In the U.S. Department of Justice’s continuing efforts to incentivize voluntary disclosure of corporate misconduct, Deputy Attorney General Lisa Monaco announced the Criminal Division’s latest corporate self-disclosure policy this week, aimed at mergers and acquisitions specifically (remarks Here). Pursuant to DOJ’s new Mergers and Acquisitions Safe Harbor Policy (the “Policy”), acquiring companies that promptly and voluntarily disclose criminal conduct of the company to be acquired, and that cooperate and engage in remediation, will receive the presumption of a declination. The policy could represent a sea change in how companies evaluate the risk of self-reporting wrongdoing by acquisition targets that comes to light during and after the M&A due diligence process.
In her speech, Monaco highlighted the key tenets of the Policy:
- First, the Department will provide acquiring companies safe harbor from criminal charges for the misconduct of a target company if the acquirer reports the misconduct within six months of deal closing. Importantly, the safe harbor protection applies to misconduct discovered both before and after the close so long as the reporting occurs within the six-month window.
- Second, the safe harbor protection can be revoked if the acquiring company fails to remediate the misconduct within a year of deal closing, subject to discretionary extensions by the Department. Any illegally-gained profits obtained as a result of the misconduct must also be paid back by the acquiring company in the one-year timeline.
- Third, target companies can also obtain safe harbor protection, including a potential declination, for misconduct if there are no aggravating factors present.
The Policy builds upon a series of corporate self-disclosure initiatives the Department has announced in the past year, each aimed at exposing corporate wrongdoing by incentivizing compliance and cooperation. For example, in March of 2023, the Department announced that corporations can receive significant fine reductions by (1) linking executive compensation to compliance-promoting criteria; and (2) clawing back compensation from employees responsible for corporate misconduct. These initiatives complement the Department’s overarching priority in promoting corporate accountability by creating incentive structures which directly implicate the C-Suite, as outlined in the September 2022 “Monaco Memo”.
Monaco emphasized the Policy will only apply to “criminal conduct discovered in bona fide, arms-length M&A transactions.” The Policy will not impact the Department’s civil oversight of corporate mergers. Monaco’s remarks also previewed several themes that will likely be components of the coming Policy:
- Application Across the Entire Department. To prevent inconsistencies, the Policy is to be applied uniformly across the Department, with the caveat that each United States Attorney’s Office can implement the Policy “to fit their specific enforcement regime.”
- Clear Timelines for Self-Reporting. To ensure predictability, the Policy establishes bright-line rules for when reporting, remediation, and repayment must occur. The six-month and one-year framework was structured off the Department’s 2008 advisory opinion issued to Halliburton in connection with a U.K. M&A deal. Halliburton sought permission to acquire the U.K. company despite not completing due diligence prior to closing because of the specific time constraints of the deal. The advisory opinion stated Halliburton would not be criminally liable for any misconduct discovered at the U.K. company so long as it was reported in six-months.
- Aggravating Factors will not Impact Declination Decisions. Under the Policy, the presence of aggravating factors at the target company will not impact the acquirer’s ability to receive a declination.
- Disclosure will not Impact Future Recidivist Analysis. Misconduct that is self-disclosed under the policy will not be included in any analysis of corporate recidivism of the acquiring company.
In sum, the Policy expands and formalizes a practice that has already been applied in specific M&A cases, giving companies more predictability of outcome and clearer timelines for action, and reinforces DOJ’s broader corporate enforcement policy of applying leniency as an incentive for corporate self-reporting.
McGuireWoods will continue to update on developments in this area over the coming months.