Time is Up on Staying Blissfully Ignorant

By Wendy Heilbut


A trend started this summer: #MeToo Diligence.  In addition to diligence on its financial health, leadership, and intellectual property assets, a target company’s workplace harassment is now also being evaluated before investment deals are finalized.  The terms being added to many corporate documents are called a “Weinstein Clause” or the “#MeToo rep” and while not yet standard operating procedure, these terms are appearing more and more frequently.

This type of clause allows an acquiring or investing party to clawback some or all of its pledged investment if subsequent diligence turns up inappropriate internal behavior or a culture that could damage the business.  The #MeToo Rep is turning up in M&A agreements and PE acquisitions.

For example, when Brookfield Asset Management purchased Forest City Realty Trust Inc. in August, it included this language in its merger agreement: “To the Knowledge of the Company, in the last five (5) years, no allegations of sexual harassment have been made to the Company against any individual in his or her capacity as an employee of the Company or Forest City Employer, LLC at a level of Senior Vice President or above.”  This clause falls in a section of the agreement which requires the target company to represent and warrant full disclose to the acquiring company.  This means that if Brookfield later learns that Forest City was aware of, but failed to disclose, allegations of sexual harassment made against a senior employee, Brookfield could take action to void the merger.

The goal of a Weinstein Clause in not to later renege on the deal, but to force disclosure during diligence of the target entity.  This allows the acquirer to decide if the deal is worth finalizing before actually signing on the dotted-line.  Anything disclosed under a Weinstein Clause would be seen as a risk – a risk the acquirer might decide makes the acquisition less valuable or even not worth the price or the hassle.

The use of these clauses opens the new frontier of how to conduct sexual harassment due diligence.  Estimates are setting this gap as a trillion-dollar market space.   Some of the challenges however include:  how to ask the right questions to get at the DNA of a company and not just its culture, where to look in public records and social media to find the red flags, how to deeply examine a company’s human resources practices, when and how to conduct interviews of former employees, and the examination of confidentiality agreements and departures of personnel.

What this represents, on a broader basis, is that sexual harassment in the workplace, once a whispered about secret between HR and internal legal counsel, is becoming part of the diligence conducted by outside lawyers and professionals in their assessment of the risks of an acquisition.  Allegations of sexual misconduct are becoming substantive material in the due-diligence online data rooms that any acquirer’s advisers will examine and assess when deciding what, if anything, a deal is worth.

Perhaps we will soon see Weinstein Clauses become standard: something the acquirer’s lawyer will always put into acquisition or investment documents.  This will flip the tables.  A target company’s lawyer can push-back on the Weinstein Clause, but this creates the inference of a culture that condones sexual misconduct.  Society is moving the needle to the other side, now the assumption is that you are disclosing sexual harassment in your workplace, versus the typical pre-#MeToo practices of attempting to keep it hidden under the rug.