October 17, 2023, Covington Alert
What You Need to Know
- On October 4, 2023, Deputy Attorney General Lisa Monaco provided new and expanded policy guidance on corporate criminal enforcement, announcing a new Mergers and Acquisitions Safe Harbor Policy (“Safe Harbor Policy”).
- The Safe Harbor Policy provides acquiring companies an opportunity to avoid criminal charges if they voluntarily self-disclose misconduct at acquired companies within six months of a merger or acquisition (“M&A”), fully cooperate in any DOJ investigation, engage in timely and appropriate remediation within one year of the transaction closing date, and pay restitution or disgorgement, as appropriate.
- The Safe Harbor Policy—which we expect will be formalized in writing and incorporated into the Justice Manual—appears to draw heavily on policies and guidance from the Criminal Division dating back to 2008, but that will now be formalized, clarified, and applied across the Department, with different parts of the Department “tailor[ing] its application . . . to fit their specific enforcement regime.”
- As with all of the Department’s recent policy announcements concerning the benefits of voluntary disclosure, significant questions remain. We discuss some of those below, and we will be watching to see how DOJ applies the Safe Harbor Policy in practice. At a minimum, however, companies should ensure that their pre- and post-closing diligence and integration processes are designed to quickly identify legacy or ongoing misconduct at acquired companies so that they may have an opportunity to consider the expected benefits and burdens associated with a voluntary disclosure under the Safe Harbor Policy.
- In addition to announcing the Safe Harbor Policy, Deputy Attorney General Monaco noted a “dramatic” expansion in national security enforcement, new enforcement tools that the Department is deploying, continued focus on incentivizing companies to seek compensation clawbacks from individual wrongdoers, and even more policy changes to come. Deputy Attorney General Monaco’s announcement follows recent shifts in enforcement remedies sought by the Department, such as divestiture in certain criminal antitrust cases—an unprecedented remedial measure.
The Safe Harbor Policy
The new Safe Harbor Policy is the first Department-wide policy to address voluntary self-disclosure of potential criminal misconduct in the M&A context, and it follows Principal Associate Deputy Attorney General Marshall Miller’s preview last month of a forthcoming announcement in this space.
The Safe Harbor Policy draws on prior policies and statements with respect to how the Department will address criminal misconduct at acquired entities.
- One prior policy was the revamped Corporate Enforcement and Voluntary Self-Disclosure Policy (“CEP”), which we discussed in a previous alert. The CEP, which applies to all matters brought by the Criminal Division, expressly provided that where an acquiring company complied with the CEP—namely, voluntarily disclosing, fully cooperating, timely and appropriately remediating, and paying disgorgement—there would be a presumption of a declination, or, in the presence of aggravating factors (described below) at the acquired entity, a declination at the Department’s discretion.
- In another previous statement of the Department’s views on enforcement in the M&A context—the seminal 2008 Foreign Corrupt Practices Act Opinion Procedure Release requested by Halliburton (the “Halliburton Opinion”)—DOJ indicated that it would decline to pursue an enforcement action against Halliburton for pre- or post-acquisition conduct of the acquired company, provided that Halliburton disclosed the conduct to DOJ within 180 days of closing and fully remediated the conduct in a reasonable period. The Deputy Attorney General specifically referenced the Halliburton Opinion in her speech, noting that the opinion “applied only to that transaction, . . . and did not have broader application.” While the Deputy Attorney General’s speech stops short of enshrining the Halliburton Opinion into Department-wide policy, it is clear that the Department intends to embed principles from this opinion release into the Safe Harbor Policy.
- The Criminal Division’s and the Enforcement Division of the SEC’s Resource Guide to the U.S. Foreign Corrupt Practice Act also addressed enforcement in the M&A context. The Resource Guide encouraged acquiring companies to conduct risk-based due diligence, enhance the compliance program of an acquired entity, conduct training at the acquired entity, perform post-closing diligence or auditing, and self-disclose corrupt payments discovered. The Resource Guide indicated that “DOJ and [the] SEC will give meaningful credit to companies who undertake these actions, and, in appropriate circumstances, DOJ and [the] SEC may consequently decline to bring enforcement actions.” The Safe Harbor Policy appears to be targeted towards giving greater certainty to companies regarding the circumstances in which DOJ, at least, will not pursue enforcement.
