I. Introduction

The Antitrust Division of the Department of Justice has quietly made a change to its Leniency Policy and Procedures (the “Leniency Policy”) that could impact companies involved in transactions that discover potential antitrust violations by the acquisition target.¹ Although the updated Leniency Policy was posted to the Antitrust Division’s Leniency Program webpage in early March,² and corresponding changes have been made to the Department of Justice (“DOJ”) Justice Manual Section on Voluntary Self-Disclosures,³ the Antitrust Division has not announced the change and has not issued guidance related to the changes.

The update to the Leniency Policy is the Antitrust Division’s implementation of the Mergers & Acquisitions Safe Harbor Policy (the “Safe Harbor Policy”) announced by Deputy Attorney General Lisa Monaco last October, which provides for declination of prosecution against acquiring companies. The Antitrust Division’s implementation of the Safe Harbor Policy appears to apply to situations where—during due diligence on a transaction target—the acquiror discovers a potential criminal Sherman Act violation by the target. For the acquiror to qualify for declination from prosecution for the conduct in such cases, the parties to the transaction must disclose the potential violation to the Antitrust Division before closing the transaction and must agree not to close until after the leniency process runs its course.

The update does not appear to apply to situations where the acquiror discovers the conduct post-close, or where there is a pending leniency application by a target that pre-dates the transaction. Accordingly, the update would seem to apply only to narrow and fairly unusual circumstances. However, the changes and the parallel provisions of the Safe Harbor Policy in the DOJ Justice Manual nevertheless raise a number of practical questions for merging parties seeking to navigate the risk of potential criminal Sherman Act violations.

II. Antitrust Division Leniency Policy

The Antitrust Division’s Leniency Policy provides protection from prosecution under the Sherman Act to organizations or individuals who self-report participation in a criminal conspiracy. To encourage reporting, only the first organization or individual who self-reports particular conduct is eligible for the program.⁴

The first company or person to self-report obtains a “marker” for the conduct, essentially reserving its place in line for leniency.⁵ The original marker typically has an expiration date to encourage swift cooperation, typically around thirty to forty-five days.⁶ The applicant then proceeds either to “perfect” the marker—providing evidence to show a criminal violation by producing documents and making witnesses available for interview—or to return the marker if upon further investigation it determines there is no violation.⁷ Upon perfecting the marker, the applicant obtains a conditional leniency letter, which is conditional on the applicant cooperating with the Antitrust Division’s investigation into and prosecution of its co-conspirators.⁸

There are two types of corporate leniency: Type A and Type B.⁹ Type A is available before the Antitrust Division has opened an investigation into the applicant and if the Antitrust Division has not received any information about the illegal activity prior to the self-reporting.¹⁰ Additionally, if granted, Type A leniency applies to the applicant’s current directors, officers, and employees.¹¹ Type B is available even after the Antitrust Division has opened an investigation or received information, but protection is not guaranteed to current directors, officers, or employees. ¹²

Historically, the Leniency Policy has not provided specific guidance or rules on applying for leniency in the context of criminal conduct by one party to a merger or acquisition, either while a transaction is pending or post-transaction. Instead, the Leniency Policy required that the conduct be reported “promptly” upon “discovery” by an “authoritative representative of the applicant for legal matters.”¹³ Antitrust Division guidance suggests that the promptness requirement is meant to encourage companies to voluntarily self-report as quickly as possible to obtain a marker, rather than wait to see if the conduct comes to light some other way.¹⁴

III. DOJ Safe Harbor Policy

On October 4, 2023, Deputy Attorney General Lisa Monaco announced a new Safe Harbor Policy for voluntary self-disclosures to be applied across all divisions of the DOJ: “acquiring companies that promptly and voluntarily disclose criminal misconduct within the Safe Harbor period [by the acquired entity], and that cooperate with the ensuing investigation, and engage in requisite, timely and appropriate remediation, restitution, and disgorgement . . . will receive the presumption of a declination.”¹⁵ The Safe Harbor Policy is a general one that applies to all corporate crimes prosecuted by the DOJ. Monaco explained the reasoning behind the new Safe Harbor Policy:

The last thing the Department wants to do is discourage companies with effective compliance programs from lawfully acquiring companies with ineffective compliance programs and a history of misconduct. Instead, we want to incentivize the acquiring company to timely disclose misconduct uncovered during the M&A process.¹⁶

DOJ announced a “baseline” or default period for the acquiror to self-report the conduct of six months from the date of closing, regardless of whether the conduct is discovered pre- or post-acquisition.¹⁷ In other words, closing a transaction did not impose any bar on an acquiror availing itself of the safe harbor even if the conduct was discovered pre-close. From the date of closing, companies will also have a baseline period of one year to remedy the misconduct—effectively, an additional six months after reporting the conduct to remedy it.¹⁸ Monaco noted that these baselines could be extended, as reasonably necessary, depending on the context of the transaction.¹⁹ This new Safe Harbor Policy seeks to place “an enhanced premium on timely compliance-related due diligence and integration.”²⁰ 

IV. Change to Antitrust Division Leniency Policy

As implemented in the DOJ Justice Manual and the Antitrust Division’s Leniency Policy, the application of this safe harbor to criminal conduct under the Sherman Act is narrower than the Safe Harbor Policy Deputy Attorney General Monaco announced last October, undoubtedly in part because the Leniency Policy already covered circumstances before and after the transaction. The updated Leniency Policy states in relevant part:

