US DOJ’s new safe harbor policy

On October 4, 2023, Deputy Attorney General (DAG) Lisa Monaco announced the U.S. Department of Justice’s (DOJ) new Safe Harbor for Voluntary Disclosure of Information Related to Purchasing mergers and acquisitions (M&A).first Under the new policy, companies that promptly and voluntarily self-disclose criminal misconduct discovered during pre-acquisition due diligence or during the merger of a newly acquired entity will receive a stipend. intends to decline prosecution from the DOJ. To qualify under this new policy, companies must self-disclose misconduct they discover within six months of closure, cooperate with the DOJ in its investigation, and initiate remediation all within one year from the date of closing. However, this policy does not apply to misconduct that is required by law to be disclosed, is publicly known, or has been discovered or disclosed to the DOJ. This policy does not affect civil merger enforcement.

In making its announcement, DAG Monaco emphasized the need for corporate executives to redouble their time and attention to compliance programs, compensation programs and diligence in acquisitions. Failure to do so could have serious consequences for our companies, shareholders and our country.2

BACKGROUND

The new M&A safe harbor policy is the latest example of the DOJ’s ongoing efforts to encourage companies to voluntarily disclose information. In September 2022, DAG Monaco announced new corporate compliance principles requiring all DOJ components to review or draft and publish a written policy on the expectations and benefits of self-disclosure.3 Similarly, in January 2023, DOJ extended the adoption of the FCPA Corporate Enforcement Policy (CEP).

includes all corporate criminal matters handled by the DOJ’s Criminal Division.4 According to CEP, if a company voluntarily discloses, cooperates fully and remediates promptly and appropriately, there is a presumption that the company will decline to prosecute absent certain aggravating circumstances.5 The new M&A safe harbor policy builds on recent CEP updates.

HIGHLIGHTS OF THE SAFE PORT POLICY:

In outlining the way [g]Good corporate governance and effective compliance programs can protect companies from enormous financial risks and penalties,6 DAG Monaco explains the following scope and conditions of the Safe Harbor policy:

  • Self-disclosure: To qualify for the policy, the acquiring company must voluntarily self-disclose wrongdoing within six months of the acquisition closing date. This six-month period applies regardless of whether the misconduct was determined before or after the acquisition. A company that fails to self-disclose misconduct within the six-month safe harbor may face successor liability for that misconduct. However, the six-month period does not apply where companies find wrongdoing related to national security or involving ongoing or imminent harm.7 In such cases, companies must self-disclose upon discovery.
  • Remedy: The acquiring company must fully cure the misconduct within one year from the date of closing and make restitution payments and distributions, if any.
  • Flexibility and reasonableness: While the policy sets out basic timeframes for self-disclosure and remediation, it emphasizes reasonableness analysis. This analysis allows for flexibility in extending deadlines based on the specific circumstances of each transaction, while recognizing that not all M&A transactions are the same.
  • Aggravating factors: The presence of aggravating circumstances in the acquired company, such as the executive’s participation in misconduct or sustained or widespread misconduct, will does not affect the acquiring company’s ability to receive a rejection.
  • Recidivism Analysis: Wrongdoing disclosed under the policy will not be included in the DOJ’s recidivism analysis of the acquiring company, either at the time of disclosure or in the future.
  • Scope: This policy is limited to misconduct discovered in long-standing, bona fide M&A transactions and does not include conduct that has been publicly disclosed, known to DOJ, or requested disclosure. Additionally, it does not affect the enforcement of civil mergers.
  • Applicable across the board: This policy is designed to apply across the department, ensuring consistency in its implementation across various DOJ components. Each component will tailor policy to fit its own enforcement mission while adhering to general principles.

SIGNIFICANCE AND RECOMMENDATIONS

The M&A Safe Harbor provides important incentives for acquiring companies to disclose wrongdoing and avoid prosecution. However, companies should proceed with caution to ensure that they are taking the necessary steps to detect trading misconduct early in order to qualify for the benefits of the policy. To ensure maximum benefit from the new Safe Harbor provisions, companies entering into M&A transactions should design and maintain robust corporate compliance programs that enable them to:

  • conduct thorough risk-based due diligence on potential new business acquisitions;
  • ensure that the acquiring company’s code of conduct and compliance policies and procedures related to the FCPA and other applicable laws are applied as quickly as possible to newly acquired businesses or merged organization;
  • Training directors, officers, and employees of newly acquired enterprises or merged units;
  • conduct risk-based audits of all newly acquired or merged businesses as quickly as possible; And
  • disclose misconduct discovered during due diligence of newly acquired entities or merged entities.8

Companies should remember that even if the DOJ chooses to decline prosecution, it will still seek apportionment and restitution where appropriate.9 Companies should also note that this policy is not binding on other U.S. regulatory or enforcement agencies.ten Accordingly, self-disclosed misconduct may be pursued by other federal agencies or foreign, state, or local authorities.

It remains to be seen how DOJ will apply this policy and what impact this new guidance will have on the current voluntary self-disclosure framework, and we continue to monitor updates to the policies. DOJ amendments. K&L Gates’ U.S. White Collar Defense and Investigations team is comprised of former senior DOJ officials from the Criminal Division and U.S. Attorney’s Offices across the country who have deep experience in all aspects edge of DOJ investigations and enforcement actions. For more information about this client alert, please contact the authors or other members of the K&L Gates White Collar Investigations and Defense team.

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