The Safe Harbor Policy builds on these prior statements and formalizes aspects of prior guidance, clarifying the Department’s expectations, providing clearer temporal guideposts, and extending the applicability of the Safe Harbor Policy Department-wide. Under the new Safe Harbor Policy, acquiring companies can qualify for the presumption of a declination if they meet the following criteria:
- Prompt and Voluntary Disclosure. The acquiring company must promptly and voluntarily disclose the acquired company’s misconduct within six months of the transaction closing date, regardless of whether the misconduct was discovered pre-acquisition or post-closing.
- Full Cooperation. The acquiring company must fully cooperate with the Department’s investigation.
- Timely and Appropriate Remediation, Restitution, and Disgorgement. The acquiring company must remediate the disclosed misconduct within a presumptive 12 months of the transaction closing date. The Department acknowledges that the remediation deadline can be extended “depending on the specific facts, circumstances and complexity of a particular transaction.” The company must also pay timely and appropriate restitution and disgorgement.
From a prudential standpoint, Deputy Attorney General Monaco positioned the Safe Harbor Policy as continuing to incentivize voluntary disclosure and to avoid unintended consequences—in particular, she explained that the Department would not want to “discourage companies with effective compliance programs from lawfully acquiring companies with ineffective compliance programs and a history of misconduct.” Consistent with this sentiment, the Safe Harbor Policy states that the presence of aggravating factors (e.g., involvement by executive management, significant profit from the misconduct, egregious or pervasive misconduct, or criminal recidivism) at the acquired company will not impact the acquiring company’s ability to receive a declination. In addition, misconduct disclosed under the Safe Harbor Policy will not be factored into any future recidivist analysis for the acquiring company. That said, the Safe Harbor Policy makes clear that aggravating factors at the acquired company may preclude the acquired company—like other companies that meet the Department’s requirements under the CEP and numerous other voluntary disclosure policies promulgated by DOJ components—from qualifying for applicable voluntary self-disclosure benefits, including a declination, even though a declination still would be possible on a discretionary basis.
While the increased transparency and predictability afforded by the Safe Harbor Policy are welcome, as with many Department policy revisions, several questions remain. In addition to the questions we noted when several DOJ components recently rolled out voluntary disclosure policies, which Deputy Attorney General Monaco suggested would apply to the Safe Harbor Policy, we will keep an eye out for further clarity regarding the following:
- The presumption of a declination applies only to criminal misconduct discovered in “bona fide, arms-length M&A transactions.” What will DOJ count as a “bona fide, arms-length” transaction? Are majority investments, or transactions in which a party with a minority stake increases its stake to take a controlling interest, included? While the policy is focused on M&A, would that apply to investments in special purpose vehicles or consortia that are created for purposes of pursuing, for example, energy or infrastructure projects?
- It is clear from Deputy Attorney General Monaco’s remarks that the Safe Harbor Policy applies to misconduct occurring prior to the transaction’s closing, but it is not clear whether DOJ intends the policy to apply to misconduct that starts pre-acquisition and continues post-closing, or that occurs only in the acquired company’s operations within the first six months post-closing. Historically, companies have had concerns about potential pre-closing violations that could carry over for several months after a transaction has closed, and we note that the Halliburton Opinion specifically covered post-closing conduct, if it was promptly disclosed and remediated. Is the Safe Harbor Policy strictly limited to misconduct that occurred prior to closing, or does it include misconduct that may spill over into the period after the transaction has closed?
