a plan to ensure business can resume as normal

Once the decision has been made to proceed with a transaction, this can lead to the appointment of external advisers with whom information may need to be shared, though many of these parties may not yet have formal contracts with the company. Therefore, at this stage, information-sharing needs to be carefully managed to ensure potential advisers are clear as to what information is confidential.  Furthermore, when initial approaches are made to target companies, investors, acquirers, private equity houses, venture capital funds, angel investors, or funding institutions, it is unavoidable that more parties will become privy to increasingly sensitive commercial information. The ICAEW therefore recommends:

  • Disclose information on a 'need to know' basis and keep records of any disclosures
  • Put in place confidentiality and non-disclosure agreements with all parties to whom data may be disclosed
  • Obtain relevant approval for disclosing confidential information to third parties
  • Seek confirmation from any potential issue/bidder whether any information is confidential or sensitive
  • Agree on common information security standards and seek representations that adequate security measures are in place to protect any shared information

As the transaction progresses, increasingly large volumes of information are shared, particularly as part of the due diligence process. This 'flurry of activity' will undoubtedly alert others that a transaction is underway. Perhaps most importantly to note, the heightened risk of cyber security threats at this stage could potentially impact not just the organisation, but also any suppliers' or customers' information which may be shared as part of disclosure. To mitigate this risk, the ICAEW recommends:

  • Consider cyber security as part of the due diligence process, investigating targets cyber security measures and past record of dealing with measures to resolve concerns early on
  • Consider appropriate methods for sharing documents as part of any disclosure exercise; for example, providing access to information on a separate monitored data store
  • Manage the risk of over-disclosure by limiting information to that which is strictly necessary for the purposes of the transaction, and which is not otherwise publicly available
  • Consider the staged release of information, particularly for highly sensitive data which should only be released to short-listed bidders at the late stage of the deal
  • Monitor access to information regularly

In the final stages of a transaction, the sensitive nature of information shared, such as timing, bid prices and financing terms, is particularly vulnerable to interception; for example, by rival bidders seeking inside information about the transaction even before a bid has been submitted. A security incident at this stage is particularly damaging, given its potential to significantly alter the value of a transaction. Risk management is paramount at this stage, particularly when transferring funds for completion. It should not be underestimated that even post-completion, it is crucial to maintain high cyber security standards. The ICAEW recommends:

  • Review any weaknesses in systems related to the storage and transfer of funds for completion
  • Continue to monitor access to information relating to the transaction, even post-completion
  • Conduct a review of information management and securities across the organisation, particularly where IT systems are acquired as part of the transaction
  • Arrange for an independent third party to carry out a cyber security health check review of IT infrastructure
  • Retain core deal data only for as long as necessary post-completion of the transaction

The ICAEW reiterates that no organisation is immune from cyber security threats. These threats are not static and are constantly evolving to the extent "as organisations become better at protecting their valuable information, so those with malicious intent will find new ways of compromising the flow of information and data across corporate networks." It is advised that the organisations most effective at safeguarding their commercial information are those which continually gather intelligence on new threats emerging, proactively investigate breaches, and constantly review their overall risk management plans.

It is worth noting that the Financial Conduct Authority (the UK's financial regulator) recently published a series of principles of good practice for handling inside information in their publication Market Watch 27. In addition, in 2012, CESG and the Department for Business Innovation and Skills produced a '10 Step Guide to Cyber Security'. The guide proposes that basic information risk management can stop up to 80% of cyber-attacks. For more information on 'Cyber Hygiene', the ICAEW guide provides links to useful resources:

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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