This prior post highlighted the DOJ’s “New Safe Harbor Policy For Voluntary Disclosures Made In Connection With Mergers and Acquisitions.”
As discussed in the post, substantively the policy is not really new, nor is it a safe harbor as companies who follow the policy and “receive the presumption of a declination” will still have to pay a disgorgement amount (which in the FCPA context can be millions and sometimes higher than other forms of resolution such as a non-prosecution or deferred prosecution agreement).
This post highlights various law firm client alerts and updates regarding the policy,
Based on the the below sampling it does not appear that many law firms are impressed with the policy.
“[I]t remains to be seen how DOJ will apply the policy in enforcement actions and whether this new guidance will materially alter the voluntary self-disclosure calculus.
Although the potential of a safe harbor for an acquired entity reduces the threat of criminal monetary penalties effectively being levied on the successor, both entities remain obligated to disgorge profits if obtaining a declination under the Corporate Enforcement Policy. Given that DOJ’s disgorgement calculations often can be onerous, this can serve as a significant deterrent.
Finally, the Policy leaves unanswered whether successor liability will become the norm for acquirers that do not voluntarily self-disclose, as opposed to a theory deployed in “limited circumstances, generally in cases involving egregious and sustained violations.” The suggestion in DAG Monaco’s speech that non-self-disclosing companies “will be subject to full successor liability for misconduct under the law” is a significant threat and certainly an incentive for voluntary self-disclosure. However, as has always been the case, voluntary self-disclosure is not the only factor to be weighed under the Principles of Federal Prosecution of Business Organizations. While companies that do not self-disclose will not receive a safe harbor, they likely still would receive some benefit from cooperation, remediation, the potential for civil or regulatory remedies and the other factors listed in the Principles.
The Policy may provide a clearer path forward for acquiring companies that have identified an issue and want the benefit of self-disclosure. However, the practical reality is that the costs of an investigation and potential disgorgement must be weighed against the value of the assets to be acquired and the likelihood that DOJ otherwise would discover the past misconduct. Although companies undertaking this analysis will be aided by the clarity of the Policy, it remains to be seen how DOJ will apply the Policy in enforcement actions and whether this new guidance will materially alter the voluntary self-disclosure calculus.”
“The Safe Harbor raises several unanswered questions for transactional parties about their enforcement risk and how the policy will be implemented in practice: Will self-disclosing companies obtain benefits that outweigh the risks? Without clearer guidance from DOJ, acquirers may have difficulty predicting with confidence how the leniency will work, potentially exposing the reporting company to additional risk that the program itself does not mitigate.
For example, complying fully with the leniency program could be so onerous that the company risks not fully satisfying DOJ’s demands to qualify ultimately for the non-prosecution benefit. In particular, where the cooperation of executives or employees facing risk of criminal prosecution is needed, companies may face challenges meeting prosecutors’ cooperation demands. Further, the acquiring company may be saddled with a company knowing its executives and employees face criminal charges, burdening the acquiring company with the associated legal and financial burdens and reputational challenges. Companies should also note that DOJ will make the determination as to whether their disgorgement and restitution obligations have been satisfied.
How should companies weigh the other risks from self-disclosure? Companies should account for threats and risks outside the control of DOJ that will likely flow from self-disclosure. For example, although the Antitrust Division’s leniency program incentivizes companies to self-report collusive conduct by providing immunity from criminal antitrust liability, the program does not shield them from civil liability in private lawsuits that almost always follow criminal investigations. This risk has been cited as a reason why many companies have elected not to self-report.
The Safe Harbor will not be binding on any other enforcement or regulatory authority. For this reason, if the conduct uncovered could be prosecuted by foreign, state, or local enforcers or regulators, companies should consider whether it would be preferable (or possible) to seek a global resolution in multiple jurisdictions.
Finally, the Safe Harbor may chill some sellers from entering the deal process altogether, or cause them to abandon it, based on the diligence burden or concerns about the consequences they would face based on the disclosure. How will the Safe Harbor operate alongside existing leniency programs? As a DOJ-wide program, the Safe Harbor could have a superseding effect on section-specific leniency policies as it is implemented. The Antitrust Division’s leniency program has been active for decades, operating without any apparent significant influence from other areas of DOJ. In recent years, however, the Antitrust Division has revised its leniency program to narrow certain of its protections to bring them more closely in line with wider DOJ policies to prioritize prosecution of individuals and push for earlier and more robust cooperation. Following this development, we should expect further alignment with DOJ-wide policies such as the Safe Harbor.”
