By Chloe Autran, Law Writer at the KCL Mergers & Acquisitions Society
- Published as part of our ‘Deep Dive’ Section, promoting in-depth pieces which analyse underrepresented issues and challenge conventional narratives.
You are probably familiar with the Harvey Weinstein scandal which erupted following an October 2017 New York Times report, precipitating one of the biggest social movements against gender discrimination worldwide. Accused of several criminal sexual acts, the former American film producer’s allegations prompted what is referred to as the “Weinstein Effect”, out of which emerged the #MeToo movement. As a result, the hitherto undermined issue of sexual harassment and misconduct in the workplace became hyper visible, “dethroning […] high-profile men in media and entertainment, sports, business and politics”. And just like that, the Weinstein Effect spilled over the corporate world, as increasing sexual misconduct allegations started to uncover blatant gender discrimination pattern across the business landscape.
More precisely, against a rather tumultuous background of global civil society strife, prominent business executives were fired, such as Les Moonves (former chairman and CEO of CBS Corporation) and Steve Wynn (former chairman and CEO of Wynn Resorts), revealing just how key it is to consider high level employers’ sexual criminal records when engaging with the business world. As such emerged the so called “Weinstein Clause”, also referred to as a “#MeToo rep” to be implemented in the M&A end of the corporate spectrum. This innovative approach to transactions ultimately seeks to apply a materiality threshold according to which sellers must indicate that over the course of the previous five years (or more depending on the case), no sexual misconduct claims have been made against a senior employee and/or that the company hasn’t entered into any relevant settlement agreement. First implemented around March 2018, the clause was used in 15 M&A deals eight months later. Fast forward to today, however, can we assert the initiative is truly successful at addressing the issue of sexual harassment in the workplace?
Raising gender discrimination awareness beyond civil society: why does the “Weinstein Clause” matter in the M&A world?
Undoubtedly, the “Weinstein Clause” has contributed to the introduction of anti-gender discrimination prerogatives in the initial due diligence stage of a transaction.
Buyers are increasingly interested in ensuring the company they are purchasing is clear of any form of pending litigation, as the costs associated with responding to sexual misconduct accusations (defending an employee in Court) are extremely high. More importantly, however, the clause reflects a general increase in society’s awareness of the structural challenges faced by women in the professional world. Parallel to this shift, companies’ reputation risks higher levels of harm in the event of such an accusation. For instance, M&A transactions can easily turn into a nightmare for the buyer. According to a survey conducted in 2018, one single claim of sexual misconduct has the power to negatively affect public opinion’s perception of an entire company. This is radically different for other types of claims. In one of the survey’s experiments, for example, participants had to rate their perception of a company based on a set of information they were asked to read. Part of the participants learnt that allegations of sexual harassment had taken place, whilst the rest was made aware the company’s employees were involved in financial misconduct. Unsurprisingly, it was generally found that people who learnt about the sexual harassment allegations were more critical about the company than those learning the organisation committed financial transgressions.
Materialising these concerns into a legal provision included in M&A documents thus represents a certain willingness to address these dangers. “What the Weinstein clause signals is that broads and investors alike are now treating sexual harassment allegations for what they are in a #MeToo era: a serious business risk”.
The “Weinstein Clause” with hindsight: 3 years after its emergence, challenges are still looming
The question remains, however, to what extent the clause is actually efficient in tackling sexual misconduct in the M&A world. First, let’s take a look at the precise formulation of the provision to uncover certain legal limits which are still to be overcome.
To the Company’s Knowledge, in the last five (5) years, (i) no allegations of sexual harassment have been made against any employee at the level of Vice President or above, and (ii) neither the Company nor any of the Company Subsidiaries have entered into any settlement agreements related to allegations of sexual harassment or misconduct by any employee at the level of Vice President or above.
The above sentence refers to a “Weinstein Clause” included in Section 4.11. of the 2019 Salesforce and Tableau merger document, which raises a series of questions due to various definitional loopholes:
- What does the term “sexual harassment” mean exactly? Does it refer to the company’s definition of the act in its employee handbook or sexual discrimination policy? Or should parties look at what national Court’s say about the matter? Which jurisdiction should be prioritised in the case of a cross-border merger?
- What does “allegations” mean? Should a claim be expressed in a written format? Should it be subject to investigations? To what extent can a simple assertion of sexual misconduct be considered a serious allegation? Sometimes, information is disclosed through nameless allegations: should these be considered?
- Who is entitled to have “Knowledge” of the allegations? Should this person be an HR professional, a lawyer, an employee of the company in question? In some cases, an employee might report such conducts to a lower-level supervisor and specifically ask not to spread the word. What should the supervisor do? What happens if she/he fails to act?
- The limits imposed by the clause might also be problematic: it only considers the last 5 years of the company’s activities. What if sexual allegations go back further in time?
- Finally, why should employees at the level of or above Vice-Presidency be the only individuals subject to the clause?
Questions are endless… In other words, “[t]he language used [in the clause] opens up a real can of worms that seems like the contract drafters did not think through these issues”.
On the other hand, the sensitive nature of the issue poses significant challenges to the clause’s effectiveness. Most significant is the fact that most harassment cases go unreported. Disclosing such claims is a daunting step, as fear of retaliation prevents employees from taking action. A 2018 Society for Human Resources Management survey, for instance, found that up to 76% of non-manager victims of such conducts didn’t report them. Further, the clauses focus on the company’s past, meaning they might not “be enough to change a toxic culture that may have enabled bad behaviour to be kept quiet”. Such work environment is particularly hostile to employees facing sexual misconduct, discouraging them from speaking up in the first place, thus overshadowing the clause’s potential.
Is there a way forward?
Of course, exposing the main difficulties and limits faced by the implementation of a “Weinstein Clause” should stimulate discussions regarding the way forward. As it is a short-term solution to a deeper structural issue related to corporate culture, buyers should consider an array of additional elements to draw an overarching portrait of the seller’s company. This includes focusing on Human Resources and labour issues as a whole, by reviewing the corporation’s diversity initiatives, its social media presence and searching for any legal records of 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.”
After all, the clause should be about generating long-lasting impacts beyond the walls of an M&A transaction.
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