Information Risk in Mergers and Acquisitions

Mergers and acquisitions are built on the assumption that both sides know what they are buying and selling. Yet in many transactions, the most significant risks are not found in financial statements. They reside in information systems, employee practices, and legacy compliance issues that rarely appear in data rooms.

Counsel and transaction advisors who fail to examine information risk may inherit liability that outlasts the deal itself.

The Expanding Definition of Due Diligence

Traditional due diligence reviews financial performance, tax exposure, and contracts. Today, it must also consider data privacy, cybersecurity, and operational transparency.

A target company’s information assets are among its most valuable holdings. They also represent one of its largest liabilities. If those assets are compromised, mismanaged, or exposed to regulatory violations, the acquiring entity inherits the problem.

Cybersecurity as Deal Exposure

Data breaches, outdated systems, or non compliant data transfers can significantly alter valuation. In some cases, undisclosed breaches have led to post acquisition lawsuits or renegotiated prices.

During diligence, counsel should ensure that security audits are performed on the target’s infrastructure. This includes vendor relationships, access controls, and any incident response history.

Information risk assessments should be documented and incorporated into representations, warranties, and indemnification clauses.

Legal and Regulatory Implications

Cross border transactions complicate data compliance. Privacy laws such as the GDPR and CCPA impose obligations that may not align with existing practices of the target entity.

Failure to align these frameworks before closing can expose the acquiring company to enforcement actions and reputational harm. Early identification of these gaps allows for remediation planning and risk allocation within the deal.

Post Integration Risks

Information risk does not end at closing. Integration introduces new vulnerabilities as systems and personnel merge.

A structured transition plan should govern data migration, credential access, and communication between IT and legal teams. Internal controls must evolve to reflect the new corporate structure.

The Counsel’s Role

Counsel bridges the gap between technical findings and contractual language. By translating cybersecurity and information risks into legal obligations, counsel ensures that risk is acknowledged and properly assigned.

An acquisition is not simply an exchange of assets. It is an exchange of liabilities, both known and hidden. Recognizing that truth is the first step toward protecting the client.