'Weinstein' Clauses In Acquisition Agreements

"Except as set forth on the company disclosure schedule, in the last 10 years, no allegations of sexual harassment or sexual misconduct have been made against any current or former officer of the company, and the company has not entered into any settlement agreements related to allegations of sexual harassment or sexual misconduct by an officer, executive or other employee of the company."

Seller's counsel will usually request that several qualifiers be inserted into this representation, each of which may need to be separately negotiated. To be sure, the inclusion of some language requiring "knowledge" is very common, at the very least to limit the "allegations" verbiage. On its face, this seems quite compelling because it is not difficult to conceive of instances where an "allegation" can be made but the seller may not be aware of it.

Negotiated Weinstein clauses may also include a combination of other qualifiers, both objective and subjective. Objective qualifiers are those that limit the scope of the contract-clause representation by objective criteria; for instance, requiring that allegations be in writing or reported to the company's human resources staff. It follows that subjective qualifiers are those that limit the scope of the representation by subjective standards and involve some level of judgment or context. Examples include limiting the representation to "substantiated" or "specific" allegations, or through the use of "materiality" or "material adverse effect." Because such subjective terms may be inherently vague or difficult to establish, buyers and related parties should be careful about accepting them.

Most Weinstein clauses use the term "allegations" as opposed to "claims," "actions" or "proceedings" (either as a defined term or otherwise). While "allegations" are perhaps not the most concrete subject for a representation, in light of the nature of sexual harassment in the workplace (and the legacy of the namesake of the Weinstein clause), this is probably best addressed through other qualifiers as discussed above.

All things considered, a more balanced version of a Weinstein clause might read as follows:

"Except as set forth on the company disclosure schedule, in the last five years, to the company's knowledge, there have been no allegations or complaints reported to the company's human resources department accusing any current or former officer or managerial employee of the company of sexual harassment or sexual misconduct, there are no proceedings pending or, to company's knowledge, threatened in writing against the company which involve sexual harassment or sexual misconduct by any current or former officer or managerial employee of the company, and the company has not entered into any settlement agreements related to allegations of sexual harassment or misconduct by an officer or managerial employee of the company, and, to the company's knowledge, no current or former officer or managerial employee has entered into such a settlement agreement."

Heightened awareness of sexual harassment in the workplace has resulted in more entertainment and media businesses engaging in internal due diligence to identify potential problems and anticipate issues that could give pause to potential buyers. When conducted prior to a sale negotiation, such due diligence — which seeks to root out sexual harassment and increase inward-facing awareness of a company's culture that could give rise to future claims or liability — places a seller in a far better position to respond to requests for a Weinstein clause. That is because a company that has done its homework will likely be able to demonstrate that significant thought, time and resources have been dedicated to relevant workplace training and remedial measures in connection with known issues; will have a fuller understanding of its culture and a more realistic assessment of how employees view their employment experience; can show that leadership is committed to maintaining an environment free from inappropriate conduct; and can better assess and value the risk of potential claims as they relate to indemnification, escrows or even sales price.

Once parties agree to a Weinstein clause with acceptable qualifiers, it is up to the seller to respond appropriately. Companies in a growing number of jurisdictions are precluded from hiding behind confidentiality provisions in sexual harassment settlement or nondisclosure agreements, unless victims request confidentiality or anonymity. Accordingly, it has become routine for sellers to disclose complaints of inappropriate workplace conduct, repeated sexual harassment allegations against the same executives, and similar indicia of related problems. That being said, the parties to a transaction should take care to disclose information in such a way as to protect against potential claims by victims seeking anonymity or whose ongoing employment and reputations can be damaged.

The level of detail required by a disclosure request is subject to negotiation. Still, failure to be adequately forthcoming can result in clawbacks, higher escrows or even future reductions to executive earn-out or compensation, and can jeopardize representation and warranty insurance coverage.

Weinstein clauses are here to stay, and while it is critical for dealmakers to negotiate appropriate qualifying disclosure language, that language alone does not serve to address the underlying concern of employee harassment, sexual and otherwise. Best practice dictates a proactive approach to ensuring an acceptable workplace culture, including internal due diligence that will make Weinstein clause disclosures as routine as the representations and warranties more traditionally seen in transaction documentation.

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Michael S. Poster is a partner at Michelman & Robinson, a national law firm with offices in Los Angeles, Orange County, CA, San Francisco, Chicago and New York City. He leads the firm's corporate and securities practice group, and maintains a practice focused on corporate and financing matters, particularly those in the music business. He can be reached at [email protected]. Elizabeth Samios, a third-year student at New York University School of Law who worked as summer associate at the firm, contributed to this article.