DOJ's New Safe Harbor in M&A Deals

Over the last several years, the United States Department of Justice ("DOJ") has increasingly sought to publish formal criteria that would provide an incentive for companies to voluntarily disclose potentially criminal misconduct in return for a declination of prosecution or, at minimum, mitigation of the penalties it would face.  Most recently, on October 4, 2023, the DOJ extended this initiative by rolling out a new policy that offers a safe harbor to acquirors in the context of M&A transactions.  Under the new policy, the DOJ provides a presumption that it will decline to prosecute an acquiring company that voluntarily discloses criminal misconduct at the acquired entity within six months of the date of closing and cooperates, remediates, and, if need be, disgorges the fruits of any such criminal misconduct within one year of closing.  This policy applies whether the misconduct is discovered pre- or post- acquisition.  The DOJ retains discretion to extend those dates under a “reasonableness” analysis.  Aggravating factors at the acquired company will not affect the ability of the acquiror to receive the declination.  The DOJ goes a step further and potentially offers the voluntary self-disclosure benefits to the acquired entity in the absence of aggravating factors.

This policy puts a premium on timely compliance-related due diligence, as the acquiror has a great incentive to identify misconduct, if any, in order to make a  voluntary disclosure and undertake remediation within the safe harbor period.  Open source research and human intelligence gathering coupled with targeted document review and interviews are powerful tools available to the acquiror.  The failure to timely identify the misconduct can lead to draconian criminal and regulatory consequences.