New DOJ Safe Harbor
Deputy Attorney General Lisa O. Monaco recently announced the Mergers & Acquisitions Safe Harbor in connection with the DOJ’s increased focus on corporate crimes. The M&A Safe Harbor Policy allows corporations six months following acquisitions to make voluntary self-disclosures without risking criminal liability for the target company wrongdoing. The safe harbor incentivizes the acquiring company to timely disclose any misconduct uncovered during and after the closing of an M&A transaction.
Safe Harbor Requirements
The safe harbor is only available for the voluntary self-reporting of criminal conduct uncovered in arm’s-length transactions. While the self-reporting process is complex (typically involving a thorough internal investigation), it provides acquirers with several guarantees, including a presumption of declination of criminal charges.
The safe harbor provides a clear timeline for a buyer’s voluntary disclosure of any criminal violations uncovered either pre- or post- closing. The buyer will fall within the safe harbor when disclosing misconduct discovered within six (6) months from the date of closing. Further, the buyer must fully remediate the misconduct within one (1) year of closing. This remediation will usually include restitution and disgorgement.
Deputy Attorney General Monaco stated that “a reasonableness analysis” will be applied to the six month and one-year deadlines given the unique nature of some transactions, so those deadlines may be extended depending on the facts. However, these extensions are unavailable to transactions involving a national security-related violation. This emphasis on fighting corporate crimes with national security implications furthers an ongoing effort now spearheaded by the first Chief Counsel for Corporate Enforcement, Ian Richardson. Richardson and 25 prosecutors will be investigating and prosecuting sanction evasions, export violations, and other criminal violations within companies. These efforts follow several investigations indicating national security risks may be present even in seemingly routine corporate transactions.
Ultimately, treatment of the target company is dependent on the extent of the bad acts. Deputy Attorney General Monaco discussed “aggravating factors” including (1) executive involvement, (2) extremely high profits, or (3) criminal activity across business units. The presence of one or more of these aggravating factors does not overcome the presumption of a declination for the acquirer but will disqualify a target company from receiving a declination. Additionally, conduct that falls under the safe harbor will not be considered in the DOJ’s recidivism analysis. Thus, companies that have repeatedly self-reported misconduct post-closing to take advantage of the safe harbor will not be prohibited from receiving declinations. However, the safe harbor does not prevent enforcement by other regulatory authorities.
Key Takeaways for Potential Buyers
- This safe harbor promotes increased depth in the due diligence process. DOJ’s safe harbor applies DOJ-wide, thus it covers all potential federal criminal violations (including antitrust, FCPA, tax, health care (FCA/AKS), and securities, among others). It may also extend the life of the due diligence process beyond the closing date. Buyers may now seek a more active role in identifying, investigating, and self-reporting potential misconduct, even pre-closing. Importantly, acquirers should pay special attention to potential areas of risk and ensure that diligence related to those risk areas is robust. Diligence request lists should be reviewed and updated accordingly.
- Deal teams should include counsel experienced with internal and government investigations early in the due diligence process and as soon as issues arise. Close collaboration with experienced counsel leading up to closing may provide the acquiring company with clearer expectations of any future restitution or disgorgement. Investigations counsel can help assess the risks associated with self-reporting. Importantly, the DOJ safe harbor is not binding on any other enforcement or regulatory authority, including foreign, state, or local regulators. It also has no effect in a civil litigation.
- Counsel negotiating purchase agreements should consider provisions related to the Safe Harbor. For instance, building in appropriate protections in the purchase agreement, such as special indemnities, escrows, and specific representations and warranties. With the introduction of this safe harbor, companies should routinely consider contracting for the target company to pay any restitution or disgorgement occurring in response to self-reporting under this safe harbor. Likewise, with the limited window available to take advantage of the safe harbor, agreements may want to consider cooperation provisions and take into account the costs of increased due diligence, restitution, reputational risk, or liability.
- Companies should build and maintain strong internal compliance programs to help identify and remediate issues as they arise. The acquiring companies will have strong incentives to identify and disclose any of the target company’s wrongdoings within the six (6) month window and target companies with prior bad acts will not be immune from criminal liability if the aggravating factors are present.
- If an acquiring company fails to uncover a prior bad act within the reporting window or chooses not to self-report, it seems likely they may now also bear that criminal liability. Acquiring companies should place an increased emphasis on due diligence, strong internal compliance programs, and ensuring adequate protections in the purchase agreement (such as escrows, indemnities, and specific representations and warranties and potentially representation and warranty insurance).
- If, however, the wrongdoings are discovered prior to closing, some corporations may feel more comfortable continuing to close knowing they will not be held criminally liable for past mistakes of the target company they are acquiring. Acquiring companies should, however, take extra precautions if the prior wrongdoings have any potential ties to national security issues including ties with terrorist organizations or violations of embargos.
