Article | January 24, 2024

by Horty & Horty, P.A.

The U.S. Department of Justice (DOJ) has announced a new safe harbor policy that incentivizes companies to proactively identify and disclose criminal misconduct in mergers and acquisition (M&A) transactions. 

New safe harbor policy, requirements, and deadlines

Under the safe harbor policy, acquiring companies must disclose any criminal misconduct they discover in the target company within six months of a transaction’s closure and cooperate with the ensuing investigation. By doing so, the acquiring company may potentially evade prosecution for the disclosed misconduct. The target company may also qualify for safe harbor in limited circumstances. 

Essentially, if an acquiring company discovers illegal activities in the course of buying another company, they can report this information to authorities within six months of closing and evade prosecution for the misdeeds of the company they’re buying. Of course, this is a very simplified view of the policy, and there are many additional requirements and caveats.

Some more specific components of the safe harbor policy include: 

  • A duty to remediate: the acquiring company will generally have one year from the transaction’s closing date to fully remediate the issue. 

  • Extension of deadlines: the DOJ may extend the deadlines for disclosure or remediation, at their discretion, based on the complexity of the matter. 

  • Prompt disclosure for certain conduct: in cases where the discovered misconduct poses an immediate threat to national security or presents a risk of significant harm, the acquiring company must report these findings immediately. 

  • Not a blanket exemption: the policy applies specifically to misconduct uncovered in bona fide arms-length M&A transactions. It does not cover misconduct that was otherwise required to be disclosed by law, already public, or known to the DOJ. 

Comprehensive due diligence can provide a strategic advantage

The Safe Harbor policy underscores the importance of thorough pre-acquisition due diligence. Acquiring companies will need to perform prompt and comprehensive due diligence to identify potential misconduct and evaluate any gaps or weaknesses in the target entity’s compliance program. Given the complexity of any acquisition and the time required to conduct due diligence, companies should begin this process as early as possible.

Under this policy, it becomes even more critical to have accounting professionals rigorously scrutinize business financial records. They can ensure financial statements are transparent and free from indicators of financial crimes such as fraud or embezzlement. For target companies, it’s prudent to engage accountants for a meticulous review prior to considering a merger or exchanging any documents with a potential buyer. 

Historically, the possibility of inheriting legal complications might have deterred companies from acquiring entities with a history of misconduct. The safe harbor policy may change this dynamic, but it’s still necessary for acquiring companies to thoroughly evaluate the extent of misconduct and the investment required to remediate the underlying issues. If misconduct is discovered at an early stage, skilled experts can leverage these risks during the negotiation process and adjust the purchase price accordingly. 

Timely integration of the acquired company into the buyer’s compliance and governance structures after acquisition is equally important. In many ways, this policy could provide a strategic advantage for companies that incorporate a robust compliance framework into the M&A process. 

Balancing risks and opportunities amid uncertainty

The policy introduces strict deadlines for self-disclosure and remediation, which can be challenging to meet. As with most safe harbor policies, the DOJ and US Attorneys have considerable discretion, so the full implications are not entirely clear. If an acquiring company self-discloses but is unable to secure safe harbor, could they still be prosecuted? 

Also, with the policy’s application across the entire DOJ, the range of criminal conduct subject to scrutiny is notably expansive. Traditional due diligence methods may need to be revisited and enhanced to effectively identify potential criminal activities within a target company in the requisite timeframe. 

Moreover, the policy does not shield companies from investigations and potential liabilities from other regulatory bodies outside the DOJ, like the SEC. It could also trigger local or foreign investigations and expose the company to shareholder lawsuits, adding layers of complexity and risk to the process. 

For target companies, there is a significant element of risk. Should the acquiring company withdraw post-disclosure, the target company may find itself subject to legal scrutiny without the benefits of the safe harbor policy or the completion of the merger. This could leave some target companies in a much worse condition than they were before the attempted transaction. With risks like these, the policy could influence the dynamics of the M&A market.

In light of these complexities and uncertainties, it is advisable for companies considering M&A transactions to seek proactive guidance from seasoned financial, legal, and compliance experts. These professionals can provide insights and strategies to navigate the policy effectively, ensuring that due diligence is comprehensive and potential risks are properly managed. 

This article is for informational purposes only and is not intended as legal advice. If you have questions about a potential merger or acquisition, please contact our office – one of our advisors would be happy to help.

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