As part of a continuing and extensive effort this year to update and strengthen Department of Justice (“DOJ”) policies aimed at deterring corporate misconduct, the DOJ announced on October 4, 2023, that it was implementing a new Mergers & Acquisitions Safe Harbor Policy. The policy will apply to all matters before the DOJ and establishes a presumption of no prosecution for a company that promptly and voluntarily discloses criminal misconduct it discovers in a company that it acquires. In conjunction with the policies announced earlier this year, including a new Voluntary Self-Disclosure Policy, a Pilot Program Regarding Compensation Incentives and Clawbacks, as well as revisions to the DOJ’s Evaluation of Corporate Compliance Programs, the new M&A Safe Harbor Policy further incentivizes companies to report criminal activity to avoid prosecution or reduce the penalties of a possible enforcement action.
Deputy Attorney General Lisa Monaco announced the new policy in a speech at the Society of Corporate Compliance and Ethics’ 22nd Annual Compliance and Ethics Institute. DAG Monaco noted that the DOJ does not want to discourage companies with effective compliance programs from acquiring companies with less effective compliance programs or a history of misconduct. Instead, the DOJ’s focus is on incentivizing the acquiring company to report misconduct it uncovers in the acquisition process.
Under the new policy, an acquiring company will enjoy the presumption of a non-prosecution decision if it promptly and voluntarily discloses criminal misconduct within the Safe Harbor period, cooperates with the ensuing investigation, and engages in requisite, timely and appropriate remediation, restitution, and disgorgement. To qualify for the Safe Harbor, acquiring companies must disclose misconduct within six months from the date of closing, regardless of whether the misconduct was discovered pre- or post-acquisition. Additionally, companies have one year from the date of closing to fully remediate the misconduct. However, these deadlines can be extended by DOJ prosecutors depending on the specific facts, circumstances, and complexity of a particular transaction.
Notably, the presence of aggravating factors, such as misconduct that poses a grave threat to national security, public health, or the environment; is deeply pervasive throughout the company; or involved current executive management of the company, will not impact the acquiring company’s ability to receive a declination. Further, unless aggravating factors exist at the acquired company, that entity can also qualify for applicable benefits under the Voluntary Self-Disclosure Policy, including potentially a declination. Moreover, any misconduct disclosed under the Safe Harbor Policy will not be factored into a possible future recidivist analysis for the acquiring company. In announcing the policy, DAG Monaco specified that the policy will apply only to criminal conduct discovered in bona fide, arms-length M&A transactions, and not to misconduct that was otherwise required to be disclosed, already public, or known to the DOJ. Finally, the new Safe Harbor policy only relates to criminal investigations and does not impact civil merger enforcement.
The new Safe Harbor policy is yet another DOJ incentive to encourage and reward self-disclosure of corporate misconduct, emphasizing the DOJ’s increasing focus on corporate criminal enforcement. Some important takeaways from the new policy include:
- Acquiring companies should place an enhanced premium on due diligence of the target entity, which should include reviewing the quality of the target company’s compliance program and interviewing the target company’s personnel and management.
- The six-month period for self-disclosure is not a significant amount of time, so acquiring companies should promptly investigate wrongdoing discovered at the target company to determine whether to voluntarily self-disclose.
- There is a one-year period for the acquiring company to fully remediate the misconduct, which could also include making restitution payments and disgorgement of ill-gotten gains.
- The Safe Harbor does not apply to misconduct if the company had an obligation to disclose, which may limit its applicability in heavily regulated industries such as healthcare.
- This is a policy, not a law. Whether a company qualifies for the policy is decided by the DOJ, not a court or other independent arbiter.