A recent report Bloomberg indicates the increasing relevance of buyers staying away from a “#MeToo company” in M&A transactions – i.e., a company facing sexual misconduct allegations. This does not suggest that buyers are staying away. Instead, buyers are developing novel ways of addressing the risk brought upon by a “#MeToo company.”
The first method that has seen increased prominence is by incorporation of a legal representation in the M&A agreement, requiring the target company to reveal allegations of sexual harassment. Known as a “Weinstein Clause” (also referred to as a “#MeToo rep”), this representation, which ultimately hinges on a materiality threshold, usually states that the seller represents that over the course of the previous three and five years (or even further in some cases), no sexual harassment or misconduct claims have been made against the company’s senior employees and/or that the company has not entered into any related settlement agreements, unless otherwise disclosed. In some deals, the buyers have even placed money into escrow, which allows them to claim the fund back if any associated issue emerges in the future.
The first instance of these clauses occurred in March 2018, and the Weinstein Clause has been identified in 15 M&A deals over the past 8 months, across an array of industries. There are two main reasons behind the increased popularity of the Weinstein Clause in M&A transactions. First, the direct economic consequences of these claims can be massive and companies want to avoid the costs associated with defending, litigating and resolving sexual misconduct allegations against senior employees. Second, the #MeToo era has heightened society’s perception of this type of behaviour, which consequently, has amplified the risk of reputational harm that accompanies these claims. In fact, a recent study revealed that a single sexual harassment allegation can diminish the public opinion of an entire organization.
The appearance of the Weinstein Clause in M&A deals signals the recognition of #MeToo issues as a serious business risk with a potential for significant liability. As pointed out by law professor Elizabeth Tippett, though it is not uncommon to include representations and warranties regarding ongoing lawsuits or threats of litigations, mere allegations of harassment have never been addressed. Further, employment-related lawsuits were generally considered immaterial in previous M&A deals. However, with the #MeToo movement, private equity firms are beginning to place a greater emphasis on sexual misconduct claims and are augmenting their traditional financial diligence with more robust inquiries into the target company’s culture, labour issues and social reputation.
Despite its expanded application, implementing the Weinstein Clause in an M&A transaction faces certain challenges. In a recent article, Jena McGregor presented the lack of incident reporting as the greatest challenge and cited a 2018 study by the Society for Human Resources Management, which found that 76% of non-managers who experienced sexual harassment in the workplace did not report it. Second, unlike other representations such as representations on environmental matters, where the regulations prescribe specific fines that provide a measurement of liability, it is difficult to assess — let alone predict — the damages that arise from sexual misconduct claims. Finally, these matters are highly sensitive in nature, which makes it difficult to properly evidence claims within the context of an M&A transaction while maintaining the confidentiality of the parties involved.
While companies start to include the Weinstein Clause in their due diligence toolbox, the Weinstein Clause alone is insufficient to address the heart of the problem: the culture itself. Jaclyn Jaeger recommends that before incorporating this representation within an agreement, the buyer should focus their efforts on human resource and labour issues, which includes reviewing the company’s diversity practices, examining their social media presence and searching court records for any employment claims. This increased scrutiny should serve as notice to target companies — and hopefully to all companies as well — that if they are even considering an exit plan, it is imperative to ensure that harassment and misconduct liabilities and preventative policies are properly documented and managed. Ultimately, however, the onus does not remain entirely with the seller, nor does it terminate upon the closing of a transaction. Post-closing, it is the responsibility of the buyer to develop and fundamentally improve the company’s culture such that the root cause of #MeToo is fully addressed.
The author would like to thank Neil Rosen, articling student, for his assistance in preparing this legal update.
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