Merge, Acquire . . . Voluntarily Self-Disclose?
Merge, Acquire . . . Voluntarily Self-Disclose?
Earlier this month, Deputy Attorney General Lisa O. Monaco announced an important extension of DOJ’s voluntary self-disclosure policy aimed specifically at incentivizing companies engaged in mergers and acquisitions “to timely disclose misconduct uncovered during the M&A process.” Monaco said that the Department’s goal in rolling out the new policy “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.”
The aptly named Mergers & Acquisitions Safe Harbor Policy (“M&A Safe Harbor Policy”) affords a presumption of declination of criminal charges against the acquiring company if it:
The “baseline” safe harbor periods for an acquiring company are (i) six months from the date of closing to report misconduct, and (ii) twelve months from the date of closing to fully remediate the reported misconduct. Monaco explained that these time periods are not set in stone, and the Department would apply a “reasonableness analysis” to accommodate particularly complex transactions or “other facts and circumstances” surrounding an acquisition or merger. If experience is any guide, enforcers will hew closely to the baseline time periods absent good cause for failing to disclose or remediate within those time periods.
Under the M&A Safe Harbor Policy, a declination would cover both pre- and post-closing conduct within the safe harbor period.
The M&A Safe Harbor Policy is an addition to the voluntary self-disclosure policy that the Department announced in January 2023 and discussed in a client alert at the time.
The M&A Safe Harbor Policy will apply Department-wide. Monaco explained, however, that each part of the Department “will tailor its application of this policy to fit their specific enforcement regime.” Accordingly, notwithstanding the Department’s goal of ensuring consistency, implementation of the Policy may vary across DOJ components, including the U.S. Attorneys’ Offices and the litigating components at Main Justice.
Notably, the M&A Safe Harbor Policy will treat “aggravating factors” differently depending on whether the company is being acquired or is the acquiror. Under the new M&A Safe Harbor Policy, aggravating factors such as involvement of executive management in misconduct, pervasive misconduct, and recidivism “will not impact in any way the acquiring company’s ability to receive a declination.” But unlike acquirors, the presence of aggravating factors will matter for the acquired entity, as they may block the path to declination.
In announcing the M&A Safe Harbor Policy, Monaco addressed another concern central to the calculus for voluntary self-disclosure: the recidivist analysis. Monaco was clear that voluntarily disclosed misconduct of an acquired company would not count against the acquiring company now or in the future: “[A]ny misconduct disclosed under the Safe Harbor Policy will not be factored into future recidivist analysis for the acquiring company.”
The M&A Safe Harbor Policy is DOJ’s latest attempt to incentivize compliance and due diligence with new and expanded benefits for disclosure. While the prospect of a declination for acquiring companies and – absent aggravating factors – acquired companies may be appealing, the decision whether to voluntarily disclose misconduct will continue to be sensitive and require a careful assessment of the potential benefits and risks inherent in reporting conduct to criminal authorities. For example, while the possibility of a safe harbor may reduce the likelihood of a criminal penalty, the DOJ Criminal Division’s Corporate Enforcement Policy generally requires disgorgement of profits to obtain a declination. If disgorgement is also a requirement under the Criminal Division’s application of the M&A Safe Harbor Policy, then that could impact the value of an acquisition. Even if a company does not self-disclose to DOJ, it is likely to receive some leniency due to any cooperation in a government investigation and remediation.
The M&A Safe Harbor Policy is a step toward the kind of predictability and transparency that companies need in order to make informed decisions, but, as always, it remains important to be alert to how the Policy is implemented in practice.
It remains as important as ever to have a thoughtful, risk-based approach to due diligence, integration, and risk mitigation in the M&A context. Absent robust diligence or, where that is not possible, a robust review post-closing, misconduct may not be discovered within the six-month disclosure period. This would not only impact the acquiring company’s ability to make use of the M&A Safe Harbor Policy, but perhaps even more important, it may result in continuing misconduct, ineffective integration, and significant legal exposure, all of which will negatively impact the value of any acquisition.