On October 4, 2023, the Department of Justice (DOJ) announced the advent of a new safe harbor for companies that discover wrongdoing by the acquired business in the course of an M&A transaction. Buyers hoping to take advantage of this avenue for leniency would be well-advised to conduct thorough diligence and act quickly to report any wrongdoing they uncover, as the potential upsides for those who do so may be considerable in light of the DOJ’s new policy.
New Universal Criteria for Reporting
As part of an October 4 speech discussing the Department’s efforts to promote corporate compliance, Deputy Attorney General Lisa O. Monaco announced a Department-wide Safe Harbor Policy for voluntary self-disclosures made in the context of the mergers and acquisition process.
The Department’s stated aim is to allow law-abiding companies to complete transactions despite uncovering misconduct during due diligence, or shortly after closing: “The 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.”
Going forward, acquiring companies that promptly and voluntarily disclose criminal misconduct within a Safe Harbor period, cooperate with the ensuing investigation, and provide timely and appropriate remediation, restitution, and disgorgement will receive the presumption of a declination from criminal prosecution for the disclosed wrongdoing. Notably: 1) The Safe Harbor is six months from the date of closing, and applies whether the misconduct was discovered pre or post-acquisition; and 2) companies will have a baseline of one year from the date of closing to fully remediate the misconduct. Both timelines may be adjusted for reasonableness, depending on issues such as the complexity of the transaction (potentially extending beyond a year) or national security implications (potentially hastening the requirement), but those decisions remain at the Department’s discretion.
Where present at the seller, aggravating factors will not be held against a buyer who merely acquires, rather than fosters, those factors. For example, misconduct isolated within an acquired company will not be imputed to the buyer in the event of a later of analysis of similar misconduct.
Increased Enforcement and Uncertainty
The new Safe Harbor is part of the Department’s “era of expansion and innovation” in corporate enforcement. While the policy as stated will not impact the civil merger review process or likelihood of merger clearance, it raises a host of questions regarding interaction with existing enforcement regimes and the agencies’ recent proposed changes to merger clearance.
As of March 2023, all DOJ enforcement branches utilize self-disclosure programs. For instance the DOJ’s Antitrust Division has had a robust Corporate Leniency Program in effect since 1993 so non-prosecution for corporate disclosure of antitrust criminal conduct was already available under that program to qualifying companies. Likewise, since 2018 the DOJ Criminal Division has applied its Corporate Enforcement Policy (CEP) beyond Foreign Corrupt Practices reporting across the Criminal Division such that companies self-reporting wrongdoing and meeting other criteria could obtain declinations or fine reductions. Those programs were previously available to companies discovering post-acquisition wrongdoing and until now, each DOJ Component individually implemented their program whether the disclosure involved a merger or not. The new safe harbor is universal—so, it remains to be seen how each Component of the Department will incorporate the policy into their existing programs and how they will interact. For instance, an acquiring company who discovers criminal antitrust conduct, fraud or FCPA violations can currently self-report under the Antitrust Corporate Leniency Program or the Criminal Division’s CEP, respectively, and potentially qualify for leniency, a declination or fine reduction under those programs, even if the conduct was discovered more than six months after the acquisition. Will the universal DOJ Safe Harbor now change those Component self-disclosure programs in practice or require actual policy changes? That would seem inconsistent with the DOJ’s purported purposes of encouraging compliance and self-disclosure by the acquiring party.
In addition, increased disclosure requirements under the recently proposed changes to pre-merger notification and HSR filings may implicate a safe-harbor-qualifying matter, especially around current concerns regarding “labor market issues.” The implications of these potential overlaps have yet to be tested.
Planning for Unknowns
The policy may be inherently limited by the nature of due diligence—in which materials made available are often insufficient to conduct a thorough internal investigation into suspected criminal conduct. Rather than accounting for potentially limited awareness, the DOJ’s new safe harbor could mean harsher consequences for any misconduct not disclosed during the six-month post-closing period.
In addition to underlining the importance of antitrust counsel on deal teams, the policy increases the imperative for companies to conduct fulsome diligence on areas of potential criminal liability. The burden on companies to uncover and quickly course-correct under the new Safe Harbor is steep. The tight timelines and disclosure expectations underscore the importance of pre and post-acquisition diligence and timely internal investigation of suspected wrongdoing.