The pervasive extent of workplace sexual harassment and assault, sexual misconduct and impropriety, and gender-related exploitative, discriminatory and retaliatory behaviour within organisations, particularly (but not exclusively) when perpetrated against women by men holding positions of power and authority in those organisations, has become an acutely critical social issue in recent years.
The potential for such claims to arise in any business is a serious risk. Increasing expectations of significant gender-based reform across multiple sectors of society have serious reputational, employment and governance implications for businesses in the acquisition context, since any revelations about such conduct in an acquired business are likely to generate extremely negative publicity, impact the viability of the business, and lead to a range of actions being taken against the company or implicated individuals by affected parties.
In the United States, the inclusion of a sexual misconduct claims warranty (commonly also known as a “Weinstein clause” or “Weinstein warranty”, as a result of the highly publicised revelations in 2017 that prompted the global “#MeToo” campaign against sexual harassment, assault and misconduct in the workplace) has emerged as an increasingly essential requirement in the warranty suites of acquisition agreements. Although not yet ubiquitous in Australian market documentation, this requirement is likely to become a market standard provision here as well.
A sexual misconduct claims warranty goes beyond the scope of the traditional “no litigation and disputes” warranty, and is intended to focus both the seller and the buyer specifically on the issue of adequately investigating and dealing with the potential for sexual harassment and misconduct issues to arise in what has been referred to as the “social due diligence” dimension of the due diligence process.
Purpose of the warranty
There are a number of ways for a target company or seller to warrant that none of its key officers or employees face allegations of sexual harassment or misconduct, or have had to enter into a settlement agreement concerning those allegations. A sexual misconduct claims warranty typically requires the seller to warrant that:
- none of the target group company’s senior executives is, or has ever been, the subject of any allegations, complaints or claims of sexual harassment or misconduct; and
- no target group company has entered into any settlement in respect of any such allegations, complaints or claims.
The clause typically does not restrict complaints or claims only to those originating from other employees of the company, but applies to allegations, complaints or claims from any person. The warranty can be adapted to apply to all employees of the target group company, if required.
The warranty is intended to have a broad effect in promoting historical transparency and reducing the risk to the buyer that the seller (or a target group company) may attempt, or have attempted, to handle any such historical matter quietly under cover of warranting that no accusation is currently on foot.
As part of the negotiation, the seller may be required to place part of the purchase price into an escrow account, to cover the costs that the buyer may face if allegations of sexual misconduct arise after completion of the transaction and the warranty is found to have been breached.
In the United States, some buyers have successfully negotiated the right to claw back some of the purchase price where subsequent revelations of sexual misconduct have damaged the business.
– Shan-Ree Tan, Senior Writer, Practical Law Australia
Social due diligence – unearthing a company’s culture
A sexual misconduct claims warranty will only go so far in ascertaining the culture of a company, and the inclusion of such a warranty will not necessarily expose a workplace culture that could give rise to future claims or liability. It is therefore equally important that the buyer asks focused questions as part of its due diligence. For example:
- Does the company have an anti-harassment policy?
- Is there an employee handbook regarding sexual misconduct and harassment?
- What are the company’s procedures for reporting of sexual misconduct and harassment?
- How does the company deal with sexual misconduct and harassment complaints?
- What actions has the company taken in response to findings of sexual harassment? Has the company entered into any non-disclosure agreements in relation to such findings?
- What systems are in place to prevent retaliation and victimisation of people involved in reports of sexual misconduct and harassment?
- What anti-harassment training does the company provide to directors and employees and how often is this training given?
- What employee complaints have been made in the past?
Related Practical Law resources
Practical Law Corporate subscribers can access:
- A stand-alone no sexual misconduct warranty in Standard clause, No sexual misconduct: seller warranty: share purchase agreement. This warranty is also included in Schedule 3 (Seller Warranties) in Standard document, Share purchase agreement: separate signing and completion.
- Information about warranties in Practice note, Warranties and indemnities: acquisitions.
- Links to Practical Law’s resources on due diligence in Toolkit, Due diligence.
Practical Law Employment subscribers can access the following resources, which deal with sexual harassment training and complaints of workplace discrimination and harassment:
- Standard document, Employee acknowledgment form: sexual harassment training.
- Standard document, Internal complaints procedure for workplace discrimination and harassment.
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