The threat of sexual misconduct allegations plays an increasingly prominent role in merger and acquisition deals today. Knowing how to protect against this risk could mean the difference between a smooth M&A transaction and one that quickly turns into a reputational nightmare for the buyer.
To lessen the financial and reputational damage resulting from prior sexual misconduct by a top executive of an acquisition target, more buyers involved in M&A agreements are incorporating a provision into their deals, known as the “Weinstein Clause” (also named “#MeToo reps”). Although the “Weinstein Clause” can take several forms, typical legal boilerplate states, “To the knowledge of the company, no allegations of sexual harassment have been made against any current or former executive officer of the company or any of its subsidiaries.”
Some agreements include additional language requiring the target company to affirm that it “has not entered into any settlement agreements” related to such behavior or include protections that give the buyer the right to claw back a portion of the purchase price if a sexual harassment revelation negatively impacts the target company’s performance post-closing.
An analysis conducted by Compliance Week identified 15 merger and acquisition deals over the past eight months in which companies have incorporated the “Weinstein Clause.” Moreover, these warranties and representations have appeared across a broad spectrum of industries: restaurant, retail, asset management, medical-device, biotechnology, manufacturing, and more.
When allegations of sexual misconduct brought by dozens of women surfaced against Hollywood mogul Harvey Weinstein on Oct. 5, 2017, it incited a movement. Since that time, more and more women have come forward with allegations of sexual harassment against many other high-profile individuals in both the private and public sector—from politicians to media personalities to senior-level corporate executives.
The earliest example of the use of a so-called “Weinstein Clause” appears to have surfaced in March 2018, concerning the announced merger between SJW Group and Connecticut Water Services. That merger agreement states, “to the knowledge of SJW, in the last five years, no allegations of sexual harassment have been made to SJW against any individual in his or her capacity as (i) an officer of SJW, (ii) a member of the SJW board or (iii) an employee of SJW or any SJW subsidiary at a level of vice president or above.”
While most M&A agreements analyzed by Compliance Week require the target company to disclose allegations of sexual harassment going back anywhere between three and five years, others include clauses that date back even further. Gannet’s merger with Wordstream, for example, requires the disclosure of allegations of sexual harass mentor misconduct in the past eight years, and AMC Networks’ acquisition of RLJ Entertainment requires the disclosure of sexual harassment allegations going back 10 years.
According to a recent analysis conducted by reputation and crisis management consultancy Temin and Company, at least 810 high-profile figures have faced such accusations since the arrest of actor Bill Cosby in December 2015, when Temin began tracking the data. Temin’s “#MeToo Index” further reveals that 56 CEOs, to date, have been the target of these accusations, including 21 public-company CEOs, 29 private-company CEOs, and six non-profit CEOs.
By industry, the data reveals that the entertainment industry draws the most accusations with 234, to date, followed by politics and government (192); business (159); media and broadcasting (114); and higher education (63).
What the Weinstein clause signals is that boards and investors alike are now treating sexual harassment allegations for what they are in a #MeToo era: a serious business risk. Historically, although it’s not unusual for M&A agreements to reference ongoing lawsuits or threats of litigation, “allegations” of harassment were not on anyone’s radar, says Elizabeth Tippett, a University of Oregon law professor.
The purpose of reps and warranties, like the Weinstein Clause, is to “serve as a recovery mechanism for if an issue were to surface, and they’re there to protect a company from the costs associated with reputational and financial risk.”
Ingrid Fredeen, VP of Online Learning Content, NAVEX Global
Moreover, lawsuits concerning employment-related misconduct generally weren’t considered material. The buyer may have wanted to know about it, but it wasn’t a “make it or break it” issue, Tippett says.
But now we’re starting to see M&A agreements that acknowledge the likelihood of a sexual harassment allegation potentially being more than an immaterial event. One recent example is Verscend Technologies’ planned merger with Cotiviti, calling for the disclosure of any “allegations of sexual harassment” made against any officer, director, or employee who supervises at least eight other employees, if it would have a “material adverse effect” on the company.
