Should harassment be a deal breaker in acquisitions?

25 Mar 2019 By Katie Sloan

Katie Sloan reports on ‘Weinstein clauses’, which buyers of companies are increasingly using to ward off the risk of sexual harassment claims

The risk of sexual harassment claims against senior figures is becoming a key risk issue for companies. In the US, it is now leading to ‘Weinstein clauses’ in deals – where buyers of companies negotiate specific protection against the risk of sexual harassment claims emerging.

Although the same approach has yet to emerge in UK deals, this development positions sexual harassment as being a significant standalone risk issue, rather than being categorised with other employment law-related risks or claims. It also puts the focus on the accountability of the business for the behaviour of senior leaders.

One novel aspect of the #MeToo movement has been the ability to challenge people previously seen as untouchable in an organisation. There has also been a subtle shift in power towards the individual who has been subjected to harassment, with a greater willingness to come forward and report. The #MeToo movement has demonstrated the power of social media to ignite issues and to increase the potential reputational impact of harassment issues within organisations. In the last two years, the risk profile of harassment has increased not because of changes in the law, but because of changes in culture and public awareness. 

Tackling sexual harassment effectively requires buy-in at the top and a move away from being an HR issue alone. That’s not always easy in a world of limited resources and competing risk issues. ‘Weinstein clauses’ in a deal will make it clear to senior leaders that harassment can affect the bottom line. If the legal repercussions of an executive’s bad behaviour at the office party could affect the purchase price of a sale, then the board and leadership team need to take this issue very seriously.

The last few years have seen the impact that individual allegations can have on a company’s share price. In December last year, it was widely reported that Ted Baker staff in the UK had launched a petition about a culture of ‘forced hugging’ by their chief executive. In the week following these allegations, the share price fell, and a non-executive board member was called in to investigate. In December, it was reported that Deloitte had publicly admitted that in a four-year period they had dismissed 20 partners for inappropriate behaviour. This was an unusual step and shows that businesses understand the value of being upfront and want to show that they take a robust approach to harassment.   

What does the ‘Weinstein clause’ say?

Typically, it involves the seller making representations that no senior manager has been accused of sexual harassment. If this turns out to be incorrect, then the buyer may be able to make a claim for damages against the seller. In the US, it’s sometimes referred to as a ‘#MeToo rep.’ Some buyers are even negotiating agreements whereby some of the purchase price is held back following the sale, in case an allegation of sexual harassment arises. 

An example of the type of clause that has been reported includes:

‘To the Knowledge of the Company, (i) no allegations of sexual harassment have been made against (A) any officer or director of the Acquired Companies or (B) any employee of the Acquired Companies who, directly or indirectly, supervises at least eight (8) other employees of the Acquired Companies, and (ii) the Acquired Companies have not entered into any settlement agreement related to allegations of sexual harassment or sexual misconduct by an employee, contractor, director, officer or other Representative.’

The reality is that a properly worded warranty would cover this type of situation without needing to frame a clause in this way. But it is the positioning and the message that it sends to senior executives rather than the legal drafting itself that makes this of interest to HR – and to employment lawyers. 

Katie Sloan is an associate with CMS

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