Digital Issues to Consider Before a Merger or Acquisition, Part 2 of 2: Paying Attention to Document Retnention Policies and Litigation Holds

Part 2 of 2: Paying Attention to Document Retnention Policies and Litigation Holds

Although there is not a great deal of information available on the exact number of mergers or acquisitions that fail due to improper data due diligence, one could successfully argue that ineffective data due diligence contributes to the high failure rate of merger and acquisition deals. In light of the increased popularity of the use and storage of electronic data, it behooves companies to invest resources on the front-end in order to avoid costly blunders post-integration. It is inconceivable that in today’s digital age, parties contemplating a merger or acquisition would not avail themselves of these tools in order to ensure a comprehensive due diligence phase. The costs associated with a merger or acquisition are no doubt extensive. However, not focusing on a target company’s ESI or e-discovery obligations can also prove costly from a pure business standpoint and result in judicial and regulatory penalties.

For example, a court recently found that a U.S. manufacturing company acted negligently in not instituting a company-wide information retention policy and ordered said company to pay about $200,000 to restore information from backup tapes. However, it is not enough for a company to institute a companywide policy, unless that policy is effectively rolled out to the company’s employees through proper training. The company’s chief compliance officer, along with the legal department, must ensure that the policy is understood and enforced.

The same can be said about a company’s litigation hold policy. As with any policy, the content must have some “teeth” in order to be effective, and failing to do so can be catastrophic. For example, in a wrongful termination case in the Southern District of New York, a company’s employees deleted e-mails relevant to the case well after the company was advised of a litigation hold. The result was that the court allowed the jurors to infer the deleted e-mails supported the plaintiff’s claims and the jury returned a verdict in favor of the plaintiff to the tune of $29 million. The fact of the matter is that most if not all companies have similar policies, but the problem lies in the application and enforcement of these policies, and often times their ineffectiveness.

** This is the last part in a two-part series which comprise an abridged version of the article “Digital Issues in Mergers & Acquisitions,” written by Daniel Garrie and published in the Los Angeles Daily Journal. To request a PDF of the complete article, please contact Law and Forensics.