Merger and Acquisition Due Diligence and Voluntary Disclosures

mergers3The Justice Department and the SEC continue the drumbeat encouraging companies to voluntarily disclose potential FCPA violations.  Of course, the reason for their position is obvious – they want to know about every violation, no matter what size and to what extent.  If I were still a prosecutor, I would say the same thing.

However, there is a lot more nuance to the issue, especially when it comes to merger and acquisition due diligence and post-closing acquisition.  In its recent settlements, DOJ and the SEC have cited as a “best practice” that companies should conduct pre-acquisition due diligence of a target company, integrate the company after the closing into the acquiring company’s compliance program and report any violations.

The question of whether to voluntarily disclose an FCPA violation is not so easy, nor should someone rush into it.  There are two important considerations – what benefit will the company receive if it does make such a disclosure?

Unfortunately, DOJ and the SEC have not defined the benefit but have suggested that companies that disclose and cooperate will receive a bigger benefit than those that do not.  A careful look at the discount factor given companies is between 20 and 40 percent from the bottom of a fine range.  In fairness, there may be situations, like Raytheon, where a voluntary disclosure coupled with remediation may lead to a declination.

It is hard to calculate and weight the benefit without a more definitive public policy statement from the DOJ and the SEC.mergers4

A second consideration that companies need to examine is whether non-disclosure but aggressive remediation is an appropriate alternative.  For example, a company may clean up a problem and then enhance its compliance program to prevent recurrence of any problem in a specific location and across the company.

In this scenario the company runs the risk that the Justice Department and the SEC may learn about the past violation and impose a fine or penalty for such conduct.  The company should and will argue that it discovered the problem and fixed the problem beyond even the requirements usually imposed by the Justice Department and the SEC.  The risk of DOJ and the SEC learning of such a violation is more significant because of the SEC whistleblower program.

mergers7DOJ and the SEC can “mandate” voluntary disclosures as a “best practice” in its corporate settlements.  However, companies that are not under investigation or seeking a resolution of an FCPA case should not adopt a voluntary disclosure mandate.  Instead, companies have to weigh the issue considering a number of factors, some of which are difficult to define in the absence of a clear policy statement from the Justice Department and the SEC.

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