Managing M&A Risks With Contract Management Governance

Mergers and acquisitions (M&A) are powerful tools for businesses looking to grow, diversify or strengthen their market positions.

A key element of these transactions involves the bulk transfer of some or all of a target business’s various assets, to the new business in the case of a merger, or to the buyer in the case of an acquisition.

Discovery of the nature of these assets is critical for the merged/acquiring business’s understanding of what’s of interest and what’s not, what’s transferable and what isn’t, and the risks involved in any transferral or disposal.

A target’s active contracts are a very important asset, governing relationships with customers, employees, partners, and vendors. The due diligence needed for a solid understanding of each one to determine its desirability, obligations, risks, and transferability can be challenging, particularly when the number of contracts is large.

The contract management governance a business normally applies not only to its new contracts on an individual basis but also to all of its existing contracts on a portfolio basis, plays a vital role in managing this challenge.

In general, it provides a structured framework and a systematic approach for identifying, assessing, and mitigating the risks associated with those contracts.

This article explores how contract management governance can help mitigate the unique contract-related risks inherent in M&A transactions, including legal, financial, operational, redundancy, and integration risks.

It delves into the specific elements of governance frameworks that support smooth contract transitions, protect business continuity, and achieve alignment with regulatory requirements.

Key Risks Mitigated by Contract Management Governance

The active contracts owned by the target of an M&A transaction can contain a variety of different risk types, dependent on the maturity of its current contract management processes and technologies.

The primary risk types include:

Financial Risks

• Contracts often include financial obligations, penalties, or hidden liabilities that can affect the overall transaction value if not identified and accounted for. Governance frameworks ensure thorough contract reviews to uncover high-risk clauses, such as change-of-control triggers, indemnities, minimum spend requirements, performance guarantees, termination fees, and warranties
• By identifying these financial risks early in the due diligence phase, governance allows the merged/acquiring business to incorporate them into valuation models, renegotiate terms where possible, or even adjust the purchase price. This approach prevents unanticipated financial burdens that could erode the value of the transaction and ensures financial predictability for the post-merger or post-acquisition phase.

Integration and Consistency Risks

• An M&A transaction may result in the availability of a wide range of contracts with differing terms, service levels, and compliance obligations, leading to inconsistencies that can complicate operations and create administrative burdens. Contract management governance frameworks support the harmonisation of contract terms across businesses, enabling consistency in compliance standards, liability terms, pricing, and service levels.
• Harmonising contract terms ensures smoother operations post-transaction by reducing conflicts and inefficiencies that arise from differing obligations. It also simplifies ongoing contract management, making it easier for the merged/acquiring business to monitor and enforce consistent standards across all contracts.

Legal and Compliance Risks

• M&A transactions often require navigating complex regulatory and compliance requirements, especially in industries such as finance, healthcare, and technology, where contracts may contain sensitive information or involve stringent compliance obligations. A governance framework ensures that all contracts are reviewed for compliance with applicable regulations, such as GDPR, CCPA, SOX, and industry-specific standards, before they are transferred or integrated
• By ensuring all contracts align with regulatory requirements, governance helps the merged/acquiring business avoid compliance breaches, fines, and penalties, minimising legal exposure and safeguarding the transaction's integrity. Governance also establishes clear procedures for tracking and auditing these compliance requirements, reducing the likelihood of issues arising post-transaction.

Operational Risks

• An M&A transaction risks disrupting essential business functions if critical contracts are not effectively transferred or if third-party relationships are interrupted. Governance frameworks help prioritise the transfer and integration of contracts deemed to be high-importance, to ensure operational continuity and uninterrupted service
• With a structured approach to handling critical contracts, the merged/acquiring business can mitigate the risk of operational delays or service disruptions, which is essential for maintaining customer satisfaction, protecting revenue streams, and preserving business reputation during and after the transaction.

Performance and Monitoring Risks

• Once the M&A transaction is complete, effective governance is essential for the ongoing monitoring of transferred contracts to ensure they fulfill their intended obligations and comply with regulatory standards. Governance frameworks enable early identification of potential issues through regular compliance checks, performance audits, and tracking of milestones
• Proactive monitoring helps the merged/acquiring business mitigate risks of contract non-compliance, unmet obligations, or disputes that could jeopardise post-transaction stability. Regular tracking of key performance indicators (KPIs) and compliance metrics supports contract optimisation, helping the merged/acquiring business achieve its strategic goals with fewer disruptions.

Redundancy Risks

• During an M&A transaction, the merged/acquiring business may inherit redundant contracts. This may occur either because it has contracts covering similar products or services already in place, or because the purposes of the target’s contracts are not aligned with its post-transaction strategy. Managing these unnecessary contracts can be challenging if they don’t allow early termination or carry significant penalties for doing so
• Contract management governance frameworks include structured processes to assess the necessity of each contract, identifying which ones are essential, redundant, or non-strategic. For contracts that cannot be easily terminated or reassigned, governance provides alternative strategies, such as evaluating renegotiation options, exploring contract buyouts, or consolidating services. By managing redundancy risks effectively, governance frameworks allow the merged/acquiring business to avoid unnecessary costs, maintain operational efficiency, and reduce administrative overhead.

