Government has been amping up disclosures in business showing many avenues for which the US has recently imposed greater disclosure requirements:
- The Securities and Exchange Commission rules mandating disclosure for cybersecurity incidents and cybersecurity risk management;
- The Office of Foreign Asset Control promoting ransomware victims to disclose paying threat actors to mitigate or lessen any sanction against them; and
- Department of Justice policy promoting disclosure for criminal conduct discovered after closing a merger and acquisition deal.
In general, an acquiring company in a transaction is liable for the predecessors’ obligations. What about a predecessor’s prior criminal conduct? That’s dicier.
Robust due diligence may uncover criminal conduct by the predecessor but because people often hide illegal conduct, maybe not. companies have proceeded with those transactions, and probably cooperated with the DOJ when they uncovered criminal conduct by the company acquired.
For example, Halliburton was bidding to acquire a foreign business in 2008 and was unable to conduct what it considered would be sufficient due diligence to avoid potential Foreign Corrupt Practices Act exposure. The Department of Justice (DOJ) opined that if Haliburton performed the post-closing procedure it proposed, then presently, the DOJ did not intend to take any enforcement action for (1) acquiring the foreign business; (2) any pre-acquisition unlawful conduct by the acquired business disclosed to the DOJ within 180 days of the closing; and (3) any post-acquisition conduct disclosed within 180 days, and which does not continue beyond the 180-day period or, if in the judgment of the DOJ the alleged conduct cannot be fully investigated within the 180-day period, which does not continue beyond such time as the conduct can reasonably be stopped. Born are the seeds for a safe harbor policy.
Fast forward to October 2023 where the DOJ announced a new policy: “Voluntary Self Disclosure: our new Mergers & Acquisitions Safe Harbor Policy.” Deputy Attorney General Lisa O. Manaco stated that “In a world where companies are on the front line in responding to geopolitical risks – we are mindful of the danger of unintended consequences.”
The Safe Harbor Policy loosely requires: “acquiring companies that promptly and voluntarily disclose criminal misconduct within the Safe Harbor period, and that cooperate with the ensuing investigation, and engage in requisite, timely and appropriate remediation, restitution, and disgorgement – they will receive the presumption of a declination.”
Does the Safe Harbor Policy trigger any conflict with existing law? This controversy is not one likely to find its way to a substantive decision. First, the Executive Branch has exclusive authority and absolute discretion to decide whether to prosecute a case. United States v. Texas, 599 U.S. 670, 678 (2023). Second, the aggrieved who might complain about the DOJ exercising this discretion do not have constitutional standing to commence an action. See, e.g., Id. 599 U.S. at 682.
Third, even if someone had standing, the DOJ has explained the reason for the Safe Harbor Policy: “The last thing the Department wants to do is discourage companies with effective compliance programs from lawfully acquiring companies with ineffective compliance programs and a history of misconduct. Instead, we want to incentivize the acquiring company to timely disclose misconduct uncovered during the M&A process.”
Disclosures abound, and there are likely more to come. Keep abreast of the disclosure obligations reaching into business operations.
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Becker attorneys represent public and private clients in complex business litigation throughout the United States in federal and state courts, and in arbitration.
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About the Author
Jon Polenberg is a senior trial lawyer for Becker & Poliakoff, P.A., headquartered in Ft. Lauderdale, FL, who regularly represents clients for their matters proceeding in state court, federal court, arbitration, and regulatory agencies. Jon also heads up e-discovery and data analytics for the firm’s business litigation practice. He represents clients in both symmetric and asymmetric matters involving varied complex e-discovery and legal issues.