In other cases, a senior executive’s checkered past may ruin a merger deal, or at least seriously delay it. The lingering merger between broadcast and media company CBS and Viacom is a recent, high-profile example. In August CBS’s board of directors announced that it retained two law firms to investigate sexual harassment allegations concerning its former CEO Leslie Moonves, in addition to “cultural issues at all levels of CBS.”
“The company has received subpoenas from the New York County District Attorney’s Office and the New York City Commission on Human Rights regarding the subject matter of this investigation and related matters,” CBS said in a Sept. 28 Form 8-K filing. “The New York State Attorney General’s Office has also requested information about these matters. The company is cooperating with the ongoing investigation and related inquiries.” CBS said it will seek potential buyers only after its investigation of Moonves concludes.
The purpose of reps and warranties, like the Weinstein Clause, is to “serve as a recovery mechanism for if an issue were to surface, and they’re there to protect a company from the costs associated with reputational and financial risk,” says Ingrid Fredeen, vice president of online learning content at NAVEX Global. But they don’t address the heart of the problem: the culture itself.
The inclusion of reps and warranties in M&A agreements, therefore, should be the first step in a robust due-diligence process, not the only step. “It’s best to start with open questions about culture,” says Andrew Jennings, founder of Ekdesk, a provider of data analytics software for creating equitable workplaces.
At a minimum, buyers and their advisers should inquire about the target company’s:
Anti-harassment and anti-retaliation policies and procedures, including employee handbooks, and training efforts;
How those policies and procedures are vetted;
Whether and how top executives demonstrate their support for anti-harassment efforts;
What employee complaints the company has had and how they were handled; and
Whether there are any known sexual misconduct allegations against any top executives.
“What does this environment look like for employees who work there?” Fredeen says. “Those are some of the ways you can dig in and get information that’s deeper than a rep and warranty that says, ‘We have a great culture and we don’t have a harassment problem.’”
A buying company should also review the target company’s employee cultural survey, especially as it concerns diversity and inclusion issues. Other places to look may include social media posts and press reports (focusing on specific keywords, like “sexual harassment” and “sexual misconduct,”) and court dockets for employment claims. All these tell a story and give an idea of other areas that may need further digging.
Having this knowledge might further influence a company’s decision as to whether it still wants to buy the target company or, from a small-picture perspective, whether to cut that executive loose or indemnify the employee in the event of a lawsuit, for example.
For target companies, the broader message is that it’s now more important than ever to document anti-harassment and anti-retaliation policies and procedures, the enforcement of those, and what potential legal liabilities pertaining to sexual misconduct the company faces before engaging in an exit strategy.
It’s important that ethics and compliance efforts continue once a deal is signed. “As long as culture remains permissive, tolerable, or blind to root causes of power abuse, the harassment is going to persist,” Fredeen says.
If senior leaders truly want to protect their investment and grow the business in a merger or acquisition, ethics and compliance measures must be a priority. Some efforts should include ensuring the company funds compliance efforts to improve its culture, especially a toxic one; normalizing desired behaviors—such as making it normal for employees to speak up or making it normal to hold others accountable, no matter who they are or at what level of the company; and establish a true commitment to non-retaliation.
Jennings notes that a change in control also “represent[s] an opportunity for people who may have been silent in the past to come forward.” Once a deal is signed and announced, the buyer should consider interviewing rank-and-file employees, for example, to learn about any potential harassment, diversity, and inclusion issues, he says, so that buyers are not blindsided by a #MeToo issue after a close.
In the broader scheme of things, the rise of the Weinstein Clause in mergers and acquisitions is a positive development for ethics and compliance officers. When these two interests converge—the compliance function’s interest in anti-harassment as a cultural issue and the board’s interest in harassment as a business risk—it becomes a priority, Fredeen says, “and when it becomes a priority, it becomes something that is supported and funded.”