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DOJ Introduces New Policy on Voluntary Disclosures Made In Connection with Mergers and Acquisitions

December 4, 2023
4 minute read

In October 2023, Deputy Attorney General Lisa Monaco announced an addition to the Department of Justice’s Voluntary Self-Disclosure Policy. In her address at the Society of Corporate Compliance and Ethics’ 22nd Annual Compliance & Ethics Institute, Monaco outlined a new United States Department of Justice Safe Harbor Policy for Voluntary Self-Disclosures Made in Connection with Mergers and Acquisitions.

Pursuant to this new policy (otherwise known as the “Mergers & Acquisitions Safe Harbor Policy”), the Department of Justice (DOJ) will presumptively decline to prosecute misconduct that an acquiring company discovers at a target company during the due diligence and closing process when the following criteria are met:

  • The conduct at issue is “criminal conduct discovered in [a] bona fide, arms-length M&A transaction[.]”
  • The acquiring company discloses the misconduct to the DOJ within six months of closing (regardless of whether the misconduct was discovered pre- or post- closing).
  • The acquiring company fully remediates the misconduct within twelve months of closing, including paying restitution and disgorging any unlawfully gained profits.
  • The acquiring company fully cooperates with the government’s investigation into the transaction.
  • The misconduct was not “otherwise required to be disclosed,” “already public,” or “already known” to the DOJ.

Notably, the six- and twelve-month deadlines described above are not firm. Monaco referred to them as “baseline” and acknowledged that they are “subject to a reasonableness analysis” that depends on the “specific facts, circumstances, and complexity of a particular transaction.” Acquiring companies must be mindful, however, that if the identified misconduct poses a risk to national security or harm is ongoing or imminent, a company must immediately upon discovery disclose to receive the benefits of the Safe Harbor Policy. 

The Mergers & Acquisitions Safe Harbor Policy is more lenient than February’s Voluntary Self-Disclosure (VSD) Policy in a one notable way: when an acquiring company discovers and adequately discloses misconduct that was committed by a company that it is acquiring, aggravating factors present in the acquired company’s practices “will not impact in any way the acquiring company’s ability to receive a declination.” In contrast, under the VSD Policy, the DOJ reserves the right to seek guilty pleas against companies that voluntarily self-disclose misconduct when an aggravating factor is present, even if the company meets every criterion to qualify for leniency as a voluntary self-disclosure. Pursuant to the VSD Policy, an aggravating factor is present when a company’s misconduct: 1) “poses a grave threat to national security, public health, or the environment”; (2) is “deeply pervasive” within the company; or (3) involves the company’s “current executive management.”

While the Safe Harbor Policy’s presumption of declination applies to the acquiring company when all the criteria are met, an acquired company can still qualify for applicable VSD benefits. However, if an aggravating factor is present, they are not given the presumption of declination. Moreover, nothing in the Safe Harbor Policy relieves an acquiring company’s responsibility to comply with the Voluntary Self-Disclosure Policy, including disclosing all relevant facts regarding misconduct committed by individual actors at the acquired company. Consistent with the VSD Policy, those individual actors may still be subject to prosecution.

The goal of the Safe Harbor Policy is to incentivize companies to “invest in strong compliance programs” and not penalize companies for “lawfully acquiring companies when they do their due diligence and discover and self-disclose misconduct.” In her address, Monaco noted that “[t]he last thing the Department wants to do is discourage companies with effective compliance programs from lawfully acquiring companies with ineffective compliance programs and a history of misconduct.” However, a company that “does not perform effective due diligence or self-disclose misconduct at an acquired entity . . . will be subject to full successor liability for that misconduct under the law.”

Takeaways:

  1. Robust due diligence in the acquisition process is paramount. The DOJ Mergers & Acquisition Safe Harbor Policy provides acquiring companies powerful incentives to thoroughly investigate a target company’s conduct and compliance programs, as well as to voluntarily self-report misconduct committed by the companies they acquire. 
  2. Acquiring companies that satisfy the Mergers & Acquisitions Safe Harbor Policy can limit successor liability associated with an acquisition target’s misconduct. An acquiring company that timely discloses and remedies misconduct will presumptively avoid criminal prosecution, even if aggravating factors are present.

When M&A teams uncover facts indicative of potential criminal misconduct during the due diligence process, it is critical to promptly engage with counsel experienced in government investigations of corporate misconduct so that they can help analyze whether the misconduct is criminal. Experienced counsel can also advise an acquiring company about the potential benefits and risks of voluntary self-disclosure, as well as when and how to effectuate any disclosure to the government.

If you have any questions about the latest DOJ policies, are concerned about whether your organization or an organization you are acquiring is in compliance with DOJ requirements, or would like assistance educating your team regarding these developments, please contact a member of our Government Investigations, White Collar & Compliance practice.

 

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