DealLawyers.com Blog

John and I have previously blogged about the DOJ’s initiation of a “Mergers & Acquisitions Safe Harbor Policy” intended to incentivize voluntary self-disclosure of wrongdoing uncovered during the M&A process. John shared that the “bottom line” of the new policy, according to Deputy AG Lisa Monaco is that: “Good companies — those that invest in strong compliance programs — will not be penalized for lawfully acquiring companies when they do their due diligence and discover and self-disclose misconduct.” Progressive non-profit organizations and lobbying groups have been critical of the policy, arguing that it gives wrongdoers a “free pass,” but this Cleary memo addresses risks on the other end — that, when it comes to Sherman Act violations, the policy actually does punish innocent acquirers. Here’s a snippet:

The Safe Harbor leaves compliant acquirors worse off than before when they buy companies that engaged in antitrust violations. For antitrust violations, the Safe Harbor does not permit parties to close until the DOJ Antitrust Division provides a conditional leniency letter or allows the leniency marker to expire. This requirement is likely to delay closing for some transactions for months or years without a predictable end date and for reasons largely outside of the parties’ control.

That is not tenable for M&A transactions, which have economic and legal reasons to expeditiously move forward toward closing. The requirement to delay closing will therefore leave the Safe Harbor an impractical option for the vast majority of purchasers.

A compliant acquiror that learns of a criminal Sherman Act violation in the course of due diligence is therefore left with fewer options than they had before the Safe Harbor. The acquiring company could choose to not self-report prior to closing, but risk facing significant potential liability and arguments that it would not qualify for leniency after closing. Alternatively, the buyer could call off the transaction. Either outcome discourages a compliant company from purchasing a company that potentially engaged in violations of law.

That being said, the memo continues:

An acquiring company that learns of misconduct after closing should still qualify under the DOJ Antitrust Division’s leniency program. The Safe Harbor applies only to misconduct “learned while conducting due diligence in connection with [the acquiring company’s] acquisition of the acquired entity.” The Safe Harbor should not prevent an acquiring company that only learns of misconduct after closing from seeking leniency under the DOJ Antitrust Division’s leniency program.

Any acquiror that is considering making a leniency application for conduct discovered after closing should ensure that it did not receive information about the acquired company’s misconduct during the diligence process.

– Meredith Ervine