The ​“Wein­stein Clause”: What is it? Could it be com­ing to Australia?

What is the ​“Wein­stein Clause”?

The dis­turb­ing rev­e­la­tions about Har­vey Wein­stein and oth­er enter­tain­ment lumi­nar­ies have put sex­u­al harass­ment firm­ly on the agen­da, embold­en­ing vic­tims to come for­ward to share expe­ri­ences and pur­sue claims, lead­ing to the rise of the #MeToo and #Time­sUp move­ments inter­na­tion­al­ly, and #NowAus­tralia locally. 

The lat­est con­se­quence of the Wein­stein rev­e­la­tions and the #MeToo move­ment is the ​“Wein­stein Clause”.

Bloomberg recent­ly report­ed that such claus­es, which relate to the behav­iour of senior man­age­ment of a com­pa­ny, are now reg­u­lar­ly being includ­ed in busi­ness sale agreements. 

In the sam­ple clause cit­ed by Bloomberg the ven­dor war­rants that to the knowl­edge of the com­pa­ny no alle­ga­tions of sex­u­al harass­ment have been made against any offi­cer or direc­tor of the com­pa­ny or any employ­ee of the com­pa­ny who super­vis­es a cer­tain num­ber of employ­ees. The sam­ple clause also con­tains a war­ran­ty that the com­pa­ny has not entered into any set­tle­ment agree­ment relat­ing to alle­ga­tions of sex­u­al harass­ment or sex­u­al mis­con­duct by an employ­ee, direc­tor or offi­cer of the company.

The clause extends beyond the stan­dard war­ranties relat­ing to lit­i­ga­tion or threat­ened lit­i­ga­tion, reflect­ing the rise of ​“social due dili­gence”, which includes prospec­tive pur­chasers mak­ing an assess­ment of the poten­tial impact of sex­u­al harass­ment or oth­er behav­iour­al mis­con­duct claims against senior exec­u­tives of the tar­get company.

That risk is not mere­ly hypo­thet­i­cal — alle­ga­tions of mis­con­duct against CBS CEO Leslie Moonves saw more than $1 bil­lion wiped from the val­ue of CBS and have seri­ous­ly desta­bilised his lead­er­ship at the company.

Unsur­pris­ing­ly the Wein­stein Com­pa­ny was dec­i­mat­ed by the Wein­stein rev­e­la­tions – it declared bank­rupt­cy in March 2018 and was then acquired in a fire sale by a Dal­las-based equi­ty firm Lantern Cap­i­tal Part­ners. It is now known as Lantern Entertainment.

Could it come to Australia?

The impact of the Wein­stein rev­e­la­tions and #MeToo have extend­ed well beyond the Unit­ed States and the enter­tain­ment and cre­ative industries.

There is no rea­son why such claus­es won’t start appear­ing in Aus­tralian deals, par­tic­u­lar­ly where the val­ue of the tar­get busi­ness is strong­ly linked to its senior man­age­ment, or cre­ative or intel­lec­tu­al tal­ent, leav­ing a pur­chas­er sus­cep­ti­ble not only to lit­i­ga­tion costs and poten­tial dam­ages in the event of sex­u­al harass­ment claims but also enor­mous rep­u­ta­tion­al and brand dam­age which in some extreme cas­es could pose an exis­ten­tial threat to the business. 

Such claus­es are not a func­tion of ​“polit­i­cal cor­rect­ness” or ​“virtue sig­nalling” but rather a hard-head­ed finan­cial cal­cu­lus, dri­ven by the bankers and lawyers involved in such deals, which recog­nis­es the eco­nom­ic loss that can result from a com­pa­ny led by man­age­ment whose con­duct put it on the #MeToo radar.

Human resources pro­fes­sion­als have long lament­ed that the con­tri­bu­tion they make to a busi­ness can be under­val­ued as it’s not always read­i­ly quan­tifi­able and is con­sid­ered by some to be too neb­u­lous to accu­rate­ly assess. The evo­lu­tion of ​“social due dili­gence”, which right­ly treats cul­ture and behav­iour as a key fac­tor in the trans­ac­tion process, goes some way to address that. 

This is a devel­op­ment well worth watch­ing and, for com­pa­nies look­ing to acquire oth­er busi­ness­es, to seri­ous­ly con­sid­er imple­ment­ing as part of the due dili­gence and trans­ac­tion process.