LEGRAND / 2018 Registration document

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INTERNAL CONTROL AND RISK MANAGEMENT RISK FACTORS AND CONTROL MECHANISMS IN PLACE

R 3.6.1.3 EXTERNAL GROWTH The Group’s growth strategy, in line with the guidance given by the Strategy and Social Responsibility Committee and the Board of Directors, mainly relies on bolt-on acquisitions (1) with strong market positions or new technologies and offering synergies with its existing businesses. The Group may not be able to complete transactions or obtain financing on satisfactory terms, to successfully integrate acquired businesses, technologies or products, to effectively manage newly acquired operations or to achieve the anticipated cost savings and other synergies. It could also experience problems integrating acquired businesses, including possible incompatibilities regarding systems, procedures (particularly accounting systems and controls) policies and business cultures, the departure of key employees and the assumption of liabilities, particularly environmental liabilities. All these risks could have a material adverse effect on the Group’s businesses, results and financial position. A dedicated acquisitions team in the Strategy and Development Department works closely with country managers to identify appropriate targets, and coordinates the acquisition process with the finance, legal, industrial, logistics and marketing departments at head office (see section 2.2.2.2 of this registration document). Regarding financing risk, the control arrangements are presented in section 3.6.4.7. For funding, the control arrangements are presented in section 3.6.4.7. The Group conducts audits and due diligence prior to any planned acquisition, based, where appropriate, on advice provided by outside consultants, in order to ensure in-depth examination of the target company’s position. At every important stage in the transaction, and according to a formal process, each planned acquisition is subject to validation reviews to confirm its advantages and to determine the terms and conditions for its completion. Acquisition agreements always include certain standard clauses that allow Legrand to cover potential risks (seller’s warranty, specific indemnities, non-compete clauses etc.). Depending on the situation, Legrand may also use warranty and indemnity insurance. The acquired company is then integrated into the Group’s financial reporting system and integrated more broadly into the Group in accordance with dedicated processes overseen by amultidisciplinary steering committee chaired by General Management. An initial internal audit is conducted as part of this integration process within around 12 months of the acquisition to establish the action plans required to ensure that the acquiree’s processes comply with Group standards.

The first consolidation of these acquisitions may result in the recognition of significant goodwill and brand asset value. This could lead to a risk of impairment in the event of a significant decline in the performance of these companies. This financial risk is described in section 3.6.4.8 of this chapter. R 3.6.1.4 CHANGES IN PRODUCT STANDARDS AND REGULATIONS Legrand’s products, which are sold in almost 180 countries, are subject to regulations and standards at the national and international levels, such as European Union directives and the National Electric Code in the United States, and product norms and standards adopted by international organizations such as the European Committee for Electrotechnical Standardization, the Federal Communication Commission (FCC) and the International Electrotechnical Commission. Changes in or more stringent application of these quality and safety standards could require the Group to make capital expenditures or implement other measures to ensure compliance, the costs of which could have a material adverse effect on the Group’s business, results and financial position. Legrand may be unable to anticipate a future change in standards or regulations and could see its products withdrawn frommarkets, or miss an opportunity to grow its market share and sales. Regulations are changing rapidly, driven by issues related to connected products. To manage the risks in this area, a standardization department is in charge of contributing to the development of standards and technical legislation applicable to products, systems and installations, depending on the Group’s strategy, and of informing the Group about such changes. A standardization committee meets three times per year, bringing together strategy, SBU and Front Office teams. A global network of correspondents informs the Group about changes in local and international standards and enables the Group to take part in certain standardization committees. Legrand’s products are also subject to numerous regulations, including trade, customs and tax regulations applicable in each country in which the Group operates and on an international level. Changes to any of these regulations and their applicability to Legrand’s business could lead to lower sales or increased operating costs, and result in a decrease in Legrand’s profitability and income.

(1) Small and medium-sized companies that complement the Group’s business activities.

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LEGRAND

REGISTRATION DOCUMENT 2018