If your San Diego business is contemplating a merger or making an acquisition, it is increasingly important to include sexual harassment and good behavior representations and warranties in the early part of the process and to provide for contingencies. These so-called #MeToo or “Weinstein” representations and warranties involve information about allegations of sexual harassment, discrimination, rape, or assault and cases/settlements involving such misconduct. An illustrative representation of this sort might look like this:

“COMPANY represents to the [BUYER] that [EMPLOYEE, OWNER, DIRECTOR, ETC.] has not been accused of sexual discrimination, harassment or misconduct either in the workplace or otherwise, and that COMPANY has not entered into a settlement agreement with employees, contractors or others, related to allegations of sexual discrimination, harassment or misconduct.”.

An experienced San Diego corporate lawyer can help prepare such representations and warranties. As can be seen, these clauses are directed at key employees who might be expected to move from the target business to the acquiring business or might end up as part of the management team of the merged entity. These issues must still be vetted early in the process even if there is no key employee that is expected to make the transition. This is because of potential successor liability if the target company has known but unresolved claims or cases involving such misconduct. Further, known-but-settled claims raises the “red flag” that more such claims exist but have not yet come to light — the “smoke-equals-fire” wisdom. Aside from legal liability, serious damage to business reputation can be suffered if a deal that is even remotely associated any some sort of allegations of sexual harassment, discrimination, rape, or assault. For these reasons, a #MeToo or Weinstein representation is now needed in the early part of the process and these issues must now be fully explored during due diligence period.

So, what happens if, during due diligence, facts are uncovered showing that there is a history of sexual misconduct within the company? For obvious reasons, the transaction will have to be modified, but this does not necessarily mean that the transaction must be terminated completely, but there are some strategies that can be used to accomplish the business purposes of the original deal. Most merger and acquisition contracts contain good provisions for how the transaction is to be changed if the due diligence raises concerns. Sexual harassment and assault issues should be covered by these contingency clauses, too.

First, consider converting the transaction to an asset purchase rather than a merger or acquisition of the entire company. This option should be built into the original agreement. Often, with mergers and acquisitions, owners, directors, and key employees agree to the deal precisely because they are getting a key role in the new entity. In other words, those key individuals probably did not want an asset sale and might well resist the conversion of the deal into an asset sale absent a contractual requirement. Thus, there is a need to have the option built into the original agreement. Many times, a merger or acquisition is done to get access to key assets. Thus, conversion of the deal into an asset purchase will accomplish the goals of the acquiring business. An asset purchase also avoids potential liability for the unacceptable behaviors via the legal concepts of successor liability.

Second, consider a serial merger and acquisition that gives reputational “distance” between the final merged entity and the original business entities. The final merged entity should not go forward with the individual who engaged in the misconduct, but sometimes that is not enough. It may be important that the end-result-business have no association with the original target business. You do not want your business to be charged with after-the-fact-facilitating or rewarding unacceptable behaviors.

An option here is to separate out the individual, create a new business entity, and then merge the original target business into or have it become a subsidiary of the new entity. The newly-created business is the one that is acquired. This gives the reputational distance. This option might be necessary when the purpose of the merger or acquisition is to expand, enter, and/or saturate a market segment. However, special care must be taken to avoid successor liability if this route is chosen.

A final strategy is to employ copious and extensive hold-backs from the sales proceeds for a significant period of time. Hold-backs are probably essential if the deal remains a merger/acquisition but is probably still needed if the deal becomes an asset purchase. The purpose is of the hold-back is to pay for legal fees and costs and judgments paid by the acquiring business if/when allegations or claims arise after the deal has been consummated. The length of the time for the hold-backs might need to extend to the full length of the applicable statutes of limitation. The purchase by the target business of insurance products, prepaid and with deductibles paid in advance, should also be explored.

Contact San Diego Corporate Law Today

If you would like more information, contact attorney Michael Leonard, Esq., of San Diego Corporate Law. Mr. Leonard can be reached at (858) 483-9200 or via email. Mr. Leonard’s law practice is focused on business, transactional, and corporate matters, and he proudly provides legal services to business owners in San Diego and the surrounding communities.

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