The U.S. Department of Justice (“DOJ”) recently unveiled a department-wide Safe Harbor Policy for voluntary self-disclosures made in the mergers and acquisition (“M&A”) process. This Safe Harbor Policy (“Policy”) is aimed at incentivizing acquiring companies to identify and timely disclose misconduct discovered during the due diligence and post-acquisition integration process. Acquiring companies that disclose within the Safe Harbor period, cooperate with the resulting investigation and engage in the remediation process will receive the presumption of a declination of prosecution by the DOJ.
Among other areas, the Policy will apply to health care transactions, as the Policy may extend to criminal conduct such as violations of the Anti-Kickback Statute, the False Claims Act, fraudulent billing practices and prescription-related fraud—ensuring consistency and breadth during complex transactions.
The Application of the Voluntary Self-Disclosure Safe Harbor
To qualify under the Policy, companies must meet the following criteria:
- Self-Disclosure: Acquiring companies must voluntarily self-disclose misconduct within six months of the closing date. This time frame applies whether the misconduct was identified pre-closing or post-closing.
- Cooperation: Companies must cooperate with any ensuing investigation by the DOJ.
- Remediation: Companies must fully remediate the misconduct within one year from the date of closing, which may include making restitution and disgorgement payments. This remediation is subject to a “reasonableness analysis” because of the specific, fact-based circumstances of each transaction.
- Scope of Application: The Policy is limited to misconduct discovered during “bona fide, arms-length M&A transactions” and does not encompass conduct that is already public, known to the DOJ or otherwise requiring disclosure. The Policy also does not affect civil merger enforcement.
Notably, misconduct disclosed under the Policy will not factor into the DOJ’s recidivism analysis for the acquiring company, either at the time of disclosure or in the future. Additionally, it’s crucial to note that the Policy is not binding on other U.S. enforcement or regulatory authorities, which means that self-disclosed misconduct could still be pursued by other agencies.
Practical Takeaways
The Policy offers a practical solution to thorny regulatory risks and introduces a new wrinkle in the negotiation of indemnification provisions, and the use of reps and warranty insurance. It also presents an opportunity for acquiring companies to remove transaction risks during due diligence and timely post-acquisition integration, avoiding prosecution by disclosing misconduct. Transactions that might have been abandoned or restructured due to the discovery of misconduct can now potentially move forward. To maximize the benefits of this new Policy, companies engaging in M&A transactions should consider the following:
- Invest in Robust Due Diligence: Conduct thorough, risk-based due diligence with experienced health care transaction counsel to uncover any misconduct early in the transaction. Failure to perform effective due diligence and self-disclose misconduct will subject an acquiring entity to full successor liability.
- Prompt Self-Disclosure and Remediation: Timely disclose any misconduct discovered during the due diligence process and fully remediate the misconduct within the guidelines. The DOJ is placing an enhanced premium on timely compliance.
- Timely Application of Compliance Measures: Ensure that the acquiring company’s compliance policies and procedures are applied promptly to newly acquired businesses or merged entities.
- Training and Audit: Enhance post-closing integration processes by providing compliance training to directors, officers and employees of newly acquired businesses, and conduct a risk-based audit of these entities as soon as practicable.
Companies that invest in and prioritize compliance in M&A transactions are more likely to benefit from this Policy. However, the decision to self-disclose or proceed with a transaction should be based on a careful legal and factual analysis in consultation with legal counsel. If your health care organization is considering M&A activity, please contact:
- Colleen Powers at (317) 977-1471 or cpowers@hallrender.com;
- Chad Sukurs at (317) 977-1452 or csukurs@hallrender.com;
- Erin Drummy at (317) 977-1414 or edrummy@hallrender.com;
- Eric Rupenthal at (317) 429-3681 or erupenthal@hallrender.com; or
- Your primary Hall Render contact.
Hall Render blog posts and articles are intended for informational purposes only. For ethical reasons, Hall Render attorneys cannot—outside of an attorney-client relationship—answer specific questions that would be legal advice.
