The hot trend in legal agreements: Weinstein clauses

The #MeToo movement has triggered a sea of change with regard to sexual harassment in the workplace, including a new trend in legal agreements.   

Dubbed the “Weinstein clause,” the new addition to the standard roster of representations and warranties in a sales agreement focuses on a company’s knowledge or awareness of accusations of sexual misconduct against its executives and managers.

For example, if Company A decides to purchase Company B, the practice has always been for the soon-to-be acquired company to disclose any information about its financial situation as well as ongoing litigation or threats of lawsuits, and represent that it has complied with certain laws. Issues like allegations of sexual misconduct were not previously part of the consideration.

Now, in the wake of the disclosures of decades of alleged sexual harassment and abuse by former Weinstein Company CEO Harvey Weinstein, a new clause has appeared. Company B is now being asked to represent to Company A that individuals holding leadership positions have not been accused of sexual misconduct and that Company B has not entered into a settlement agreement related to sexual misconduct.

A typical clause may read: “To the Knowledge of the Company, (i) no allegations of sexual harassment have been made against (A) any officer or director of the Acquired Companies or (B) any employee of the Acquired Companies who, directly or indirectly, supervises at least eight (8) other employees of the Acquired Companies, and (ii) the Acquired Companies have not entered into any settlement agreement related to allegations of sexual harassment or sexual misconduct by an employee, contractor, director, officer or other Representative.”

In some cases, Company B has been asked to put some of the purchase price in escrow for a period of time to cover costs shouldered by Company A in the event allegations of sexual misconduct arise after a transaction. Other clauses feature a time period going back several years, often past the actual statute of limitations for claims based on the conduct at issue.

A review of agreements involving public companies by Bloomberg revealed the clauses are being used by companies in a host of industries, from real estate to hospitality to entertainment to healthcare. While the use of the clauses was at first limited to large deals, they are now being found in deals of all sizes.

A variation on the Weinstein clause is also making its way into employment agreements. Companies have reportedly started to change their contracts with executives to be more explicit about sexual harassment and misconduct with regard to termination for cause, in the hopes of reducing (or eliminating) severance pay or the acceleration of stock options when a high-ranking employee is asked to leave.

Previously, cause for termination was generally limited to triggering events such as conviction of a crime.

In addition, companies are asking incoming executives to affirmatively represent that they have not been the subject of a sexual harassment claim, reached a settlement agreement involving allegations of sexual misconduct and/or engaged in harassment or misconduct.

The updated employment agreements serve a two-fold purpose: to create an incentive for executives to avoid such behavior and to protect the company in the event the executive does engage in sexual misconduct.

Allegations of sexual misconduct are now a significant business risk to companies, as evidenced by the drop in $3.5 billion in value to shareholders of Wynn Resorts after sexual harassment allegations surfaced against Steve Wynn; Weinstein’s production company, valued at $200 million, filed for bankruptcy as the claims against him mounted. 

Whether in an employment agreement or sales deal, the so-called Weinstein clauses demonstrate the concrete effect of the #MeToo movement that continues to play out for employers and businesses, with greater scrutiny on culture, diversity, sexual harassment claims and preventative measures.