August 16, 2024

The Critical Role of Privacy Due Diligence in M&A Success

With today’s growing emphasis on data, data privacy compliance is gaining more attention in mergers and acquisitions (M&A). Understanding a target company’s data privacy practices is essential not only for legal compliance but also for assessing potential risks and costs. This blog post aims to guide you through the essential data privacy questions to ask when conducting due diligence for M&A transactions. Our focus is on what to look for and how to quantify the financial implications of data privacy issues. By the end of this post, you will gain a deeper understanding of why data privacy due diligence is a vital component of the M&A process and how it can safeguard investments and enhance value.

What is Due Diligence?

From a potential buyer’s perspective, due diligence is a thorough review to understand the value of a purchase. In an M&A context, this involves assessing various aspects of the target, including financial health, legal compliance, human resources, customer and vendor contracts, technology, and intellectual property—anything that might impact value. Risk impacts value significantly, so it is critical to identify compliance gaps.

This process usually involves consideration of positive and negative impacts on value. As part of evaluating the negative impacts, it is important to identify what the target company has failed to do or what might have been done to them (such as in the case of a data breach). Conversely, positive impacts come from work already done, reducing the buyer’s need to invest further time, effort, and resources. For instance, a comprehensive privacy policy and a robust record of processing activities (RoPA) indicate a strong data privacy posture, adding value.

Key Data Privacy Elements to Review

Let us take a closer look at some key aspects that need to be investigated as part of data privacy due diligence.

Privacy Notice

Ensure the company’s privacy notice is comprehensive, including critical information such as the legal basis for processing data under the EU’s General Data Protection Regulation (GDPR). A thorough privacy notice is a good indicator of the company’s commitment to transparency and compliance. Verify that the privacy notice complies with the legal requirements of all jurisdictions where the company operates. This ensures that the company meets regional standards and avoids regulatory issues. Having a checklist that highlights all the requirements for a privacy notice can be extremely helpful.

The privacy notice must accurately reflect current practices and commitments the organization makes to its users. Reviewing historical notices helps identify past compliance issues that could pose risks.

Privacy Program Documentation

Data Map/RoPA
A data map or Record of Processing Activities (RoPA) is essential for understanding data flows, legal bases for processing, and data sharing practices. A significant compliance gap exists if this is missing.

Incident Register
Does the company have a security incident (data breach) register? Review the incident register for records of all security incidents, including those not reported to authorities. This helps evaluate past and ongoing risks that may arise post-acquisition.

Data Subject Rights Requests
Examine documentation of data subject rights requests and the company’s ability to honor them. Frequent requests and their handling indicate the company’s responsiveness to privacy concerns. Due to strict regulatory focus and increasing public knowledge of privacy rights, this should be thoroughly reviewed.

DPIA/PIAs
Data Protection Impact Assessments (DPIAs) are required in specific situations, often when large volumes of sensitive data are processed. Check if the company conducts these assessments, since they demonstrate that the organization is risk aware and that mitigation is implemented. They also provide insights into how the company proactively manages privacy risks in practice.

Internal Policies and Procedures

Access Management and Security
Evaluate the company’s internal information technology security policies relating to matters such as access and password management and data security training. Effective policies indicate robust security practices

Data Retention
Data retention policies should align with legal and industry-specific requirements. Proper retention practices reduce the risks related to data over-retention or deletion and play a key role in data minimization.

Vendor Management
Review procedures for evaluating and managing third-party vendors, including Data Protection Addenda (DPAs). Understanding vendor management processes helps assess potential risks from third-party relationships.

Data Subject Rights Requests
A standard operating procedure should be in place to address any data subject rights requests that are submitted. Having this procedure documented will guide employees on how to appropriately respond to such requests in a timely manner and in compliance with the regulations in scope.

Internal Privacy Policy
This policy serves as guidance for employees to reference when privacy issues arise and when needing to follow a specific privacy-related procedure. The internal Privacy Policy is a prime indication of the level of maturity for the target’s privacy program.

Contracts

Scrutinize the data privacy aspects of the company’s contracts. Pay attention to these issues:

Role Identification
Ensure the target’s role as a data controller or processor is correctly identified in contracts. This clarity is crucial for appropriate data management and liability assignments.

Data Transfers
Check compliance with international data transfer requirements for adequacy. For example, does the company employ the European Union’s Standard Contractual Clauses (SCCs)? Proper data transfer practices are essential to ensure compliance and avoid regulatory attention.

Maintenance of Data Protection Addenda
Assess how the target monitors compliance of its DPAs and whether it adapts them to new legal requirements. This assessment should include a review of the DPA to measure the level of safeguards built into the addendum. Regular compliance monitoring indicates a proactive approach to data privacy.

Indemnification and Breach Notifications
Review provisions for data breach notifications and indemnification in contracts. These clauses help manage liability and the monetary impact of potential data breaches.

Industry-Specific Considerations

Privacy due diligence is particularly critical in industries heavily scrutinized by regulators, such as those dealing with children’s data, health data, geolocation data, biometric data, and artificial intelligence. Regulatory focus in these areas increases potential risks and impacts value. Some industries are overseen by more than one regulatory body, so ensure that you have considered the requirement for each that is in-scope.

Final Insights and Recommendations

Be aware of what you are acquiring! Effective data privacy due diligence in M&A transactions is essential to mitigate risks and ensure the value of the acquisition. By understanding and evaluating the target company’s privacy practices, you can avoid potential pitfalls.

With extensive experience in data privacy, the VeraSafe team is ready to provide tailored guidance and support to help you navigate privacy due diligence in your next M&A deal. Contact us to ensure your investments are safeguarded and positioned for success.

Related topics: Compliance Tools and Advice