Building with Puzzles

Don’t Let the Plaintiffs’ Bar Acquire Your Cash in an M&A Deal

Increased acquisitions come with class-action lawsuits, so companies need to conduct a thorough look at the brand’s current risks and potential exposure to legal challenges.

Merger and acquisition (M&A) activity in the food and beverage industry is increasing at a steady pace. As consumers focus on healthier alternatives and cleaner products, private equity firms and multinational corporations seek to acquire newer, smaller brands that have developed a significant consumer following, in hopes of capturing a portion of this emerging market. However, while acquisition and financing deals rise, so do class-action lawsuit and demand letters from the members of the plaintiffs’ bar looking to cash-in under the guise of consumer protection. A thorough due diligence process is important to understanding a brand’s current risks and potential exposure to these plaintiffs’ bar challenges.

In many M&A deals, acquiring companies are private equity firms with little to no experience in the food and beverage industry or multinational corporations looking to shift the burden on the sellers through carefully crafted acquisition agreements. The agreements almost always contain holdback clauses that set aside a significant amount of funds for a lengthy time to insulate the buyer. As a seller, the goal is to include as many disclosures as possible so that the buyer assumes the risk with respect to those disclosures at the time of purchase. As a buyer, the goal is to seek the broadest form of indemnification possible. Expectations of both parties can only be managed through a meaningful due diligence process. While examining a company’s financials continues to be the cornerstone of due diligence reviews, regulatory and advertising reviews have become an equally important aspect given the current regulatory climate.

As a seller unfamiliar with the intricacies of food and beverage regulations, the question becomes, “What documentation do you ask for to develop the level of comfort needed to complete a transaction?” Whether you sell a dietary supplement or a packaged food, there are myriad manufacturing- and processing-related documentation requirements set forth in both title 21 part 111 and part 117 of the code of federal regulations. Additionally, a false advertising action is almost sure to affect a company’s bottom line, and therefore review of advertising and possible issues related to advertising compliance is paramount. The documents relating to these two categories are crucial, but other documents should be reviewed as well. The following non-exhaustive list can help provide a snapshot of the seller’s business as it relates to regulatory and advertising compliance:

  • State, federal and local government or regulatory agency permits, licenses, approvals, consents, special arrangements or agreements that pertain to the business of the company;
  • Documentation of inspections of the business by any regulatory agency, including local, state and federal, and documentation relating to audits completed by third parties;
  • Documentation of pending or threatened challenges, audits or recertifications relating to the company’s business practices, including notices of deficiencies or administrative complaints, actions or reports;
  • Documentation of consumer complaints, including complaints of safety concerns;
  • Documentation of agreements with the company’s supplier(s), including but not limited to quality agreements, supply or manufacturing agreements and/or indemnification agreements;
  • Documentation regarding quality control (QC) and GMPs (good manufacturing practices) at the company’s facilities, including but not limited to standard operating procedures (SOPs), facility maintenance and monitoring records, product complaint records and other documentation required to be kept by the company pursuant to title 21, part 111 or part 117 of the code of federal regulations;
  • Documentation regarding training of pertinent company personnel, including but not limited to facility and/or QC personnel on FDA, USDA and/or FTC regulations pertaining to the company’s business;
  • Documentation regarding the company’s supplier monitoring and compliance program, or if no such program exists, the company’s procedures and policies for compliance monitoring of suppliers — including monitoring of claim compliance with respect to claims such as “all natural,” “no artificial sweeteners,” “non-GMO,” “healthy,” etc., or procedures for the inspection of supplier facilities;
  • Documentation regarding company advertisements and brochures, including company information provided to prospective suppliers of the company and documentation provided to retail customers of the company, and substantiation for any advertising claims;
  • Documentation regarding advertising inquiries or challenges concerning the company’s advertising claims by any regulatory agency, state, local or federal, or any third-party advertising claim including but not limited to class actions, or inquiries initiated by the National Advertising Division (NAD) or other similar third-party advertising forum; and
  • Documentation regarding a company’s policy and procedures for the development of website content and/or advertising materials, including descriptions of content development, review and approval phases.

Along with reviewing the above documentation, buyers should consider engaging subject matter experts and regulatory counsel to assess overall compliance. Labels and other promotional literature should be reviewed for FDA and FTC compliance. Careful consideration must be given to industry hot topics such as litigation related to “natural,” “artificial colors,” and “healthy” claims. One aspect of compliance that is recently gaining traction is slack-fill. While plantiffs’ lawyers rarely engage on the merits of a case after sending a demand letter, and instead waive the cost of defense argument in attempts to resolve quickly and privately, it is still important to engage in the due diligence process and understand potential exposure and risks related to a prospective purchase.

On the seller’s end, a thorough and complete data room that anticipates all the above documentation requests makes for a smoother transaction. Often, engaging regulatory counsel and subject matter experts prior to a potential transaction helps manage a buyer’s expectations and concerns with respect to regulatory exposure.

Monumental acquisition and financing deals closed in 2017, and this trend isn’t slowing, with 2018 expected to be equally, if not more, impressive. However, a thorough, informed, due diligence review can be the necessary anecdote to a plaintiffs’ attorney cashing in on years of a company’s hard work. Do it right. Due Diligence.  

Abhishek Gurnani is a partner at Amin Talati Upadhye. Gurnani represents a wide variety of health and wellness-focused companies addressing issues such as quality control (QC), recalls, government investigations and class-action lawsuits, as well as dealing with matters before FDA, FTC, U.S. Customs and USDA.

 

 

 

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