DOJ’s new safe harbor policy encourages self-disclosure in M&A

New safe harbor policy guidance

On October 4, 2023, the United States Department of Justice (DOJ) announced its new Safe Harbor Policy that encourages companies to voluntarily self-disclose criminal misconduct discovered at an entity acquired through a merger or acquisition (M&A) transaction. This new DOJ policy provides that companies that comply with the safe harbor requirements will receive a presumption of declination from disclosed criminal misconduct. This policy is being applied across all DOJ departments, including the Foreign Corrupt Practices Act (FCPA) unit, which is responsible for pursuing enforcement actions associated with successor liability for FCPA-related misconduct by a predecessor. The safe harbor requirements include disclosing criminal wrongdoings at the acquired company within six months of the deal closing, cooperating with the DOJ during its investigation and fully remediating the misconduct within a year of the deal closing, although both time frames are subject to reasonableness tests and could be extended by DOJ officials. It is important to note that the timeline applies whether the misconduct was discovered pre- or post-acquisition. In the DOJ’s official announcement, Deputy Attorney General Lisa Monaco stated, “The last thing the department wants to do is to discourage companies with effective compliance programs from lawfully acquiring companies with ineffective compliance and a history of misconduct.” This new policy puts a finer point on the value an acquirer can gain from addressing legal and compliance concerns at an acquired entity and promptly putting an end to criminal behavior.

What is the impact of the new safe harbor policy?

Companies with effective compliance programs are afforded greater protections from DOJ enforcement actions when engaging in M&A activity when criminal misconduct is promptly identified, disclosed and redressed at an acquired entity. This new safe harbor is another incentivization offered by the DOJ consistent with revisions to its corporate enforcement policy announced earlier in January related to voluntary self-disclosure, cooperation and remediation. These DOJ policies aim to encourage companies to proactively address misconduct and strengthen their compliance programs.

Previously, companies may have been discouraged from acquiring entities with past criminal misconduct due to the prospect of inherited legal risks, namely the threat of prosecution with hefty financial consequences. However, this significant looming threat can now be mitigated under the safe harbor policy. Unless aggravating factors exist, both the acquirer and the acquired company could qualify for applicable self-disclosure benefits, including potential declination.

In addition to prosecutorial benefits under the safe harbor policy, performing pre-acquisition due diligence has two other significant benefits.

1. Advanced integration planning: The SEC and DOJ continue to evaluate whether the acquiring company promptly incorporates the acquired entity into its compliance program and internal controls framework. Understanding regulatory issues and compliance activities during pre-acquisition due diligence enable the acquirer to get a head-start on how it can quickly enfold the acquired entity into its compliance activities and controls.
2. Deal value: Having a compliance mindset during due diligence is key. Not fully understanding the current implications of potential misconduct at a target and the long-term investment needed to remediate it can be a financial burden for the acquirer if it is not quantified and factored into the deal value. Knowing such factors upfront and incorporating them into the parameters of the deal, including the purchase price, representation and warranties clauses, and contractual remedies, can mean greater success in unlocking the deal value.