The #MeToo Movement Migrates to M&A Boilerplate.

Author:Windemuth, Anna


INTRODUCTION 491 I. THE #METOO CLAUSE'S EMERGENCE IN M&A TRANSACTIONS 495 A. Navigating M&A Agreements 496 B. The #MeToo Clause's Origins 499 C. Content Analysis of Thirty-Nine Clauses 503 1. Knowledge Qualification 504 2. Reference to Disclosure Schedule 508 3. Specific Time Span 509 4. Allegations of Sexual Harassment or Misconduct 511 5. Professional-Capacity Limitation 513 6. Current-Employee Limitation 514 7. Hierarchical or Role-Based Limitation 515 8. Written-Allegation Limitation 516 9. Reference to Settlements 517 II. A NEW SOCIOCULTURAL IMPACT ON M&A 518 A. The #MeToo Clause: A Unique Form of "Reactive Growth" 518 1. Reactive Growth in M&A 519 2. The #MeToo Clause Is Here to Stay 521 B. The Benefits of the #MeToo Clause 521 1. Driving Conversations Among Lawyers, Executives, and HR 522 Personnel 2. Deepening Inquiries into Sexual-Harassment Policies 523 During Due Diligence 3. Legal Recognition of Harassment Allegations 524 4. Incentivizing Companies to Prevent Sexual Harassment 525 C. The Drawbacks of the #MeToo Clause 526 III. THE #METOO CLAUSE GOING FORWARD 527 A. Reimagining the #MeToo Clause to Focus on Reporting 528 Infrastructure B. Targeting Settlement Agreements 530 C. Improving Sexual-Harassment Reporting Infrastructure 531 D. Effective Communication During Due Diligence 534 CONCLUSION 535 APPENDIX A: METHODOLOGY 535 1. Quantitative Method 535 2. Qualitative Method 537 APPENDIX B: #METOO PROVISIONS IN PUBLIC M&A DEALS 539 INTRODUCTION

The #MeToo movement has left its mark on corporate lawyering, but not through a slew of high-profile firings. Rather, the risk-averse field of corporate law has integrated #MeToo into one of its most significant tools: the mergers and acquisitions (M&A) agreement. Dubbed the "Weinstein clause" on Wall Street, this new provision began appearing in M&A contracts in early 2018, a few months after sexual-assault allegations against film producer Harvey Weinstein surfaced in the popular media. The clause exists in various forms, but generally represents that, to a target company's knowledge, senior employees have not been subject to allegations of sexual harassment within a particular time span.

Reporters and pundits expressed surprise that a clause reflecting awareness of workplace sexual harassment would surface in the "male-dominated world of M&A advisory," (1) the "male-dominated world of finance," (2) or the "testosterone-infused Wall Street mergers and acquisitions market." (3) Such surprise, this Note argues, is misplaced. The clause does not stem from a desire for progressive reform, but is rather best understood as a tactical industry response to reduced tolerance for misconduct.

The Weinstein Company's demise illustrates the economic power of such reduced tolerance. Before the New York Times first reported on allegations against Weinstein in October of 2017, (4) the Weinstein Company's board estimated that its television entity alone was worth around $650 million. (5) A few weeks after Weinstein's infractions became public, an expert predicted massive discounts for interested private equity firms, perhaps up to forty percent. (6) As nearly ninety women came forward to express that they had endured unwanted sexual contact from the Hollywood producer, (7) the company's value plummeted. An investor group finally offered to pay about $275 million for the entire company and to assume $225 million in debt. After New York's attorney general filed a lawsuit against the company for its handling of the allegations, however, the deal fell through. (8) A month later, the company filed for bankruptcy. (9)

Activist Tarana Burke, the woman who coined the term "Me Too" over a decade ago, has said that her work is "about survivors talking to each other." (10) That's a far cry from corporate lawyers engaging in transactional negotiations. But even though an M&A provision addressing sexual harassment does not reflect industry concern for anything beyond risk mitigation, it certainly pressures companies to carry meaningful conversations about harassment into the deal room. Involving a wider range of actors in such discussions helps carry an onus that has traditionally fallen on victims of sexual harassment alone--"[t]he onus," in Burke's words, "to tell [their] stories, to elevate the conversation,... to keep the conversation going." (11)

