United States: Data Privacy And Security Considerations In M&A Transactions

Last Updated: April 21 2015
Article by C. Andrew Konia and Robert A. Crawford

By some estimates, cybercrime costs the global economy $445 billion annually. If cybercrime were a single country, this dollar amount would place it within the world's top 30 countries in terms of gross domestic product, and cybercrime would be the largest business in the world in terms of revenue generation. What's more: On an annual basis, more than 150,000 and 200,000 jobs are lost in the EU and U.S., respectively, as a result of cybersecurity attacks. These sobering figures, when coupled with the number of recent high-profile data security breaches at various companies and organizations, has some predicting that deal lawyers and their clients will be placing a heightened emphasis on the potential impact that data privacy and security (DPS) could have on certain merger and acquisition (M&A) transactions.

Types of Transactions that Implicate DPS

While DPS issues can arise in many M&A transactions, the appropriate level of focus on DPS is usually driven by the specifics of the underlying transaction. For instance, DPS concerns may (or perhaps should) be at the forefront of any transaction in which a potential buyer will be acquiring sensitive information and data, such as personally identifiable information (PII) or protected health information (PHI). In addition, DPS could play a more significant role in acquisitions where the target company operates in certain industries, such as the financial services and insurance industry, defense industry, technology and software industry, and energy industry. Finally, parties may be particularly focused on DPS in cross-border transactions involving the actual or potential transfer of PII, PHI or other sensitive information and data. This is due, in no small part, to the fact that different countries can have widely varying regulatory regimes concerning DPS matters, some of which can be far more stringent than the federal and state privacy protection laws found in the U.S.

For its part, the U.S. has numerous DPS-related legislation and agencies that may be implicated in any given M&A transaction. At the federal level alone, the Federal Trade Commission, the Federal Financial Institutions Examination Council, the Consumer Financial Protection Bureau, the National Security Administration, the Securities and Exchange Commission, the Department of Energy, the Federal Energy Regulatory Commission, and the U.S. Department of Health and Human Services maintain varying degrees of oversight on DPS matters. Moreover, numerous federal and state laws and statutes may apply to a particular transaction, such as the Fair Credit Reporting Act, the Gramm-Leach-Bliley Act, and the Health Insurance Portability and Accountability Act of 1996.

Possible Severe Consequences

Failure to adequately identify and address DPS issues during a transaction could expose both buyers and sellers to a litany of adverse consequences, including lawsuits, fines or other governmental sanctions, audits, suspensions, breaches of contracts, and overall reputational damage. These consequences could extend not simply to a given buyer or seller, but to their respective officers and directors as well, some of whom could be subject to claims for breaches of fiduciary duties. This also highlights the need to pay appropriate attention to directors and officers (D&O) insurance policies and "tail" policies, and the effect such a transaction may have on any such policies.

DPS in a Transaction Lifecycle

DPS issues can, and often do, arise throughout multiple phases of a transaction: from preliminary due diligence, to negotiation of the definitive transaction documents, and through to post-transaction compliance and integration. In each phase, a potential buyer and its legal counsel can take certain measures to attempt to mitigate the risks associated with DPS.

Due Diligence Period

During the due diligence period of a transaction, a potential buyer should ensure that it is receiving and reviewing all materials that relate to the target company's DPS. Such materials would include, among other things, all of the target company's policies and procedures relating to the collection, encryption, storage and destruction of PII, PHI and other sensitive information and data, as well as any internally and externally prepared compliance reports and analyses. In addition, during its due diligence investigation, such buyer should seek to uncover any instances of past noncompliance with relevant DPS laws and regulations by the target company or its affiliates or employees, and any past instances of cybersecurity attacks upon the target company or its affiliates.

Negotiation Period

During the negotiation period of a transaction, a potential buyer will attempt to broaden, while the applicable seller will attempt to limit, the scope of any DPS-related representations and warranties. While necessarily tailored to the target company and the transaction as a whole, such representations and warranties often cover one or more of the following areas relating to the target company: data security, privacy policies, compliance with laws, disputes and claims concerning data, and past occurrences of cross-border data exchanges.

Beyond seeking broad DPS-related representations and warranties, a potential buyer can attempt to further mitigate its risks associated with DPS liabilities in a number of other ways. One such way would be to structure the transaction as an acquisition of assets rather than an equity acquisition (whether by merger, consolidation, equity purchase or otherwise). Another risk-mitigation tactic that could be employed by such buyer is to negotiate for more favorable post-closing indemnification. This may include, but not be limited to, negotiating a lower indemnity basket, a higher indemnity cap, a special indemnity covering DPS-related liabilities, an extended survival period of DPS-related representations and warranties, and/or a special holdback or escrow of a portion of the purchase price. When the target company is publicly held − meaning that post-closing indemnification generally will be unavailable − a potential buyer can negotiate for more favorable pre-closing covenants and closing conditions, one of which is often the target company's creation of a comprehensive cybersecurity policy.

Post-Closing Period

Even after a transaction closes, it is often important that the buyer remain cognizant of, and vigilant with respect to, the target company's DPS compliance and management systems. Among other things, such buyer should consider performing routine compliance audits, counseling board members and other members of senior management on DPS risk-management practices, and obtaining cyber/intrusion insurance policies.


As seen, DPS can play a key role in many M&A transactions. Buyers and sellers that ignore this area do so at their peril, as security and privacy vulnerabilities have the potential to significantly and adversely affect the value and continued attractiveness of a particular transaction. We believe that the current trend of greater focus being placed upon DPS will only continue in the future, to the point where DPS analysis becomes a routine component in many transactions in order to protect investments and preserve value for both buyers and sellers alike.

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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