November 29, 2018

The effect of #MeToo on business deals. The rise of the Weinstein Warranty.

What is the “Weinstein warranty” or "Weinstein clause"?

We know about the allegations of sexual harassment against Harvey Weinstein and other prominent figures in various industries. We know about rise of the #MeToo and #TimesUp movements.

What is less known is that, as a result of the campaigns, the “Weinstein warranty” has emerged. It also goes by the “Weinstein clause”.

The “Weinstein warranty” works in the following way in business or share sale transactions: a buyer requires a warranty in the contract that states that the seller does not know of any sexual allegations that have been made against a director or officer of the company, or indeed any employee who supervises a specified number of employees.

The warranty may also require disclosure from the company or seller indicating that they have not made a settlement with an individual relating to sexual misconduct or sexual harassment by any officer/director or employee of the company.

Social due diligence

Historically, claims of sexual harassment or misconduct were not considered an essential factor in making an agreement. Such claims were relatively small when considering that deals could be worth millions or billions of dollars.

However, in light of the fact that Harvey Weinstein's company, which was valued at $200 million went bankrupt, and Sir Philip Green’s Arcadia Group which has recently been plunged into difficulties as a result of alleged improper sexual conduct, there have been ripples of concern within the business community.

It was reported by Bloomberg on 1st August 2018, that 475 high profile executives and employees have been accused of improper sexual conduct over the last 18 months.

Further, as recently as September 2018, following allegations of sexual misconduct by the CEO of the CBS Corporation, Leslie Moonves, the share price plunged.

The “Weinstein warranty” has now been used with regularity outside of the entertainment business. Recently, Del Frisco's Restaurant Group Inc. bought the Barteca Restaurant Group for $325 million. As part of the deal, Del Frisco required information as to whether any managers who supervised eight employees or more had ever been accused of any sexual misconduct since 1st January 2015.

Business risk

In many respects, the #MeToo movement has created more than just a social change. It has highlighted sexual misconduct and harassment as a serious business risk, and in the current economic climate, many buyers are risk averse.

M&A advisors have also started to negotiate the right to get a partial refund of the money should any allegations of sexual misconduct or harassment come to light, and subsequently, economically damage the business.

Often, money is being set aside as part of the deal to address #MeToo issues should they arise. Gregory Bedrosian, chief executive officer of boutique investment bank Drake Star Partners, said in an interview.

“Sellers have even put money in escrow that buyers can claim if any social issues arise. This can sometimes be as much as 10% of the total value of a transaction.”

The new normal for compliance

The realisation that buyers need to be cautious when dealing with mergers and acquisitions, not just about financial matters, but also with regard to social due diligence, is an acknowledgement that matters relating to improper sexual misconduct could create problems in the future and a serious loss of revenue.

Could it come to Australia?

The “Weinstein warranty” is starting to appear in Australian deals.

No potential purchaser wants to be associated with harassment, let alone being exposed to the cost and distraction of litigation should any claims of sexual misconduct or sexual harassment arise. Further, a loss of reputation for the company could lead to a loss of revenue and social capital and damage-control expenses for the new buyer.

Consequently, buyers are looking beyond financial due diligence and building adequate protection into transaction documents.

What do you need to know before doing a deal?

You should at the minimum address the following matters:

  • What is the company's policy regarding anti-retaliation and anti-harassment procedures?
  • Is there an employee handbook regarding sexual misconduct and harassment?
  • What training have directors and employees of the company received?
  • How have all the policies and procedures been vetted before implementation?
  • Have all the hierarchy within the company shown their support for anti-harassment measures?
  • What employee complaints have been made in the past?
  • How has the company handled complaints of sexual misconduct and harassment?
  • Have any sexual misconduct allegations been made against any of the senior executives of the company?
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