The Weinstein scandal may have been egregious enough to set off these conversations in deal rooms. But sustained interest in sexual harassment, this Note argues, was a product of the #MeToo movement's lasting economic impact on a range of industries. After Weinstein, the movement to expose miscreant executives spread quickly to other companies. Reputation and management consultancy firm Temin & Company compiled a database of high-profile individuals accused of sexual harassment between December 2015 and October 2018: a total of 810, from Bill Cosby to Brett Kavanaugh. (12) The firm identified a "steep explosion" in public accusations after the Weinstein revelations. (13) By October 2018, fifty-six CEOs were the subject of accusations. (14) "[Organizations are paying attention to and acting on complaints more quickly," Temin found, as "#MeToo begins to be seen as a real reputational risk." (15) The firm concluded that "leaders--CEOs and board directors--are looking for insight on why, why now, and how we can address the reputational risk of toxic workplace cultures." (16) The Weinstein scandal's aftermath also showed that reputational costs arise even absent legal liability. Hours after Kate Upton accused Guess cofounder Paul Marciano of harassment on Twitter, the company's shares dropped by almost eighteen percent--a loss of $250 million in market value. (17) The company's public denial of Upton's claims did not stop its shares from tumbling. Within three days of the Wall Street Journal's publication of a story detailing allegations of assault against casino mogul Steve Wynn, (18) who also denied the allegations, his company lost about $3.5 billion in value. (19) "Call it the cost of sexual harassment allegations in the age of the Me Too movement," a Fortune reporter wryly noted. (20)

Enter the Weinstein clause in March of 2018. The term "Weinstein clause" itself signals the clause's focus--no business wants to be the next Weinstein Company, and no investor wants to accidentally acquire one. Despite its noble-sounding origins, the Weinstein clause merits close scrutiny. It was developed to maximize profits rather than social good, and even its incidental social impacts are not universally positive. By focusing on allegations of misconduct, the clause risks stigmatizing reports of sexual harassment--already a notoriously underreported phenomenon.

This Note examines these risks and downsides alongside other effects of the clause and suggests improvements to help maximize its potential benefits. Most centrally, I argue that the clause should focus on a company's reporting channels and harassment policies rather than the number of recorded sexual-harassment incidents. This reorientation would promote reporting channels and more effectively target the underlying risk of toxic workplace culture. Similarly, I suggest that the clause should target settlement agreements, which are more indicative of underlying harassment problems. Although the Weinstein clause's profit-maximizing origins might invite suspicion, I argue that the clause generally benefits the workplace by involving more corporate actors in conversations about harassment and by engaging with a long-term cultural shift driven by women of color.

One suggested change to the clause is adopted in this Note. Instead of referring to the provision clause as the "Weinstein clause," I have termed it the "#MeToo clause" to center the conversation on "power and privilege" (21) rather than a specific offender. Admittedly, using this symbol in the context of corporate law risks "blunt[ing]" its "rage, despair, and horror" (22) for ease of reference. But the #MeToo symbol has become so widespread (23) that its use in corporate law does not dilute its focus on victims of sexual harassment.

This Note uses interview data from practitioners and public M&A filings to examine the #MeToo clause's origins and evaluate its implications. In Part I, I provide background information on M&A agreements, discuss the origins of the #MeToo clause, and provide a content analysis of thirty-nine public filings featuring such a clause. Although public filings provide only a glimpse of all M&A deals, variations among these provisions show how the #MeToo clause can be tailored to assign liability, define the scope of harassment issues under scrutiny, and determine due-diligence measures. My analysis of contract language is further informed by qualitative data obtained through interviews with twenty-seven practitioners. These interviews provide broader insights on the public filings based on practitioners' experiences in both public and private transactions.

In Part II, I argue that the #MeToo clause is an example of what John Coates terms "reactive growth," wherein M&A contracts change to accommodate shifting external risks. However, unlike the examples discussed by Coates and raised by practitioners during interviews, the #MeToo clause was driven by a social movement. As a result, I argue that the clause is more likely to have a lasting presence in M&A, as it is not attached to an isolated law or even the egregious Weinstein episode, but rather anchored in a long-term shift in public attitudes toward sexual harassment. Further, Part II discusses the clause's potential to foster broader conversations surrounding harassment, legitimize victims' allegations through legal recognition, improve the due-diligence process, and incentivize burgeoning companies with acquisition aims to foster harassment-free corporate cultures from their inception. I also address concerns that the clause may...

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