Under a new safe harbor policy announced by Deputy Attorney General Lisa Monaco on October 4, 2023, an acquiring company that discloses potential wrongdoing at a company being acquired within six months of the deal closing date—and fully cooperates and fixes the underlying problems within a year of closing—can presume it will not be criminally prosecuted by the U.S. Department of Justice (DOJ).
The new incentives for M&A transactions come as the DOJ doubles down on voluntary self-disclosure policies and on investigating alleged corporate wrongdoing. This latest announcement from the DOJ appears designed to promote compliance-enhancing M&As (and blunt criticism that DOJ’s recent enforcement efforts and policies were discouraging M&As, even compliance-enhancing ones, due to successor criminal liability concerns), by providing a significant enticement to the acquiring company for timely disclosure of misconduct uncovered during the M&A process.
“Going forward, acquiring companies that promptly and voluntarily disclose criminal misconduct within the Safe Harbor period, and that cooperate with the ensuing investigation, and engage in requisite, timely and appropriate remediation, restitution, and disgorgement – they will receive the presumption of a declination,” DAG Monaco remarked in her speech at the Society of Corporate Compliance and Ethics conference in Chicago last week. Additional enticements include certain protections against recidivist treatment in future enforcement actions, as well as the ability to obtain protection even with the presence of “aggravating factors” (e.g., senior level misconduct, pervasive or repeated misconduct, substantial financial gain, etc.) at an acquired company.
The Safe Harbor policy applies where an acquiring company:
- Self-reports misconduct committed by the acquired company within six months of the closing date, regardless of whether the illegal activity was discovered pre- or post-acquisition; and
- Fully remediates the misconduct within one year of the closing date.
Monaco stated that these deadlines are subject to a reasonableness analysis and may be extended by the DOJ depending on the facts and circumstances of a particular transaction. The policy would be implemented in all divisions of the DOJ but would apply only to “criminal conduct discovered in bona fide, arm’s-length M&A transactions,” DAG Monaco said (emphasis added). This policy will not affect civil merger enforcement. It does not apply to alleged criminal activity for which there is an existing reporting obligation, or to conduct already in the public domain or otherwise known to DOJ. Nor will DOJ’s policy necessarily provide protection from enforcement efforts of other U.S. agencies or foreign authorities, at least not yet (whether other U.S. agencies and foreign authorities adopt similar policies remains to be seen).
For companies that discover misconduct threatening national security or involving ongoing or imminent harm, DAG Monaco said they must act quickly to benefit from the program and cannot wait for a deadline to self-disclose. “Our goal is simple: Good companies—those that invest in strong compliance programs—will not be penalized for lawfully acquiring companies when they do their due diligence and discover and self-disclose misconduct,” DAG Monaco said. The new policy is one among a recent line of incentives dangled by DOJ in an effort to entice and encourage timely and greater corporate cooperation. (See, e.g., our previous posts on this topic here and here.)
The takeaway: Companies may face more lenient treatment if they report potential criminal misconduct uncovered during the M&A process to prosecutors. The time frame laid out in the DOJ’s new policy indicates it expects acquiring companies to act diligently to identify potential misconduct. Indeed, the new policy highlights the importance of compliance teams at both the acquiring and target companies working together to swiftly identify misconduct. Companies that wish to avoid successor liability should consider incorporating compliance personnel in M&A transactions, conducting effective due diligence, and timely disclosing—with the assistance of counsel–and remediating any misconduct that they identify. Squire Patton Boggs’ globally positioned Government Investigations & White Collar team stands ready to assist companies in this endeavor.