New M&A Safe Harbor Is a Double-Edged Sword for Buying Companies

On Oct. 4, Deputy Attorney General Lisa Monaco of the Department of Justice announced a mergers and acquisitions safe harbor policy intended to decrease the risk of successor liability related to a target company’s criminal misconduct. This policy generally allows an acquiring company to receive a “presumption of declination” of criminal charges.

The acquiring company must voluntarily disclose criminal misconduct of a target company within six months from the date of closing on a merger or acquisition; cooperate with any ensuing criminal investigation; and engage in timely and “appropriate” remediation, restitution, and disgorgement related to the criminal misconduct. This policy has caveats and conditions.

Private equity firms and public companies should heed the announcement. It arrived in the context of the DOJ’s increasing attention to national security and focus on punishing companies subject to US jurisdiction that engage in crimes abroad.

The DOJ’s recent landmark criminal plea agreement involving Binance and its CEO shows that the DOJ wields considerable power to police foreign executives and companies with assets and operations in the US.

At first glance, the safe harbor policy benefits private equity firms that wish to minimize the risks of acquiring another company. But the policy also raises the standard for due diligence and corporate compliance for all mergers and acquisitions.

The DOJ’s guidance likely will incur increased due diligence costs and—incident to any merger or acquisition—preemptive implementation of compliance programs, audits, and remediation for any target company with significant international operations.

The agency recognizes the added burden for acquiring companies, saying “[c]ompliance should no longer be viewed as just a cost center for companies” and to “invest in compliance now or your company may pay the price—a significant price—later.”

Private equity firms can no longer afford to acquire a company without dedicating due diligence resources vetting the target company’s compliance with the Foreign Corrupt Practices Act, Bank Secrecy Act, anti-money laundering laws, export control and sanctions laws, cybersecurity laws, anti-terrorism and human trafficking laws, and other white collar criminal laws related to national security.

Overseas companies are squarely on the DOJ’s radar because their operations are likely to implicate national security concerns, and they may operate in jurisdictions with more lenient regulatory and enforcement systems.

Private equity firms subject to the DOJ’s broad reach should more closely scrutinize buyouts of international companies or companies with significant international operations. As seen in the recent Binance plea agreement, few companies fall outside the DOJ’s jurisdiction over banking, transactions involving US securities, and financial markets.

Acquiring companies should also investigate whether any compliance, corporate training program, corporate audit, executive compensation clawback policy, remediation, or disgorgement of illicit profits should be implemented by the target company and factored into the purchase price for the buyout.

As part of this investigation, acquirers should consider whether the target company has aggravating factors that could prevent it from obtaining a non-prosecution agreement, since the receipt of a declination by the acquirer will do little to prevent the potential damage to the acquirer’s financial investment in the target.

The DOJ’s increased focus on corporate crimes may raise tactical issues in other parts of the transaction process related to level setting for liability allocation in the letter of intent, agreement on the scope of rep and warranty insurance and preparation for underwriting, negotiation of indemnification terms in the acquisition agreement, and transition services arrangements supporting post-closing integration.

Many commentators have heralded the new safe harbor policy as a significant benefit, which it is for acquirers. However, some interest groups submitted a letter to the DOJ to reverse the policy, complaining it will “incentivize more concentration of corporate power through strategically-timed mergers or acquisitions sought in order to wipe the slate clean for lawbreakers.”

But the safe harbor policy allows the DOJ to retain significant discretion to deny any definitive purchase agreement or non-prosecution agreement for companies that time or structure a transaction to avoid criminal liability.

Ultimately, the DOJ has sent a clear message that it expects significant due diligence—the associated costs aren’t an excuse. This is particularly the case for any target company with assets or operations abroad due to national security concerns from the DOJ’s perspective.

Whether many private equity firms or acquiring companies rush to take advantage of this policy as a carrot remains to be seen. However, the safe harbor policy represents a formidable stick in the short term to any acquiring company or private equity firm that has failed to invest in an appropriately experienced due diligence team.

Acquiring companies and private equity firms should seek advice from white collar criminal experts—in both the boardroom and the courtroom.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Jacqueline M. Arango is co-chair of the white collar crime and government investigations practice at Akerman in Miami.

Kenneth G. Alberstadt is a corporate partner with Akerman in New York.

Ildefonso P. Mas is a litigation partner with Akerman in Washington, D.C.

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