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Increased Importance of Corporate Compliance Rises With New Department of Justice Safe Harbor Policy

    Client Alerts
  • October 26, 2023

Compliance assessments can be a valuable tool during the mergers and acquisitions process, but the Department of Justice (DOJ) is incentivizing due diligence reviews under a newly announced policy.

Deputy Attorney General Lisa Monaco announced the Safe Harbor Policy earlier this month during a speech about compliance and ethics. 

This is the first time the DOJ has formalized its policies around voluntary self-disclosures that happen before, during, and after closing of a deal, Monaco said.

Under the policy, companies that acquire other companies have six months from the date of closing to fall within the safe harbor. Acquiring companies that uncover criminal misconduct by the company they are buying have to promptly and voluntarily disclose the behavior plus cooperate with the ensuing investigation as well as remediation, restitution, and disgorgement in order to receive the presumption of declination, Monaco said during her speech.

The policy only applies to misconduct discovered in bona fide, arms-length mergers and acquisitions transactions. It does not apply to situations where misconduct was required to be disclosed, was already public, or was known to the DOJ.

In implementing the policy, Monaco said the DOJ was thinking about unintended consequences.

"The last thing the Department wants to do is discourage companies with effective compliance programs from lawfully acquiring companies with ineffective compliance programs and a history of misconduct," Monaco said. "Instead, we want to incentivize the acquiring company to timely disclose misconduct uncovered during the M&A process."

In addition to the DOJ's overarching guidance that companies should be stewards of good corporate governance, the policy should serve as an incentive for companies to uncover and report criminal misconduct. 

Here is a look at how the Safe Harbor Policy impacts the mergers and acquisitions process, especially for acquiring companies. 

  • The policy makes the due diligence review of the target's compliance component even more critical. A company should be incentivized to assess the condition of the compliance program of the company it is buying. An initial compliance assessment can lead an acquiring company to triage high-risk areas and conduct additional and targeted diligence both pre- and post-acquisition to learn more about its targets' previous compliance.
  • The compliance team or officers of the acquiring company should have a seat at the M&A table and be actively involved in the transaction both pre- and post-closing. 
  • Employees of the company that was purchased might be more inclined to speak up about misconduct post-closing. Acquiring companies should develop a plan to educate its new workforce on its compliance reporting or other whistleblower policies and procedures, given the Safe Harbor Policy extends six months after the closing date. 

Final Takeaways

The Safe Harbor Policy underscores the importance of regular auditing and compliance review, especially for those companies looking to go up for sale. Companies must decide whether they are prepared to go through self-disclosure, knowing there will be another company in the room to decide what information about its compliance program is shared with the government. 

In turn, the policy could have a chilling effect for companies considering going up for sale. With the possibility for a safe harbor, those companies may choose against a sale.

An acquiring company, meanwhile, should seek to conduct thorough diligence prior to signing. It is always better to uncover misconduct and potential exposure pre-acquisition, and the Safe Harbor Policy provides acquiring companies greater certainty that they will receive the presumption of a declination if they comply with the policy's requirements.

The Safe Harbor Policy will be applied across the DOJ, Monaco said, though each part of the department will have different ways of applying it to fit their enforcement regimes. This raises significant questions about how the policy will be implemented across the DOJ.

To qualify, acquiring companies that discover misconduct must disclose misconduct at the acquired company within six months from date of closing. The acquiring company will then have one year to fully remediate the misconduct. Depending on the circumstances, those deadlines could be extended, Monaco said in her speech.

Monaco also noted that the DOJ is beefing up its enforcement division by adding 25 new corporate crime prosecutors in the department's National Security Division. The department is also adding about 40% more prosecutors to the Criminal Division's Bank Integrity Unit.

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