“It is one of the hardest questions a company can face: after discovering criminal conduct inside your company, do you self-report to the government or not? If you can quickly and quietly fix the problem, then you may be able to fully remediate the issue and avoid any negative publicity or government involvement. But if the government later finds out, there could be a lengthy and expensive investigation that likely will result in a public settlement and reputational harm. On the flip side, if you self-report, then you are more likely to receive a declination and avoid an enforcement action, but you will be buying yourself a lengthy internal investigation, you will need to commit to fully cooperate with all government requests for documents and interviews, and you will be required to disgorge profits, which can add up to significant financial costs, distractions to operations and expenditures of limited resources. The reality is that when faced with the question of self-reporting, most companies generally believe it would be unwise to voluntarily self-report and disclose criminal conduct to the government.
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Notwithstanding the several new incentives that appear to be present in DOJ’s M&A Safe Harbor Policy, significant disincentives remain. As noted above, in addition to requiring full remediation of the problems that are identified within a year of disclosure, the M&A Safe Harbor Policy continues to require companies to fully cooperate with DOJ’s investigation against individuals, which in practice could mean costly and voluminous document reviews and productions and facilitating interviews for current and former employees, which can be expensive endeavors. More significantly, the M&A Safe Harbor Policy continues to require an acquiring company to disgorge all profits and pay restitution to victims, which in larger cases could result in financial costs of millions, or even tens of millions, of dollars. Finally, DOJ officials have been silent about whether DOJ will continue its practice of publicizing the names of companies that receive declinations under the CEP, even if a declination results from a self-disclosure pursuant to the new M&A Safe Harbor Policy. This means that companies that make the decision to self-report may still need to suffer at least one “bad news day,” and such disclosures could also result in derivative litigation costs and reputational harm.”
“As with other DOJ policies incentivizing voluntary self-disclosure and remediation, the path to receiving the Safe Harbor Policy’s full benefits is a narrow one that leaves prosecutors with significant discretion. Companies considering whether to self-disclose under the Safe Harbor Policy must carefully weigh the pros and cons of self-disclosure, including the incentives provided by the policy, as well as potential collateral consequences, such as civil litigation, parallel investigations by other enforcement authorities (including authorities in foreign jurisdictions, where applicable), and regulatory actions.”
“The DOJ’s introduction of fixed time frames and a reasonableness analysis seek to address continuing uncertainty as to whether and to what extent the DOJ would extend such benefits based on the particular facts of a given transaction. Nevertheless, without a clear history of administering this new program, uncertainty remains. In addition, the incentives that the Safe Harbor Program will create for both acquirers and sellers may vary greatly depending on the facts of the transaction.
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It is also an open question how the DOJ will calculate disgorgement, and how the DOJ will precisely draw the line between gains that accrued pre- versus post-acquisition.
This new Safe Harbor appears to apply specifically to companies and not individuals. The DOJ has been placing an increased emphasis on pursuing individual wrongdoers. Companies will have to weigh the benefits of self-disclosure carefully if there is risk that its executives may remain subject to prosecution.
Non-U.S. jurisdictions increasingly are enforcing their anticorruption and other criminal laws. It is not certain that jurisdictions outside of the U.S. will support this DOJ policy, and companies should consider the risks of local (non-U.S.) enforcement for any transactions involving multiple jurisdictions.
In many international deals, acquirers gain comfort from the ability to have recourse to get Representations and Warranties Insurance (RWI) for a target’s breaches of representations and warranties. In general, RWI does not apply to violations of those contractual provisions that were known to the buyer prior to closing. Further, it is unclear if RWI would cover the costs of the investigation needed to comply with the Safe Harbor Program’s requirements, or any restitution or disgorgement required to be paid under the Safe Harbor Program.”
“[Companies] should also be mindful that restitution and disgorgement, as well as a public recitation of the facts, will be required even if DOJ declines prosecution.”
“Though the Safe Harbor Policy offers acquirers more clarity on DOJ’s posture toward successor liability, the decision to self-report will remain fact intensive and require a complete assessment of the risks and potential benefits.”
“While the Safe Harbor Policy is an additional factor to consider when evaluating the merits of self-disclosure, companies should continue to make self-disclosure determinations on a case-by-case basis in light of the specific facts and circumstances at hand.”
“[N]ot a seismic shift in DOJ focus or practice.”
