The U.S. Department of Justice (DOJ) has recently announced a groundbreaking new “Safe Harbor” policy intended to encourage the voluntary self-disclosure of criminal activities during mergers and acquisitions (M&A).
The introduction of the Safe Harbor policy marks a significant change in the rights and responsibilities of businesses engaging in mergers and acquisitions. Companies that qualify for Safe Harbor will enjoy a more straightforward and less burdensome regulatory process if they discover wrongdoing in the course of merging or acquiring another business.
This policy represents a significant shift in how the DOJ approaches these corporate activities, potentially altering the landscape for businesses looking to merge with or acquire other companies. Let’s examine the new policy and its implications for companies considering M&A transactions.
Understanding the Safe Harbor Policy
At its core, the Safe Harbor policy is designed to provide clearer guidelines and more predictability to companies during the merger and acquisition process. It allows companies to voluntarily disclose criminal misconduct discovered during these transactions.
The policy provides a six-month period post-acquisition for disclosure, with an expectation of cooperation, remediation, restitution, and disgorgement. This would typically result in a declination from criminal prosecution. The policy aims to encourage compliance and lawful acquisition of companies with ineffective compliance programs and is part of the DOJ’s broader strategy to enhance corporate enforcement.
However, businesses must be diligent in understanding and complying with the specific criteria of the policy. Failure to accurately assess obligations and requirements under Safe Harbor policies could result in legal challenges or criminal penalties for the acquiring business on the assumption that it was complicit in the wrongdoing.
What Constitutes Corporate Criminal Misconduct?
Corporate criminal misconduct refers to illegal actions committed by or on behalf of a corporation. These can include:
- Tax Evasion: Corporations or individuals associated with them may engage in fraudulent tax practices to reduce their tax liabilities, such as underreporting income or inflating deductions.
- Falsifying documents: This includes forging contracts, invoices, receipts, or other records to deceive stakeholders or regulators.
- Embezzlement: Embezzlement occurs when an employee or executive misappropriates company funds for personal use. This can involve stealing cash, diverting payments, or misusing company credit cards.
- Insider trading: This is the illegal buying or selling of a company’s stock based on non-public, material information. This type of fraud typically involves company insiders, such as executives or employees, who trade stocks to profit from privileged information.
- Environmental crimes:
- Bribery: Corporate fraud may involve offering or receiving bribes, kickbacks, or other improper payments to gain business advantages or government contracts.
- Kickbacks: Kickbacks often involve providing improper payments or benefits to suppliers or service providers in exchange for favorable treatment, such as inflated contracts or purchase orders.
- Money laundering: Concealing the origins of illegally obtained funds by making them appear legitimate through a complex web of financial transactions.
Such misconduct often involves intentional wrongdoing, deception, or significant harm to individuals, other businesses, or the government. Corporations found guilty of criminal misconduct can face substantial fines, legal sanctions, and reputational damage, and individuals involved may face personal legal consequences.
Corporate fraud can have serious consequences for stakeholders, customers, and potentially even the industry as a whole. However, identifying it from outside of the organization is often prohibitively difficult and expensive. This is why the DOJ has chosen to allow voluntary self-disclosure of criminal wrongdoing discovered during the M&A process. By permitting companies to disclose wrongdoing discovered when merging with other businesses without facing substantial criminal penalties, the DOJ hopes to encourage these companies to act in good faith and resolve the wrongdoing voluntarily.
The Importance of Due Diligence in Corporate M&A Transactions
The DOJ’s new policy makes performing proper due diligence in M&A transactions more important than ever. Here’s why it matters:
- Legal Compliance: Ensuring legal compliance is fundamental when merging with or acquiring another company. Failing to identify criminal wrongdoing during due diligence can expose the acquiring company to substantial legal and financial risks. Ignorance of such issues is typically not accepted as a defense, and the acquiring company may be held liable for the target company’s past actions. This remains true even under the new Safe Harbor policy.
- Regulatory Consequences: Many industries are subject to strict regulatory oversight, and acquiring a company with a history of criminal wrongdoing can trigger regulatory investigations and penalties. Identifying such issues during due diligence allows the acquiring company to assess the potential regulatory consequences and determine whether the acquisition is worth pursuing.
- Financial Liabilities: Criminal activities within a target company may come with hidden financial liabilities. Unresolved legal disputes, fines, or pending lawsuits related to criminal activities can have a significant impact on the target company’s financial health, which can ultimately affect the value of the deal and the acquiring company’s financial stability.
- Legal Liability for Acquiring Company Executives: Executives and officers of the acquiring company may also be personally liable for failing to conduct adequate due diligence if criminal wrongdoing is later uncovered. Ensuring a thorough due diligence process helps protect the leadership of the acquiring company.
Identifying and reporting wrongdoing prior to the expiration of the six-month Safe Harbor period is critical to reducing the financial and regulatory penalties. The only way to accomplish this is by ensuring your company performs its due diligence before, during, and after the M&A process.
Legal Representation for Due Diligence in M&A Transactions
The Safe Harbor Policy emphasizes rigorous due diligence in M&A, requiring a thorough assessment of potential criminal and regulatory risks from the target company and its executives. It mandates due diligence as a core process, not a mere formality.Under the new policy, it is essential for organizations considering mergers or acquisitions to seek experienced legal counsel to ensure they receive the full benefit of Safe Harbor should any wrongdoing be discovered. The skilled corporate attorneys at the Law Office of Katherine R. Moore are available to assist companies with navigating the complex landscape of M&A law and minimizing liability under current DOJ policies.
