ESG Dealmaking
University of Pennsylvania Journal of Business Law, Volume 26, Issue 4, 2024
34 Pages Posted: 25 Nov 2024
Date Written: May 01, 2024
Abstract
Environmental, social and governance (“ESG”) concerns are driving businesses globally to re‐calibrate their merger and acquisition (M&A) transactions. This article contends that, despite a growing ESG backlash in the United States, for many businesses undertaking an acquisition transaction, ESG will continue to be a salient issue. Given global regulatory hardening on ESG factors, parties in M&A deals are incentivized to enhance ESG due diligence and transaction planning. Risk assessment, including with respect to non-financial factors, has long been an important focus of M&A due diligence. The emphasis on ESG has the potential to heighten that focus. This article evaluates the potential benefits and challenges of ESG due diligence for M&A deal-making and analyzes the possible implications of recent regulatory changes which incentivize or require an ESG-focused diligence process in M&A. It chronicles how ESG due diligence has affected deals across the spectrum, including deals that are not explicitly motivated by opportunities that result from ESG trends. Yet, the complexities of ESG due diligence are significant. This Article uses a case study of human rights due diligence in M&A to illustrate some of the challenges facing dealmakers in a new era of ESG due diligence. The Article then turns to examining how ESG has affected transaction planning in M&A. As with due diligence, an ESG focus may serve as a critical tool for transaction planning and documentation. For example, many ESG issues overlap with and are captured by the broad representations and warranties traditionally included in M&A transaction documents. This Article chronicles how an ESG-focus in M&A deal-making has expanded beyond the fine-tuning of representation and warranties to other deal planning mechanisms such as closing conditions, indemnifications and other purchase price adjustments.
This Article was written for the 2023 Symposium on the “Future of ESG” hosted by the University of Pennsylvania Journal of Business Law and the Institute for Law and Economic Policy to honor the scholarship and influence of Professor Jill E. Fisch.
Keywords: environmental, social, governance, ESG, M&A, mergers, acquisitions
JEL Classification: K22, L21, G34
Suggested Citation: Suggested Citation