- If the Safe Harbor Policy is intended to apply to post-closing conduct, whether new or continuing, how will potential conflicts between various voluntary self-disclosure policies and the Safe Harbor Policy be resolved? For instance, as we covered in a previous alert and companion chart, several voluntary disclosure policies—including those promulgated by the U.S. Attorneys’ Offices, the Environmental and Natural Resources Division, the Tax Division, the National Security Division, and the Civil Division’s Consumer Protection Branch—do not provide for a presumptive declination. As we noted in our alert, uncertainty regarding which voluntary disclosure policy might apply when two or more are applicable will also persist here. This unpredictability, or even perceived unpredictability, has the potential to undermine the Deputy Attorney General’s stated objective of achieving consistent results across the Department.
- The Safe Harbor Policy does not address the Department’s intentions in a situation involving the presence of aggravating factors at the acquiring company. Could the presence of such factors overcome the presumption of a declination, thereby exposing an acquiring company to a criminal resolution? What other factors could overcome the presumption of a declination for the acquiring company?
- The Department has made clear that the Safe Harbor Policy will not apply to “misconduct that was otherwise required to be disclosed or already public or known to the Department.” How will the Safe Harbor Policy apply to companies that operate in regulated settings, such as in environmental regimes that rely on mandated disclosures to the government regarding environmental non-compliance, or government contractors facing reporting obligations under the Federal Acquisition Regulation?
- As noted above, recognizing the unique nature of individual transactions, Deputy Attorney General Monaco advised that the timelines for disclosure and remediation will be subject to a “reasonableness analysis,” and therefore DOJ attorneys have the discretion to extend the timelines in the Safe Harbor Policy—and, by contrast, to shorten them for issues that “can’t wait for a deadline” to be disclosed, such as “misconduct threatening national security” or “involving ongoing or imminent harm.” What factors will prosecutors consider in determining whether to exercise such discretion, and what precisely qualifies as an issue that “can’t wait for a deadline” to be disclosed?
- Deputy Attorney General Monaco noted that if an acquiring company “does not perform effective due diligence” or voluntarily self-disclose misconduct, then the company “will be subject to full successor liability for that misconduct.” Does this signal an intent to more aggressively pursue acquiring rather than acquired companies in situations that do not involve voluntary self-disclosure?
- While the Safe Harbor Policy provides for a presumptive declination for an acquiring company that meets the stated requirements, acquired companies—particularly those with aggravating factors—do not enjoy the same presumption. Will the Department’s treatment of the acquired entity vary depending on the form of the corporate transaction, and in particular whether the acquired company continues to exist as a separate legal entity that could enter into a resolution of its own? Will the Safe Harbor Policy change companies’ calculus with respect to transaction form? One of the themes of Deputy Attorney General Monaco’s remarks was the Department’s efforts to avoid “unintended consequences,” and we will be watching to see if the Safe Harbor Policy creates any of its own.
- The Safe Harbor Policy may augment longstanding policies—such as the Antitrust Division’s leniency program—which already provide leniency for companies that voluntarily self-disclose violations. Deputy Attorney General Monaco confirmed that that the Safe Harbor Policy would apply “Department-wide” and “[e]ach part of the Department will tailor its application of this policy to fit their specific enforcement regime.” How will various DOJ components, including the Antitrust Division, revise their policies in light of the new Safe Harbor Policy? We will be watching to see how various components bring their policies into alignment with the Safe Harbor Policy.
As with many of the Department’s policy revisions over the last couple of years, the new Safe Harbor Policy seeks to provide companies with more transparency, predictability, and consistency in an effort to support decisions to voluntarily self-disclose misconduct. In response, companies should position themselves to take advantage of the benefits, if they so choose.
The Safe Harbor Policy sends a clear signal to companies that compliance should be of paramount importance before, during, and after a transaction. Indeed, Deputy Attorney General Monaco stated that “[c]ompliance must have a prominent seat at the deal table if an acquiring company wishes to effectively de-risk a transaction.” Now that the Department has announced its expectations, companies should review how they approach acquisitions to position themselves to consider taking advantage of the Safe Harbor Policy:
- A Seat at the Table. Compliance must be a significant stakeholder in corporate transactions, with companies supporting effective pre- and post-acquisition due diligence and compliance integration. The Department has made clear that it is “placing an enhanced premium on timely compliance-related due diligence and integration.” While sophisticated companies have long focused on identifying compliance risks pre- and post-transaction, and on integrating an acquired company into its compliance ecosystem, the Department has provided real incentives to double down on those efforts, and to undertake them with rigor.