Pursuant to JM § 9-28.900(A)(3)(c) [the Justice Manual section on voluntary self-reporting], when an acquiror discloses illegal activity by the acquired entity, the prosecution team should apply a presumption of declination to the acquiror only if the parties (i) satisfy all relevant requirements of the Antitrust Division’s leniency policy; (ii) voluntarily disclose the misconduct to the Antitrust Division (and the Federal Trade Commission, if the Commission is reviewing the transaction) before the merger or acquisition closes; and (iii) enter into an agreement, to the satisfaction of the Antitrust Division (and, when relevant, Federal Trade Commission), that (a) suspends any review period until a conditional leniency letter is issued or the marker lapses, and/or (b) otherwise commits to not close the merger or acquisition for a specified period of time, in the discretion of the Antitrust Division (and, when relevant Federal Trade Commission), after a conditional leniency letter is issued or the leniency marker expires.²¹

Notably, the updated Leniency Policy includes at least two important differences from the broader Safe Harbor Policy. It requires the acquiror to (i) disclose the alleged conduct before closing the transaction (as opposed to within six months of closing); and (ii) hold open the transaction while the applicant navigates the marker process (which can take many months) and for some unspecified period after a conditional leniency letter issues or the marker is allowed to lapse.

V. Practical Implications of the Updated Leniency Policy

Although the updates to the Leniency Policy will likely apply only in a relatively narrow set of circumstances, the changes and the corresponding Safe Harbor Policy provisions of the DOJ Justice Manual nevertheless raise practical implications for merging parties.

• The updated Leniency Policy does not appear to prevent an acquiror from obtaining leniency if it discovers a potential criminal Sherman Act violation by an acquired company only after the transaction closes. The Safe Harbor Policy allows for declinations for self-reported criminal violations during post-close “due diligence,” without defining what that is.²² However, the Leniency Policy states that reporting must occur pre-close for the acquiror to take advantage of the DOJ Justice Manual declination policy, suggesting an expectation from the Antitrust Division that the discovery must occur pre-close. This suggests that the pre-existing Leniency Policy requirements and process apply to a post-close discovery of criminal conduct.
  • Acquirors that apply for leniency post-close over conduct committed by a target should expect questions about their due diligence and whether the conduct should have been discovered pre-transaction. Acquirors should be prepared to provide details of the discovery process, including whether the information that led to the discovery was potentially available pre-close—e.g., in a clean room or through access to productions made by the target during merger review.
  • The updated Leniency Policy is silent on whether a target’s failure to “promptly” report a potential violation that it discovered before the transaction could prevent the acquiror from applying for leniency if the acquiror acts promptly upon discovery post-transaction. Acquirors should consider including in seller representations and warranties that no unreported potential criminal Sherman Act violations are known to the seller.
• Pre-close, the target and its culpable employees are liable for the target’s criminal conduct, yet the updated Leniency Policy refers to a pre-close disclosure to the Antitrust Division by the acquiror.
  • The update to the Leniency Policy does not appear to apply to a pending leniency application by the target that pre-dates signing of the purchase agreement. In such cases, the discovery and self-reporting are not a result of the transaction.
  • Since the acquiror has no criminal liability pre-closing, it is unclear in what circumstances it would be advantageous to have the acquiror apply for declination, rather than the target to apply for leniency, which the acquiror would benefit from upon acquisition. If the acquiror learns of criminal conduct by the target, it is likely that the prior non-disclosure of the criminal conduct would allow the acquiror to abandon the transaction or otherwise force the target to apply for leniency as a condition of the transaction.
• The DOJ Justice Manual declination policy states that prior to declining a prosecution, the prosecution team must determine that “both parties to the transaction were not coconspirators in the misconduct.” The updated Leniency Policy is silent on whether merging co-conspirators could both be covered by declination and leniency. The safest course for a party that discovers reportable conduct that implicates the other side in a transaction will likely be to self-report the conduct to the Antitrust Division without notifying the counterparty in order to protect its ability to obtain leniency. How to proceed as to the counterparty will depend on various factors, including the scope of the conduct, the potential and scope of civil liability, the importance of the transaction, contractual commitments to the counterparties, and whether there are colorable arguments to carve in the counterparty to the applicant’s leniency. 
• In the event that the updated Leniency Policy does apply, the marker process often takes many months, especially if the applicant self-reports to the Antitrust Division before doing an internal investigation. The requirement that merging parties finish this process before the transaction can close will introduce substantial delays in closing affected transactions. 
  • Although the DOJ Justice Manual provision on declination for Sherman Act violations only requires the parties to “suspend any review periods under the Hart-Scott-Rodino Act,”²³ it is unclear whether the additional requirement in the Leniency Policy that parties “otherwise commit[] to not close the merger or acquisition for a specified period of time” applies to non-HSR reportable transactions.

Both acquirors and targets will need to navigate the updated Leniency Policy with care if a potential criminal violation of the Sherman Act is discovered during the transaction process or immediately post-close. Pre-transaction, parties need to carefully assess whether the transaction agreements should address the potential risks to deal timing posed by the updated Leniency Policy.