Safe Harbor or Sailing into the Storm? Voluntary Self-disclosure in Mergers and Acquisitions Through New DOJ Whistleblower Policy

The Department of Justice (“DOJ”) announced a new safe harbor policy for mergers and acquisitions, and companies are grappling with the potential benefits and pitfalls of utilizing the policy. The policy is a product of the DOJ’s focus on corporate criminal enforcement, as national security-related corporate crime has doubled from last year to this year. As highlighted by Deputy Attorney General Lisa Monaco, corporate crime intersects with “national security in everything from terrorist financing, sanctions evasion, and the circumvention of export control, to cyber-and crypto-crime.” (Lisa Monaco, U.S. Department of Justice). The DOJ has identified mergers and acquisitions as a source of access to corporate crime that threatens national security. Through this policy, the DOJ is hoping to create a “virtuous cycle” of acquiring companies identifying and reporting potential crimes committed by the  target companies during the due diligence stage, thereby assisting the DOJ in identifying and prosecuting individuals. Id. This cooperation spares the target company from prosecution as long as the acquiring company pays back any ill-gotten funds. Id. In exchange for their whistleblowing efforts, acquiring companies are protected from prosecution, provided they follow additional requirements. This post will examine the concerns and risks acquiring companies utilizing the safe harbor policy face.

The safe harbor policy allows acquiring companies to act as a whistleblower on themselves and their target company without criminal prosecution of that company; the focus of any prosecution is on the individual actors at fault. Under this policy, when an acquiring company self-discloses criminal conduct of the target company to the DOJ, the DOJ will not prosecute the target, provided that the acquiring business self-discloses any criminal conduct of the target company within six months of closing the deal, the acquiring company corrects the issue within a year and the target company pays back all illegally garnered profits. (Ben Penn, Bloomberg Law).This relatively short timeline provides an incentive for acquiring companies to complete their due-diligence timely and thoroughly when they are working through deciding to acquire the target company or not. Though the DOJ is hopeful that this policy will assist in the identification and prosecution of corporate criminal conduct, acquiring companies have to balance this opportunity with certain concerns surrounding the policy.

The foremost concern of the policy is the requirement for disgorgement of any funds that the target company had received due to criminal conduct when self-disclosed by the acquiring company. When an acquiring company has its eyes on a target company, it will undertake significant due diligence on that target company. If the acquiring company identifies criminal activity and reports it under the safe harbor, the acquiring company is required to disgorge any ill-gotten gains. The disgorgement requirement creates a concern that a large disgorgement may cause the deal’s value to plummet. (Ben Penn, Bloomberg Law). An acquiring company therefore may feel it behooves them to handle the criminal activity themselves instead of facing the risk of disgorgement.

However, the DOJ suggests that the policy’s success is guaranteed in light of two recent cases where acquiring companies became whistleblowers. (Lisa O. Monaco, U.S. Department of Justice). The DOJ had a case this year against Safran, the world’s second largest aircraft manufacturer which ended in declination. (Glenn Leon et al., U.S. Department of Justices). The DOJ Foreign Corrupt Practices Act Corporate Enforcement Policy defines declination as “a case that would have been prosecuted or criminally resolved except for the company’s voluntary disclosure, full cooperation, remediation, and payment of disgorgement, forfeiture, and/or restitution.” (FCPA Corporate Enforcement Policy, U.S. Department of Justice). The Safran declination stemmed from a disclosure the company made after acquiring companies that had bribed Chinese business consultants for contracts in knowing violation of the Foreign Corrupt Practices Act (“FCPA”). (Sannon Debra et al., WestLaw Today). Safran worked with prosecutors to remediate, secure a declination with disgorgement and prosecute those involved in the conduct. Id. The second case was earlier this year, where the DOJ declined to prosecute Corsa Coal Corporation, a pure play metallurgical coal producer, for FCPA violations after Corsa voluntarily disclosed misconduct and worked with prosecutors to resolve the case through disgorgement. (Glenn Leon et al., U.S. Department of Justice). The information helped prosecutors criminally charge a number of individuals, including two former vice presidents of the acquired company. Id. The success of these cases caused the DOJ to formally adopt the safe harbor. 

The second major concern regarding the policy is that the subsequent prosecution could be lengthy and the law is unclear. (Maria Calvet et al., Bloomberg Law). If a company decides to take advantage of the policy, they are required to comply with prosecutors to reach a resolution that is acceptable to the DOJ.  Id. Further, Deputy Attorney General Monaco admittedly does not give a lot of details on how the existence of aggravating factors could impact disgorgement or other charges. (Lisa O. Monaco, U.S. Department of Justice). The DOJ Criminal Division Evaluation of Corporate Compliance Programs is equally vague about how the extent and pervasiveness of aggravating factors weigh. (U.S. Department of Justice Criminal Division, Evaluation of Corporate Compliance Programs, U.S. Department of Justice).

Despite the disgorgement requirement and the lack of clarity regarding subsequent prosecution, the safe harbor policy may still be beneficial to acquiring companies. In both of the DOJ cases, the criminal conduct ended and the individual offenders left the target company before the acquiring company took over. Conversely, when whistleblowing does not occur, the acquiring company opens itself up to legal liability and risk of reputational harm once the target company is acquired. (Ben Penn, Bloomberg Law).

In framing this whistleblower safe harbor as a tool to address national security, the DOJ has created a psychological incentive for companies to assist. National Security as vague as it may appear in this context, is something every American company is likely to say they are aligned with though the fear of negative repercussions may halt them from using the Safe Harbor Policy.  Regardless of whether they use it or not, acquiring companies will have a heightened focus on due-diligence and assessing the compliance of target companies before they acquire them in the hopes of avoiding the need to utilize the policy at all.