M&A News: Use of “Weinstein Clauses” Becoming Routine

If you are contemplating a San Diego business merger and/or acquisition, be prepared to discuss, review, and possibly include “Weinstein clauses” in the purchase and sale agreements. These clauses are intended to protect the purchasing company from the reputational and financial consequences if it is later disclosed that senior management of the target company engaged in prior sexual misconduct. These issues are now front and center for purposes of due diligence, as well. This is yet another reason that asset purchase transactions are on the rise — as opposed to stock purchase sales. Finally, issues with respect to sexual misconduct and similar misbehavior have become important when dealing with the sale/purchase of intellectual property such as trademarks and copyrights. An experienced San Diego corporate attorney can help.

“Weinstein clauses” are named for Harvey Weinstein. As many remember, back in late 2017, Harvey Weinstein — a well-known, powerful, and successful Hollywood producer — was the subject of a New York Times expose article that detailed decades of sexual harassment, unwanted sexual contact, and other sexual misconduct. It was revealed that Weinstein had entered into settlements with at least eight women and, later, as many as 80 women came forward to accuse Weinstein including several famous Hollywood A-list stars. He is now under criminal investigation. See news report here.

One under-reported aspect of the Weinstein scandal was the impact on his various business ventures. Essentially, all of Weinstein’s companies ceased doing business and various business partnerships were severed. In general, businesses have long recognized the financial risks associated with sexual harassment and discrimination. However, the Weinstein scandal has taken matters to a new level. Whereas once the risk was litigation and court judgments, now the risk is the complete destruction of the ongoing value of a business. As a result, sexual misconduct is now a key issue for due diligence and is subject to new contractual representations and warranties. An example of a Weinstein clause might read as follows:

“SEXUAL HARASSMENT/MISCONDUCT CLAIMS: COMPANY hereby represents and warrants that it is not party to a settlement agreement with a current or former officer, employee or independent contractor resolving allegations of sexual harassment by either (i) an officer of (ii) employee of COMPANY. Since DATE, there are no Legal Actions pending or filed or, to the Company’s Knowledge, threatened, against the Company, in each case, involving allegations of sexual harassment by (i) any member of COMPANY’s Senior Management Team or (ii) any employee of COMPANY in a managerial or executive position.”

This type of clause is important since it provides a buyer protection in the event that the target business falsifies information. Such can be the basis for fraud litigation and rescission of the merger/acquisition. Clawback provisions can be added to give additional “teeth” to a Weinstein clause.

As noted above, sexual misconduct by employees and senior management must be added to the due diligence list. Review of the social media accounts — Twitter, Facebook and other accounts — for senior management is now almost mandatory, particularly if key employees will be retained in post-merger.

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. Mr. Leonard has been named a “Rising Star” four years running by SuperLawyers.com and “Best of the Bar” by the San Diego Business Journal.

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