Private Equity Seeks Legal Guidance on New M&A Disclosure Policy

Private equity firms and companies that frequently acquire others are rushing to white-collar attorneys for guidance on what the Justice Department’s new policy for disclosing wrongdoing means for ongoing deals.

The calls have flooded in since DOJ last month launched its safe harbor initiative aimed at providing buyers clearer paths to avoid prosecution when self-reporting misconduct at the target company—either before or after the deal goes through.

Private equity and multinationals are especially keen on learning the practical effects on their time-sensitive negotiations or post-deal integration already underway, attorneys said.

“It’s gotten pretty good penetration in the community of clients that are what I would call serial acquirers,” said Kimberly Parker, who co-chairs the white-collar defense and investigations practice at WilmerHale. “This really gave us an opportunity to get in front of clients, working together with our M&A group in a way that we might not of before.”

The safe harbor proposal may be resonating more than earlier Biden administration announcements designed to encourage companies to alert DOJ about wrongdoing, attorneys say. For years, many DOJ corporate investigations were triggered by purchasers unearthing crimes during the M&A due diligence process.

Giving clearer timelines to self-report has gotten more attention, even as it’s premature to determine if it’ll actually boost overall voluntary disclosures.

Lawyers fielding questions said they’re hearing from clients across industries. Deputy Attorney General Lisa Monaco, in announcing the safe harbor revisions Oct. 4, said DOJ’s overall corporate enforcement principles are especially implicated in cybersecurity, tech, and national security.

The value of global deals stands at $1.9 trillion for the year through Sept. 28, according to data compiled by Bloomberg. That’s down $1 trillion—or about a third—on 2022 levels, and includes the smallest amount for a third quarter in more than a decade, the data show.

Progressive groups and Sen. Elizabeth Warren (D-Mass.) have criticized the department’s new incentives which they say will increase M&A activity and undercut the administration’s work combating market concentration.

Top Questions

DOJ spurred rapid outreach by revising what had been a less formal system for M&A voluntary disclosures. Companies will have six months from a deal closing to self-report if they wish to receive declinations—decisions not to prosecute—and one year from closing to correct the misconduct.

First people are asking, “‘What does this mean, what’s changed?’” said Kathleen McGovern, a white-collar partner at Squire Patton Boggs and veteran DOJ criminal fraud supervisor. Then they want to know if they have time to turn in evidence to the department if they do spot a problem at the target, she said.

Finally, “there is interest in folks just saying, ‘hey, as we’re going into this we’re actually going to be more diligent, and can you help us?’” McGovern added. “‘Because if we do uncover something, it benefits us to find out about it.”

Some lawyers caution that the policy is not a sea change, yet the department’s approach has given them a talking point when encouraging companies to thoroughly audit targets for anticorruption and other offenses. It’s been useful in preparing companies to undertake more rigorous reviews in the post-acquisition phase, which is typically when access to inside information greatly improves.

The policy “helps drive the conversation with the client about why you want to make sure that you’re able to hit the ground running if you’re doing an acquisition where you’ve been limited in the amount of due diligence that you can do on the target before the deal closes,” said Kara Brockmeyer, a litigation partner at Debevoise & Plimpton. This lets the purchaser “come in with a plan to surface any issues” by already having a “sense of where the company has potential risks.”

‘Innocent Buyer’

Some companies with questions about the safe harbor’s implications are being told that it doesn’t necessarily shift the calculus they would’ve applied going back to around 2008, said Andrew Varner, who co-leads the M&A practice at Arnold & Porter.

That’s when the department, on more of a one-off basis, began rewarding businesses for walking in violations at companies they acquire, especially for overseas bribery.

But by specifying that disclosing companies will definitively qualify for a declination, which wasn’t as clearly laid out beforehand, Varner said there could be changes on the margins.

“The one thing that this policy is helpful for is the case of the innocent buyer who acquires a company, and post closing discovers this problem that they really didn’t have any idea existed before,” he said. “Will that change behavior by anyone is a different question.”

New Voices

The safe harbor policy is also sparking more coordination within law firms between the corporate partners, who take the lead on advising companies through deals, and white-collar practitioners with more experience opposite DOJ.

Wilson Sonsini’s Jessica Lonergan, a former federal prosecutor in Manhattan, said her team is preparing to give a presentation to corporate partners about the DOJ policy. She’ll be instructing the M&A experts on how to identify potential white-collar crimes during their due diligence reviews.

Another anticipated impact is that in-house compliance professionals could gain greater input when their company is reviewing the target’s books.

“This really gives you concrete milestones that I think can be helpful to people in-house to let them show business partners” that compliance risk assessments are “important to prioritize, among all the other pieces of integration,” added Parker. “It gives them a tool to get that to the top of the agenda.”

The decision to actually self-disclose will be far more complicated. Various other considerations, such as reputational hit and costs associated with DOJ starting its own investigation, may weigh against reporting.

As is always the case, companies are often dubious
the government would learn of the misconduct on its own.

At a minimum, the safe-harbor strategy is showing signs of landing with its intended audience with a sharper focus than prior DOJ efforts to dangle new carrots.

“The other iterations were like, ‘OK, isn’t this the same thing that came out before?’” McGovern said. “Where at least here people are like, ‘wait a second, this actually applies to me.’”