Due Diligence on steroids
The SANDS investigation group represents a business law-driven approach to an investigative tradition that has been located in the major consultancy and auditing firms.
“The willingness to work at the intersection between business law and criminal law is not evenly distributed among lawyers,” explains partner Nicolai Skridshol, who leads the investigation unit at SANDS.
He is sitting with Special Advisor and business economist Lene Eia Bollestad in SANDS’ head office in Vika. Together with eight colleagues with various legal expertise, they have a mandate that is so unique in Norway that they are often used by other due diligence groups:
“Our job is primarily to dig deeper than other lawyers or consultants and do what’s necessary to find information, in a lawful manner. It often entails digging deep into international matters. The information we find is provided as part of giving commercial advice, which includes uncovering and addressing risks which should be taken into account before a transaction is entered into and how the risks can be managed in a proper manner that uses resources efficiently,” says Skridshol.
Legal assessments without a foundation. The spark for investigation was ignited in Skridshol a few years ago when he was a business and litigation lawyer at a large competing law firm and had an unusual stock exchange transaction land in his lap.
“I understood that investigating business law matters is quite hardcore and involves understanding the fundamental commercial aspects.”
Internationally, investigation was moving at that time more into business law and complex transactions. The global auditing firm that was being used to review the transaction realised that their traditional expertise mix of police officers with an economic crime background and auditors might need business law assistance, because it was the law that to an increasing degree controlled what facts were necessary to obtain.
Skridshol was recruited by PwC to develop their commercial investigation expertise. They had large cases and large teams, and the investigators often had to live abroad for long periods to dig up local information.
“It was a wonderful education in practical investigation at a very capable, global player,” recalls Skridshol.
He thinks a Norwegian law firm can well measure up to global auditing firms:
“We have a good relationship with the various auditing firms, and they are sub-contractors on our engagements when it is necessary. This means that we generally have at least four global auditing firms as potential sub-contractors on our engagements, which makes us stronger than the individual auditing firms. They usually just use foreign colleagues within their own firms,” he says.
“We assess which sub-contractor is best on a case-by-case basis, depending on the nature of the engagement and the expertise of the teams presented. In addition, we have a very good network with foreign law firms, which means that we cover large parts of the world with our team of experts.”
Easy to be toyed with. At that point, SANDS contacted Skridshol and asked whether he wanted to develop an investigation group where law and professional development occupied a central position.
“SANDS is an internationally oriented firm with leading experts in legal fields such as M&A, oil and gas, shipping, personal privacy, economic crime and other areas that often involve investigation. It was easy to say yes,” says Skridshol.
Among those he brought with him was Lene Eia Bollestad, from the Norwegian Government Pension Fund Global, a business economist with a background in PwC’s investigation unit.
“Lene digs it when she gets demanding cases abroad. She has been part of developing a practice here that differs both professionally and in terms of personality from the auditing and law firms,” says Skridshol.
As a field, investigation is often associated with crises. The unit often assists in managing crises in all phases – for unforeseen events, suspected censurable matters, whistleblowing and other situations where the facts of the matter may be concealed from view.
Just as often, the unit assists the M&A department, for example if a client tries its hand at an international collaboration or an acquisition of a company in an unfamiliar market.
“It’s easy for Norwegian companies who don’t know the culture in other places to be toyed with. And it’s difficult to have any faith in the due diligence forms that are usually sent out,” says Skridshol.
It is often necessary for the investigators to show up at offices in foreign countries, challenge the management together with local expertise and dig up facts in order to find out more about the risks of the transaction:
the investigators must find out what the lawful manner is to do things locally and whether it is compatible with Norwegian law. They review whether unusual loans have been granted or a suspiciously large number of lawyers are being used, whether there are affiliated companies with strange billing practices or quid pro quos, whether permits or concessions have been granted lawfully, whether concessions and licences from government authorities or loans from banks can stand the light of day or whether collaboration partners are used who might affect the client’s reputation.
The new reputation regime. Where previously only the anti-corruption legislation was relevant, now responsible investment and corporate social responsibility are also involved, explains Lene Eia Bollestad. As a business economist, Bollestad assists global companies with strategic advice and dealing with anti-corruption, integrity or other ethical and commercial challenges that can lead to financial and reputational losses. This is particularly complex in the case of international transactions.
“If you are going to buy a shopping centre in Oslo, it is not always we in the investigation unit you need, because normally there is a clear risk picture. On the other hand, when you want to buy a company abroad – for example, in Russia or Brazil, or on continents such as Africa or Asia – the risk picture is a completely different one: you do not necessarily know who all the players are and you have to conduct an expanded due diligence. We are a part of the expanded package, a package which becomes a natural addition to legal and financial due diligence,” says Bollestad.
The investigation unit’s clients are typically the international companies that also attach great importance to reputation in international transactions. They have a great deal to lose on a bad deal, and they “would rather pay for three pages of gold than a hundred pages of bull,” as Skridshol puts it:
“If the M&A department is evaluating an acquisition in Brazil, or a private equity fund is considering investing in Uganda or Iran, there is often a desire to find out who it is you are actually doing business with, whether the middleman is reliable, whether the target price is the right one, whether doing business with the authorities that directly is the right thing to do. These sorts of things,” says Skridshol.
This also applies to transactions in the Nordic countries, particularly if they have foreign branches and sub-contractors.
“Because these are issues for which traditional lawyers or consultants do not have detailed training for assessing the risk, we also assist competing professional services firms to assess the risk of getting involved with a government-owned company which already has ten ongoing corruption cases, whether in this case distance can be created to the rest of the stuff exposed to risk and how to manage the risks,” continues Skridshol.
Has the client looked closely at the significant foreign sub-contractor and the manner things might have been done or should be done? Is there a risk that the investment will lose value because a licence has been illegally granted?
“We often participate as a part of the M&A team, where we discuss the various aspects of the transaction. The companies then decide which risk profile they want and which investments will be made,” says Skridshol.
“We never have a goal of stopping a transaction, only providing the client an ice-cold risk assessment.”
Trimming transactions. The investigation report can be worth its weight in gold. The M&A group and the client can use it to improve aspects of the transaction, for example negotiating the target price down by a heavy amount.
“They may say that they will not pay x million dollars for the company but are willing to consider y million dollars, in exchange for two seats on the board of directors, the CEO, the legal and/or CFO function, in order to play a more active role in operations. They can write stricter clauses in contracts and assist with good follow-up and implementation after closing, to ensure as positive a result from the transaction as possible,” says Skridshol.
In addition to assisting other professional services firms with due diligence processes in unfamiliar markets, SANDS’ expertise has also become pertinent for insurance companies who are assessing whether they will insure a transaction against fraud or other risks.
The investigation unit has become an important part of what SANDS can offer large clients. The group has assumed a unique position in the Norwegian business community, with large international firms on its client list. They work internationally a great deal, where they distinguish themselves through the creation of a separate interdisciplinary team that works particularly on Africa and China. Skridshol concludes by saying that basically there is a nucleus of hardcore business law, with a wagging tail of financial expertise and economic crime:
“We will do an outstanding job for clients who do not want people to just tag along. That’s us in a nutshell.”