Third-Party Consent and Transferability Risks

• Many contracts contain change-of-control or assignment clauses that require third-party consent to transfer ownership. Failing to obtain these consents can lead to contract termination or renegotiation, which could disrupt business operations or change the terms under which the contract was initially executed. Contract management governance frameworks establish standardised protocols for identifying these clauses, tracking consents, and managing novation (creating a new contract in place of the old) or assignment (transferring rights and obligations)
• By creating clear workflows and assigning responsibilities for securing third-party approvals, governance helps ensure timely action on critical contract transfers. This minimises the risk of losing valuable contracts due to failed or delayed approvals and maintains positive relationships with counterparties.

How Contract Management Governance Helps Overcome M&A Challenges

Contract management governance provides an organised approach to tackling the unique challenges of M&A, offering practical solutions that help streamline the contract transfer process and protect business interests. Here’s how governance frameworks support M&A success in key areas:

Centralised Review and Tracking of Change-of-Control Clauses

• Contract management governance ensures that each contract is thoroughly reviewed for clauses that may be triggered by an M&A transaction. Standardising the review process and automating it with appropriate software allows the transaction team to quickly identify change-of-control or assignment clauses and determine the required steps for compliance
• With this centralised approach, the risk of overlooked clauses is minimised, giving the merged/acquiring business a clear view of which contracts need consents or adjustments to facilitate smooth transition and prevent disruptions.

Compliance Tracking for Regulatory Adherence

• Compliance tracking within a governance framework helps ensure that transferred contracts meet all regulatory standards. By reviewing contracts for applicable laws and standards, governance frameworks help prevent regulatory issues, reduce the risk of fines, and align the merged/acquiring business with industry standards.
• Establishing robust compliance tracking also supports internal and external audits, demonstrating proactive risk management and regulatory adherence to stakeholders.

Consistent Procedures for Novation and Assignment

• Contract management governance includes standardised procedures for novation and assignment of contracts, ensuring each transfer follows legal and operational requirements. Predefined templates, legal reviews, and approval workflows help manage the complexity of contract transfer, ensuring no obligations or rights are missed
• Consistent procedures help avoid delays, misunderstandings, and legal challenges, protecting business continuity and ensuring critical agreements remain valid and appropriate under new ownership.

Ongoing Monitoring and Audits of Transferred Contracts

• Governance frameworks facilitate ongoing monitoring and audits of key contracts post-transaction. These periodic audits help ensure that transferred contracts adhere to compliance requirements, align with the merged/acquiring business’s strategic objectives, and meet performance expectations.
• Continuously monitoring and auditing contracts allows the merged/acquiring business to proactively address issues and maintain a stable foundation for minimising long-term risk.

Selective Exclusion of Redundant or Non-Essential Contracts

• As part of due diligence, contract management governance incorporates a review for contract redundancy to identify cases where the merged/acquiring business already holds active contracts that cover the same requirements or has no current or prospective need for such contracts.
• Governance frameworks provide standardised criteria to help the transaction team evaluate which contracts are redundant and can be eliminated when practical post-transaction, minimising excess and ensuring efficient resource use.
• By establishing a clear protocol for excluding non-essential contracts, governance reduces the administrative and financial burden of managing unnecessary agreements, streamlines the transfer process, minimises duplicate obligations, and enables a more focused approach to integrating valuable contracts.

Standardised Risk Assessment and Prioritisation

• Governance frameworks establish criteria for assessing and prioritising contracts, not only by risk but also by importance to the merged/acquiring business’s operations.
• This assessment identifies all contracts that are critical, high-risk, or operationally essential for prioritised transfer.
• By deprioritising less important contracts, the governance framework ensures that the contracts vital to business continuity or operational efficiency are transferred first. This focuses post-transaction efforts on managing the valuable contracts that align with the strategic objectives of the transaction.

Structured Approach for Securing Third-Party Consents

• Governance frameworks set up clear communication protocols and workflows for obtaining third-party consents, which might be needed to transfer, novate, or assign contracts.
• Governance allocates responsibilities to team members, establishes tracking systems for each needed consent, and sets deadlines to ensure responses to consent requests are received on time.
• Managing third-party consents in a structured way minimises the risk of missed approvals, delays, or issues with counterparties, helping to ensure that critical contracts transition seamlessly.

Use of Contract Lifecycle Management Systems for Selective Contract Integration

• Governance frameworks utilise Contract Lifecycle Management (CLM) systems to prioritise the transfer of important transferable contracts initially, rather than all contracts at once.
• This selective approach ensures that key contracts are tracked, obligations are monitored, and key milestones are met, without overloading the CLM system with non-essential contracts.
• Streamlining CLM system usage minimises the administrative workload and keeps the system organised, focusing governance resources on contracts that are essential for ongoing operations and compliance.

Wrap Up

Contract management governance offers a structured, methodical approach to managing the inherent complexities of M&A transactions. 

By addressing contract risks related to financial obligations, integration, legal compliance, operational continuity and redundancy, governance frameworks enable merged / acquiring businesses to handle contract transitions systematically.

Incorporating a robust contract governance framework into M&A strategy ensures that contract-related challenges, including red§undant and non-essential contracts, are managed efficiently, allowing the merged / acquiring business to realise the full value of the transaction. 

Through proactive risk management and seamless contract integration, contract management governance supports the financial, operational and strategic goals of any successful M&A deal.

To learn how Gatekeeper can help with your contract management governance, don't hesitate to get in touch with us.