DOJ Announces Safe Harbor for M&A Transactions

The Department of Justice (DOJ) recently announced its new Mergers & Acquisitions Safe Harbor policy that encourages acquiring companies to promptly disclose criminal conduct discovered in the course of a merger or acquisition. Deputy Attorney General Lisa Monaco presented the Department-wide policy on voluntary self-disclosure along with other new DOJ efforts directed at fighting corporate crime, proclaiming that, “corporate enforcement is in an era of expansion and innovation.”

The M&A Safe Harbor policy aims to promote good corporate governance and effective compliance programs by rewarding those companies that disclose criminal misconduct discovered during the M&A process with the presumption of a declination—that is, a presumption they will not be prosecuted. In order to take advantage of this Safe Harbor, acquiring companies must (1) timely—and voluntarily—report the conduct, (2) cooperate with the DOJ investigation and (3) timely perform the requisite remediation, restitution and disgorgement.

While some divisions or sections of the DOJ previously addressed M&A transactions as part of their voluntary self-disclosure policies, there were inconsistencies in the application. The new policy addresses these inconsistencies by both applying the safe harbor DOJ-wide and setting out clear timelines. To that end, regardless of whether the misconduct was discovered pre- or post-closing, the acquiring company must disclose the misconduct within six months from the date of closing and fully remediate the misconduct within one year from the date of closing. However, in announcing the M&A Safe Harbor policy, Monaco made clear that the timeline is subject to a reasonableness analysis and DOJ prosecutors may extend those deadlines based on the specific facts, circumstances and complexity of a particular transaction, and conversely, companies that detect misconduct threatening national security or involving ongoing or imminent harm can’t wait for the deadline to disclose.

Notably, the presence of aggravating factors at the acquired company, such as pervasive or longstanding misconduct, will not impact a cooperating company’s ability to receive a declination. The acquired entity may similarly qualify for voluntary self-disclosure benefits, including potentially a declination, even if there are aggravating factors. Furthermore, misconduct disclosed under the M&A Safe Harbor policy will not affect any recidivist analysis for the acquiring company. The M&A Safe Harbor policy only applies to criminal conduct, like FCPA violations, discovered in a bona fide, arms-length M&A transaction and does not impact civil merger enforcement. Regulatory rule violations would not fall under the purview of this new policy.

This policy brings companies’ compliance and business goals into alignment—companies that invest in compliance can de-risk transactions and protect themselves from the potential financial and reputational fallout of acquiring companies with ineffective compliance programs. As Monaco put it, “investing in strong compliance programs is good for business.”

Companies planning acquisitions, regardless of the perceived risk associated with a potential target, should prepare themselves to take advantage of this safe harbor by encouraging reporting from their entire deal teams (both internal and external), completing thorough due diligence of the target with extra scrutiny on compliance issues and fostering an environment of disclosure at the newly acquired company.