There’s a problem at the intersection of M&A and corporate crime. The problem arises from buyers’ acquisition of not just targets’ private assets and liabilities but also their criminal and regulatory (i.e., quasi-criminal) liabilities. That is, if A commits a criminal offense, and if B acquires A, B is liable for A’s offense despite being uninvolved in its commission. In the case of tort or contract claims, successor liability can be justified as preventing firms from evading private obligations through restructuring. In arm’s-length transactions, buyers can manage private successor liability through contractual terms that reallocate those costs and risks onto sellers. In the case of successor liability for criminal offenses, however, the serious non-financial consequences of criminal conviction (or even potential conviction) cannot be neatly managed through contractual risk allocation. Instead, distinctive consequences of criminal liability could frighten potential buyers away from otherwise-attractive deals. The result would be a suboptimal level of M&A activity: firms that would be ideal targets for acquisition but for their criminal exposure might sell for less efficient prices or to less efficient buyers, or they might not sell at all. As a result, this problem could represent social cost in that one of corporate law’s key mechanisms for addressing business deficiencies—the market for corporate control—might fail when the deficiency in question is a culture of lawbreaking.

The acquisition of Bankrate—a once-public financial firm—by Red Ventures—a private marketing company—is an instructive example. In 2012, the SEC raised concerns with Bankrate about its financial reporting, leading to the discovery that its CFO had engaged in a form of securities fraud known as a cookie-jar accounting. In 2017, Red Ventures, although it was aware of the accounting issues, bought Bankrate for approximately $1.4 billion. The investigation continued and later that year Red Ventures and the DOJ entered into a non-prosecution agreement (NPA). Under the NPA, the DOJ acknowledged that “Red Ventures acquired Bankrate, Inc. after the criminal conduct had taken place and had been investigated by the government, and Red Ventures had no involvement in any of the misconduct . . .”. Nevertheless, Red Ventures “admit[ted], accept[ed], and acknowledge[d] that it [wa]s responsible under United States law for the acts of [Bankrate’s former] officers, directors, employees, and agents” in connection with the old CFO’s fraud.

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