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On October 4, 2023, in a <a href="https://www.justice.gov/opa/speech/deputy-attorney-general-lisa-o-monaco-announces-new-safe-harbor-policy-voluntary-self">speech</a> at the Society of Corporate Compliance and Ethics’ 22nd Annual Compliance &amp; Ethics Institute, Deputy Attorney General (DAG) Lisa Monaco announced a new safe harbor policy for M&amp;A transactions.

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According to DAG Monaco, acquiring companies that promptly and voluntarily disclose criminal misconduct discovered at the acquired entity to the Department of Justice (DOJ) within a safe harbor period, cooperate with the ensuing investigation, and engage in timely remediation, restitution and disgorgement will receive the presumption of a declination (the Safe Harbor Policy).

The Safe Harbor Policy allows acquiring companies to manage transactional risk and avoid potentially significant liability for possible misconduct of the acquired company. However, companies must have robust due diligence processes in place to ensure that any misconduct is uncovered and promptly reported to DOJ.

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In an important policy announcement aimed at rewarding robust due diligence and compliance programs, DOJ announced that acquiring companies that promptly and voluntarily disclose criminal misconduct discovered at the acquired entity within a safe harbor period, cooperate with the ensuing investigation, and engage in requisite, timely and appropriate remediation, restitution, and disgorgement will receive the presumption of a declination. This Safe Harbor Policy will be applied DOJ-wide; however, each part of DOJ will tailor its application of the policy to fit its enforcement regime. This is the first time DOJ has announced such a department-wide policy in the context of M&amp;A transactions, although some groups within DOJ already had similar policies in effect.

DAG Monaco made DOJ’s motivations clear: DOJ does not want to discourage companies with effective compliance programs from acquiring companies with ineffective compliance programs and histories of misconduct. To further this goal, DOJ is incentivizing companies to timely disclose misconduct uncovered during or after a proposed transaction.

In order to qualify under the Safe Harbor Policy, companies must disclose misconduct within six months from the date of closing. This timing applies regardless of whether the misconduct was discovered pre- or post- acquisition. Companies will have one year from the date of closing to fully remediate the misconduct. DAG Monaco left open the possibility that these deadlines could be extended depending on the facts, circumstances and complexity of a particular transaction. Of note, and consistent with DOJ’s recent focus, was DAG Monaco’s comment that companies that detect misconduct with national security implications should not wait until any deadline to self-disclose.

Importantly, the presence of aggravating factors at the acquired company will not impact the acquiring company’s ability to receive a declination. Additionally, unless aggravating factors are present at the acquired company, the acquired company can also potentially be eligible for a declination. Further, any self-reported misconduct under the Safe Harbor Policy will not be factored into future recidivist analysis for the acquiring company.&nbsp;

DAG Monaco emphasized that DOJ is placing a premium on conducting effective due diligence during the M&amp;A process and self-disclosing and remediating any misconduct that is discovered. In return, DOJ will not penalize corporations for lawfully acquiring companies with compliance issues. DAG Monaco concluded her remarks by further emphasizing the critical importance of compliance: “[C]orporate executives need to redouble time and attention to compliance programs, compensation programs, and diligence on acquisitions. Failing to do so can have dire consequences for companies, shareholders, and our nation.” Indeed, the first step to qualifying for protection under the Safe Harbor Policy is a robust due diligence and compliance program.

The announcement of the Safe Harbor Policy further advances DOJ’s focus on rewarding corporate self-disclosure and provides clarity in the M&amp;A context. The Safe Harbor Policy can potentially provide protection for companies that wish to acquire companies with compliance issues but fear successor liability. Transactions that historically may have been abandoned due to the discovery of misconduct may go forward as long as the acquiring company has a disclosure and remediation plan in place. However, whether to self-disclose or go through with a transaction is a complex factual and legal analysis and companies should engage legal professionals to assist in that analysis. In addition, companies should also work with their legal advisers to ensure that they have a robust due diligence process and compliance program that can effectively identify and remediate any misconduct.

BakerHostetler’s attorneys have extensive experience helping clients with these issues, through their work on our practice teams for White Collar, Investigations and Securities Enforcement and Litigation and Mergers &amp; Acquisitions. Please feel free to contact any of our experienced professionals if you have questions about this alert.

DOJ Announces Department-Wide Safe Harbor Policy for Voluntary Self-Disclosures Made in the Context of Mergers and Acquisitions

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