Data Due Diligence - Data problems can kill an acquisition

 

We live in the era of big data. Data is king. So, if data is not properly obtained or used, then the risks or limitations arising from the data can result in a buyer losing interest in the acquisition. Whether you are looking to purchase or sell a company now or in the future, data issues need to be well-understood and properly managed.

In relation to Facebook’s recent acquisition of WhatsApp, the Federal Trade Commission (FTC) issued a stern warning that Facebook was required to honor all of the WhatsApp privacy obligations contained in the WhatsApp privacy policy. The privacy commitments of WhatsApp were stricter than those applying to Facebook users, and the FTC wanted to ensure the continued protection of the WhatsApp users’ information. In this case, the user information was significantly more valuable to Facebook than the WhatsApp technology platform. This is a good example of how restrictions on the use of customer information could seriously threaten the post-closing success of an acquisition.

The collection, use and transfer of personal information must be in compliance with the company’s privacy policy, related documents and laws. Non-compliance can result in a risk of liability to an acquirer or to an inability to use the information in a profitable manner.

Following are a series of questions that should be considered when planning for an acquisition:

  • What information is being collected?
  • How is the information being used?
  • What third parties are receiving this information?
  • What documents, such as a privacy policy, define the rights to use the information?
  • What laws govern collection, use and transfer of the information?
  • In what countries is the information being processed?
  • Are the collection, use and transfer of information in compliance with the company's policies and laws?
  • Have users been properly notified about the policies and changes to the policies?
  • Have the ways the use of the information has changed over time been properly covered by new versions of the policies?
  • Do the policies and/or laws contain specific restrictions that would prohibit current or future intended use of the information?

Depending upon the structure of the acquisition, a buyer might be assuming past liabilities. In such a case, careful review of these issues becomes all the more important. Even if the buyer does not assume such liability, the method of collection of the information may not permit the buyer’s intended use.

Bottom Line: Data is a key asset in most acquisitions. The time to be careful about data collection is now. Trying to fix problems after the fact can be costly, and unravel an acquisition.

By William S. Galkin, Esq. | December 13, 2014
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William Galkin manages GalkinLaw. Mr. Galkin has dedicated his legal practice to representing Internet, e-commerce, computer technology and new media businesses across the U.S. and around the world. He serves as a trusted adviser to both startup and multinational corporations on their core commercial transactions.

  
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