NSD’s Revised Enforcement Policy for Business Organizations Incentivizes Voluntary Self-Disclosures in M&A Context // Cooley // Global Law Firm

Companies engaging in M&A activities should take note of the revised voluntary disclosure policy (VSD Policy) of the National Security Division (NSD) of the US Department of Justice, published on March 7, 2024, which grants procedural leniency to acquirers that promptly disclose to the NSD the criminal conduct of acquired entities.

VSD Policy Expands Substantially Similar Policy earlier version adding a specific M&A Policy comprising various incentives to voluntarily disclose violations of national security laws and regulations, including export control and sanctions (trade controls), discovered during the course of due diligence conducted in connection with corporate transactions. In particular, business controls carry successor liability, meaning that an acquirer will assume liability for violations (both criminal and civil) in which the acquired entity participated prior to the transaction. In the context of growing national security threats, NSD has increasingly prioritized the enforcement of trade controls. These efforts have been complemented by civil enforcement actions carried out by US government agencies that administer the underlying regulations, including the US Department of the Treasury's Office of Foreign Assets Control and the Bureau of Industry and US Department of Commerce Security

To qualify for the protections of the Mergers and Acquisitions Policy, an acquirer must comply all of the following criteria:

  • Complete a legal and bona fide acquisition of another company (as described in the Mergers and Acquisitions Policy).
  • Voluntarily and promptly (generally no later than 180 days after completion of the transaction or, as applicable, at the "first reasonable opportunity") self-disclosure of NSD criminal conduct committed by the acquired entity.
  • Please cooperate fully with the NSD investigation.
  • Promptly (usually within one year after the completion of the transaction) and sufficiently remedy the subject's misconduct.

The M&A Policy provides that when an acquirer makes a qualified voluntary disclosure, NSD will generally not seek a guilty plea from the acquirer. Additionally, the acquirer will benefit from the presumption that he will qualify for a declination of processing (rather than simply a non-processing agreement). Additionally, the acquirer is assured that it will not be required to pay a criminal fine or forfeit assets, and that the disclosed misconduct will not adversely affect the acquirer's record of recidivism in future matters involving the acquirer. Importantly, the presence of aggravating factors in the acquired entity generally will not preclude the acquirer from being eligible for the protections of the Mergers and Acquisitions Policy, as long as those factors do not continue to affect any party to the transaction after an qualified disclosure.

Although the above protections are only available to the acquirer, the M&A Policy provides that if the acquired entity remains legally distinct after the transaction, NSD will credit the acquirer's qualified self-disclosure to the acquired entity and may consider whether it is also required. another mitigation credit. deserved. If the acquirer's self-disclosure does not qualify for the protections of the M&A Policy, then NSD may nonetheless consider whether that self-disclosure is eligible to receive mitigation credit pursuant to other provisions of the VSD Policy, which generally encourages prompt disclosure and full cooperation with NSD.

NSD's attention to the application of business controls underscores the need for careful pre-transaction due diligence aimed at uncovering historical and/or current instances of criminal misconduct. Importantly, acquirers wishing to avail themselves of the protections of the M&A Policy must comply with the specific conditions set out therein, or else risk losing procedural leniency and a potentially significant mitigation credit.

Cooley closely monitors regulatory developments related to law enforcement and others. Please feel free to contact a member of our team if you have any questions.

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