Safe Harbor Policy provides ‘carrot’ for voluntary M&A misconduct disclosures

To give an added jolt to government efforts to deter criminal misconduct in merger and acquisition transactions, the U.S. Department of Justice unveiled a new Safe Harbor Policy last year geared toward voluntary self-disclosures.

Deputy Attorney General Lisa Monaco announced the new policy in October 2023 at the Society of Corporate Compliance and Ethics’ 22nd Annual Compliance & Ethics Institute.

Attorneys familiar with Safe Harbor are taking a wait-and-see approach as to the policy’s impact on the volume of M&A deals and how it will be enforced.

Brent Mosby, a partner with Dinsmore & Stohl LLP’s Indianapolis office, said he doesn’t think the policy will have much effect on deals involving smaller Indiana companies with no international presence.

Mosby said there could be occasional circumstances where the policy could lengthen the time needed to complete some M&A transactions or might even kill some deals.

“But I think that would be the exception, not the rule,” Mosby told Indiana Lawyer.

In announcing the policy, Monaco said the last thing the DOJ wanted to do was discourage companies with effective compliance programs from lawfully acquiring companies with ineffective compliance programs and a history of misconduct.

“Instead, we want to incentivize the acquiring company to timely disclose misconduct uncovered during the M&A process,” Monaco said.

New policy highlights

Monaco said any misconduct disclosed under the policy would not be factored into future recidivist analysis for the acquiring company.

The deputy attorney general said the policy will only apply to criminal conduct discovered in bona fide, arms-length M&A transactions, with Safe Harbor not applying to misconduct that was otherwise required to be disclosed or already public or known to the DOJ.

Monaco said DOJ was placing an enhanced premium on timely compliance-related due diligence and integration.

She said the policy aligned with DOJ’s principles of both civil and criminal enforcement in holding corporate and individual wrongdoers accountable, incentivizing compliance, self-disclosure, remediation, and cooperation, and deterring and penalizing repeat bad actors.

“Compliance must have a prominent seat at the deal table if an acquiring company wishes to effectively de-risk a transaction,” Monaco said.

Faegre Drinker Biddle & Reath LLP hosted its annual Indianapolis M&A conference in May.

One of the firm’s panel discussions at the conference was “To Disclose or Not to Disclose: Navigating DOJ’s New M&A Safe Harbor Policy.”

That panel’s speakers included Faegre Drinker partner Henry Van Dyck and Zachary Myers, U.S. Attorney for the Southern District of Indiana.

Myers said the policy is an effort to reduce corporate crime and incentivize companies to do self-enforcement.

“What we’re trying to convince folks to do is to do the right thing,” Myers said at the conference.

Van Dyck, Erica MacDonald and Kerry Gibbons wrote about the policy for Faegre Drinker on the firm’s website.

The Faegre Drinker attorneys pointed out that DOJ will provide the presumption of a declination to companies that self-report corporate misconduct discovered during the M&A process.

To qualify for this safe harbor, the acquiring company must promptly and voluntarily report misconduct within six months from the date of closing a deal.

The attorneys noted that Monaco highlighted the DOJ Criminal Division’s previously announced pilot program on compensation incentives and clawbacks in her Safe Harbor speech.

Under the program, companies who clawed back, withheld or attempted in good faith to claw back incentive-based compensation from individual wrongdoers may reduce their criminal fines by the same amount, according to the attorneys.

Potential impacts

Jason Covert, a partner at Taft Stettinius & Hollister LLP’s Indianapolis and Washington D.C. offices, said it’s hard to say what the impact of the new policy will be on M&A activity, given that it just came out in October.

“I think folks are still trying to feel out what it looks like in practice,” Covert said.

Covert works in Taft’s Compliance, Investigations, and White Collar Defense and Commercial Litigation practice groups.

He said his legal background included a stint as a white-collar crime prosecutor with the U.S. Department of Justice’s Criminal Division, Fraud Section in Washington.

The Taft partner said he hasn’t seen a slowdown in the firm’s day-to-day M&A activity.

Covert said with the Biden Administration, there’s been an emphasis on corporate enforcement. He described the Safe Harbor policy as one of several policies that the DOJ and Monaco are using as a “carrot and stick” approach to get compliance.

“This one has a lot more carrot to it,” Covert said.

When she announced the policy, Monaco said that aggravating factors will be treated differently in the M&A context.

“The presence of aggravating factors at the acquired company will not impact in any way the acquiring company’s ability to receive a declination,” Monaco said.

Covert said eliminating aggravating factors from the equation constituted a big exception for acquiring companies.

With a November presidential election looming, Covert said he thought the policy would stay on the books after the election regardless of whether there is a Democratic or Republican administration in charge in 2025.

He acknowledged that enforcement of the policy could be different with a new administration, with possibly less emphasis on prioritizing corporate enforcement.

Covert said he didn’t see the policy impacting M&A deal flow.

“I can’t see it in a negative way impacting the volume,” Covert said.

Mosby said the Biden Administration has been fairly aggressive in its approach to antitrust issues.

He acknowledged that most small companies are probably unaware of the new policy, but larger companies doing a lot of higher dollar M&A deals probably have Safe Harbor on their radars.•