As a creative sector, the fashion industry is constantly evolving. With a view to increasing revenue, the organizations that form the fashion ecosystem are looking to consolidate their position in the market, become more competitive and keep up with trends, particularly the digital transformation, which is advancing at a rapid pace.
Within this framework, among investments and restructurings, mergers and acquisitions (“M&A”) are key instruments, the object of which is (i) the merger between two or more entities to form a new entity or (ii) the acquisition of one or more company(ies), in both cases driving the expansion or consolidation of an organization and, consequently, an increase in revenue.
In the fashion sector, we are currently witnessing mergers and acquisitions in various fields, with a special focus on innovation and financial profitability:
- As a result of legal ESG requirements, tech start-ups and SMEs with consolidated ESG practices, particularly in terms of sustainability, have become strategic targets for mergers and partnerships;
- The constant increase in the use of digital platforms, which led to the exponential growth of e-commerce and digital marketing, has increased the attractiveness of start-ups and SMEs in the sector, making them a target for future acquisitions or mergers promoted by large organizations;
- In order to reduce costs and promote efficiency, many organizations are acquiring and/or merging entities involved in the production chain, particularly in the textile, logistics and distribution areas, thus integrating the intermediaries that make up the various stages of the production chain;
- Organizations with financial constraints and low liquidity are targets for restructuring through acquisition processes or mergers with other entities.
Despite the range of opportunities, the success of these operations requires a legal approach capable of anticipating risks, protecting the assets involved and ensuring compliance with applicable legal and regulatory standards.
To this end, before concluding any transaction or corporate operation, it is essential to carry out a financial and technical audit, as well as identifying possible contingencies of a legal nature through legal due diligence. Legal due diligence is, therefore, an essential tool for identifying legal risks and making informed decisions, mitigating risks and providing security for the operation. In the fashion sector, this analysis should include an examination of the following aspects, in addition to others that may be relevant according to the particularities of each case:
- Governance models: evaluating how the organization is managed and controlled, what the decision-making process is like and who has the power to appoint the members of the governing bodies and, thus, to control the management of the organization;
- Contracts: identification of the main contracts, identifying clauses with obligations or limitations, particularly in commercial contracts such as supply, distribution and agency contracts;
- Intellectual property: checking the legitimacy of trademarks, designs and copyright, as well as the existence of litigation that could compromise the organization’s value;
- Criminal, Misdemeanor and Compliance: assessing the existence of criminal and misdemeanor proceedings to which the organization is a party and to verify compliance rules, particularly regarding the prevention of money laundering;
- Labor issues: analyzing tcompliance with labor and occupational safety legislation;
- ESG: assessing compliance with ESG standards, including greenwashing risks and labor practices in the supply chain;
- Competition: ensuring that the operation does not infringe national or European competition law, that it does not result in practices that restrict competition or concentration that require notification to the competent authorities;
- Financing: analyzing the type and amount of financing subscribed to by the organization, and the restrictions and contingencies generated by it;
- Taxation: verification of local tax obligations and possible contingencies.
Mergers and acquisitions in the fashion sector are a strategic path with high potential for growth and innovation. However, their implementation requires multidisciplinary legal preparation to ensure risk mitigation and compliance with the applicable legal framework.
by Ricardo Cardoso and Carolina Ribeiro Santos, Practice Area – Sports, Fashion and Entertainment
