Congressional investigations are now a common reality across corporate America, and companies large and small are therefore more focused than ever on the potential effects of congressional inquiries into business activities, goals, and strategies. In this new reality, the most sophisticated companies, private equity firms, and other corporate players are adding congressional investigations and other political risk diligence into existing procedures for assessing mergers, acquisitions, asset purchases, joint ventures, new product launches, and other major business actions.
In this alert, we describe the general risks associated with congressional investigations, as well as the particular ways in which transactions and other business strategies can draw the attention of investigators on Capitol Hill. From there, we highlight strategies and best practices for integrating consideration of these risks into existing due diligence, including key questions to ask and documents to collect to evaluate potential congressional investigations risk as part of an effective diligence process.
Even for companies accustomed to civil litigation and government investigations, congressional oversight can be a disorienting mix of legal, political, public relations, and investor relations issues. Exceedingly broad and sweeping document requests and impractical response deadlines are the norm—a typical congressional request will demand compliance in two weeks (or sooner). The traditional protections from discovery, such as protective orders or respect for confidential information, are largely absent. Any objections to such demands are not heard by a neutral judge, but are instead the purview of the same congressional committee leaders that have imposed the requests. Congress’s longstanding position is that it is not bound by common law protections such as the attorney-client privilege or protections for confidential business information. Congressional investigators also often work closely with other adversaries, and it is not uncommon for sensitive materials to be shared freely with plaintiffs’ lawyers or other government investigators.
The risks associated with a congressional inquiry can be significant. For example, failure to comply with a request for documents or testimony is often met with a scathing press offensive and allegations of stonewalling. Even good faith efforts to cooperate are not always enough to avoid combative and widely publicized escalation tactics, such as issuing a subpoena accompanied by an aggressive press release and public cover letter. In addition, congressional inquiries frequently spur ancillary legal and regulatory investigations that bring additional legal risks. In sum, though not every congressional investigation will make national or industry news, those that do can become all-absorbing crises that can derail corporate strategies, devour senior executives’ time, and have immediate and lasting effects on a company’s bottom line.
Many major congressional investigations have been prompted by corporate transactions, new products, and other business decisions. For example, following the financial crisis, Congress closely examined various bank mergers and consolidations. In recent years, Congress’s wide-ranging investigations of prescription drug pricing focused extensively on price increases that followed major acquisitions of products or subsidiaries, launches of new products, and corporate mergers. Other recent examples include congressional hearings focused on high-profile proposed mergers in the grocery and media industries, competition in digital markets, and the bankruptcy and sale of a genetic testing company.
Much the same, congressional scrutiny has increasingly focused on companies owned or controlled by private equity firms. For example, beginning in 2023, the Senate Budget Committee conducted an extensive, bipartisan investigation into private equity ownership of hospital systems, issuing sweeping document requests to portfolio companies and their private equity sponsors. Congressional scrutiny of private equity-owned companies has also extended well beyond the healthcare sector, with investigators targeting small and medium‑sized portfolio companies operating in a wide variety of industries. In the current Congress, for example, investigators have launched inquiries targeting corporate owners of mobile home parks and a private equity-owned government contractor, among many others.
As these examples illustrate, it is easy for parties on all sides of a transaction to become ensnared in burdensome, headline-grabbing investigations that potentially could have been mitigated or avoided entirely if issues were identified and addressed at the outset. With both political parties becoming more populist, skepticism of corporate mergers and acquisitions has become more politically salient, and major transactions have begun attracting regular attention across Capitol Hill. In recent years, Congress has conducted significant oversight of corporate mergers and acquisitions to look at market effects, antitrust considerations, and the implications for consumers. Private equity ownership can serve as an independent trigger for congressional scrutiny, increasing the likelihood that a portfolio company—or a transaction involving such a company—will attract investigative attention regardless of whether the underlying conduct would otherwise have drawn interest from Congress. And even if the transaction itself does not prompt congressional scrutiny, companies should consider the risks for the post-deal company.
In this new reality, it is important that companies incorporate congressional investigations risk into standard transactional due diligence. As a general matter, congressional investigations diligence should be designed to identify, assess, and mitigate the particular vulnerabilities arising out of future scrutiny on Capitol Hill.
Though each transaction is unique, such diligence would typically begin with a few fundamental questions.
- Is the target company, new product, or line of business currently the subject of a congressional investigation—whether a one-off request from an individual member or a formal investigation by a major oversight committee?
- Has the company previously been the target of such an inquiry and, if so, how was that investigation resolved? Even congressional outreach that never escalated can be a signal of things to come.
- Has the company or industry been referenced in other congressional investigations, hearing transcripts, floor statements, or committee reports?
- Does the company have existing procedures in place to identify and respond to congressional oversight inquiries? Are the company’s government affairs staff and outside advisors attuned to congressional investigations risks and considerations, and can they be relied upon to quickly and effectively identify early warning signs and elevate the issue to senior management and legal teams? Is it possible that an inquiry is in the works or has already begun and not yet filtered up to senior management?
- Is the business, acquisition, or planned activity likely to have political relevance? Is the underlying issue likely to gain media attention, which will itself feed congressional interest?
- Is there media coverage, litigation, or other regulatory exposure that could attract congressional oversight interest?
To answer these questions, it is helpful to understand a company’s past interactions with Congress, as well as any outstanding inquiries that will demand an immediate response. For example, in a corporate transaction, before consummating a deal, the acquiring company or private equity firm should consider obtaining the following materials from all parties involved.
- Copies of any recent congressional inquiries—including, but not limited to, requests for congressional testimony and any subsequent questions for the record, document request letters, and congressional subpoenas.
- Any materials produced to Congress in connection with such requests, as well as any materials prepared in connection with the company’s response that were not provided to Congress.
- Copies of any existing policies, procedures, or training materials related to responding to congressional inquiries.
Recognizing and assessing possible exposure to a congressional investigation is an important component of evaluating a potential transaction. Too frequently, executives overlook the real legal risks associated with congressional investigations, misdiagnosing the issue as purely political or only for government relations and lobbying teams to address. In addition to the risks presented by congressional inquiries themselves, these investigations also frequently act as force multipliers for federal regulators, state attorneys general, and class-action plaintiffs. There is a significant risk of statements or productions to congressional investigators later being used out of context in enforcement actions or litigation. As with other elements of a diligence process, it is critical to draw on experienced counsel to assess and address the unique risks presented by congressional investigations properly before closing a deal, launching a new high-profile product, or making other significant business decisions.
If you have any questions concerning the material discussed in this client alert, please contact the members of our Congressional Investigations practice.
Back