- Prepare for Post-Acquisition Work Prior to Closing. Particularly where pre-acquisition diligence is limited or where potential issues are identified, companies should be prepared to move quickly to conduct post-transaction assessments of compliance risks and to evaluate pre- and post-acquisition conduct. Companies will need to quickly identify potential issues in order to consider whether or not to voluntarily disclose.
- Raise Issues to Decision-Makers. As part of a diligence or integration process, companies should ensure that compliance-relevant information is escalated to permit decisions about voluntary self-disclosure and to promptly remediate any potential misconduct.
- Weigh the Benefits and Costs of Voluntary Self-Disclosure. Companies should carefully weigh the benefits of voluntary disclosure against any potential costs or burdens. Seeking the benefits of the Safe Harbor Policy requires providing full cooperation with the Department’s investigation, as well as “appropriate remediation, restitution, and disgorgement,” which may prove burdensome for acquiring companies. Companies should also consider that the Safe Harbor Policy does not protect them from risks beyond the Department’s control, such as investigations by other domestic or international regulators, or follow-on civil litigation.
Beyond announcing the Safe Harbor Policy, Deputy Attorney General Monaco’s remarks focused on other areas of the Department’s corporate criminal enforcement priorities, and she foreshadowed even more policy changes to come.
- “Dramatic” Expansion of National Security Enforcement. Echoing Principal Associate Deputy Attorney General Miller’s remarks last month, Deputy Attorney General Monaco noted that the Department will continue to pursue a “dramatic” expansion of national security enforcement. The Department recently hired the National Security Division’s first-ever Chief Counsel for Corporate Enforcement, and the Deputy Attorney General said that more than 25 prosecutors will be added to the Division. Moreover, the Department anticipates a 40% increase in prosecutor headcount in the Criminal Division’s Bank Integrity Unit, which prosecutes complex international criminal cases involving financial institutions and individuals who violate various federal statutes, including the Money Laundering Control Act, the Bank Secrecy Act, and economic and trade sanctions programs authorized by the International Emergency Economic Powers Act.
- New Enforcement Tools. The Deputy Attorney General said that the Department is developing new tools and remedies to punish and deter corporate criminal misconduct. For the first time in DOJ history, corporate criminal resolutions have included mandated divestitures of lines of business, specific performance as part of restitution and remediation, and more tailored compensation and compliance requirements. Recent examples include the Antitrust Division’s deferred prosecution agreements with two pharmaceutical companies (covered here), where the Department required the companies to divest a product line that was a core part of the companies’ alleged price-fixing misconduct.
- Increased Scrutiny of Compensation Systems. Earlier this year, the Criminal Division launched a Pilot Program Regarding Compensation Incentives and Clawbacks, which itself followed Deputy Attorney General Monaco’s focus on compensation in a September 2022 memo (covered here) and March 2023 revisions to the Criminal Division’s Evaluation of Corporation Compliance Programs guidance. In her speech, Deputy Attorney General Monaco signaled a continued focus on compliance systems, and she touted benefits that companies have achieved in recent resolutions where they have sought or obtained compensation clawbacks from individual wrongdoers.
- More Changes to Come. With all of the policy changes coming out of the Biden Administration DOJ, there is a risk that policy-revision fatigue and confusion may set in, leaving companies to wonder when the dust may settle. Yet, Deputy Attorney General Monaco signaled that even more changes are on the horizon, and we expect that further revisions to voluntary self-disclosure programs, including the Antitrust Division’s leniency program, may be forthcoming in the nearer term.
If you have any questions regarding the material discussed in this client alert, please contact a member of our White Collar Defense and Investigations, Anti-Corruption, or Antitrust practices.