Another DOJ Self-Disclosure Policy – This time for M&A Lawyers

October 6, 2023By Anne K. Walsh

DOJ has issued another “voluntary disclosure” policy intended to encourage companies to disclose misconduct it discovers as part of a merger and acquisition.  Under this new policy, a company will receive a “presumption of declination” of agency action – i.e., a safe harbor – if it discloses misconduct discovered at the acquired company within six months before or after closing.  If the acquiring company cooperates with the government’s investigation of that misconduct, and commits to a full remediation within one year from closing, it can avoid criminal prosecution and payment of fines and penalties that otherwise could follow a full-fledged investigation.

This new policy only applies to the disclosure of criminal conduct, not administrative or regulatory violations.  But it is intended to apply DOJ-wide, meaning it applies to FDA criminal violations prosecuted by DOJ’s Consumer Protection Branch (CPB).  Earlier this year, DOJ’s CPB issued its own voluntary disclosure policy, which applies more broadly to potential criminal violations “involving the manufacture, distribution, sale, or marketing of products,” as well as “misconduct involving failures to report to, or misrepresentations to” regulators.

FDA-regulated entities benefit under the new self-disclosure policy because any misconduct that is discloses will not be factored into whether a future violation by the acquiring company counts as a second violation. As noted in our earlier blog post, the FDC Act contains an automatic escalation clause that promotes a second violation of the Act to a felony, even if there was no intent to defraud or mislead involved in the second violation.  This automatic felony escalation can cause problems for a global company engaged in a multitude of FDA-regulated activities, particularly one that has grown through acquisitions and thus not subject to a consistent corporate culture or global awareness of past conduct.   DOJ’s policy will remove the risk that a company will be considered a recidivist as long as it self-discloses FDC Act violations uncovered during diligence shortly upon closing of the M&A transaction.

As corporate counsel for FDA-regulated companies, we often uncover “red flags” during diligence that we recommend as high risk, potential deal stoppers.  This new policy should now be factored into that calculus, and could give an acquiring company comfort to consummate an M&A transaction knowing that there is a safe harbor afforded for disclosure.  The voluntary disclosure policy also could impact the valuation of the deal, which would necessarily include the costs of remediation required for the safe harbor benefit.  As with the other voluntary disclosure policies DOJ has issued, time will tell whether DOJ honors its stated commitment to prioritize compliance over penalties.

Categories: Enforcement