#TimesUp For Your Representations and Warranties
In late 2017 and throughout 2018, the world watched the careers of several top executives topple. Once considered titans of their industry, these individuals were ensnared by allegations of sexual harassment. In their wake, the #MeToo movement arose and has permanently shifted public sentiment and empowered alleged victims to come forward in droves. For fiscal year 2018, the EEOC reported a 13.6 percent increase in sexual harassment charges and a 50% increase in lawsuits that the EEOC filed for sexual harassment as compared to 2017. We expect the number of claims being filed to continue to rise.
Victims are not the only ones speaking out. There has been a recent rise in shareholder derivative actions alleging breach of fiduciary duties by companies by condoning the actions of executives in perpetrating sexual harassment (and sometimes paying these executives generous exit packages on their way out). In their latest campaign for improved corporate governance, shareholders argue that these actions are costly to companies and expose them to future litigation. While the outcome of these cases is far from clear given the relatively high standard of deference given to the businesses under the business judgement rule, what is clear is that these suits bring unwanted attention and reputational damage to companies by shining a light on how they handle allegations of sexual harassment.
Meanwhile, our lawmakers also have been busy at work and have enacted a flurry of #MeToo legislation aimed at protecting victims of sexual harassment. These laws have popped up across the country and include: mandatory sexual harassment training for employees, restrictions or prohibitions on the enforceability of confidentiality provisions, and banning the use of mandatory arbitration agreements for claims of sexual harassment.
With the changing landscape, employers must also adapt the way that they think about and deal with allegations of sexual harassment. Savvy employers are not being complacent. We recently have seen employers:
- review their internal policies and practices when dealing with allegations of sexual harassment – including their non-disclosure agreements, employment agreements and settlement agreements;
- institute sexual harassment training for employees – even where there is no legal requirement to do so; and
- update the language of their executive employment agreements – in particular, provisions relating to terminations for cause to explicitly include sexual harassment and sexual misconduct as a basis for such termination and thereby rendering the executive ineligible for severance and other benefits.
Going beyond this, there are two additional tools for companies to add to their arsenal – this time within the context of corporate transactions:
- increased focus on social due diligence; and
- adding #MeToo representation to deal agreements.
Social Due Diligence
Employment related diligence traditionally has focused on “big-ticket” items such as potential wage and hour violations (whether it be classifying contractors correctly, getting employee overtime exemptions right or failing to provide meal or rest periods), issues related to unions and collective bargaining, and benefits compliance (in particular when it comes to things like pensions).
In conducting diligence, companies typically ask for the target’s policies and pay practices, offer letter and other employment-related agreements, information relating to employee complaints, terminations and litigation, and so on.
In addition to the above, buyers are advised to take a closer look at potential social and reputational risks associated with sexual harassment claims. In particular, companies should ask the target for:
- details on specific HR processes that are undertaken when an employee raises a complaint;
- any complaints of sexual harassment, specifically in relation to executives;
- steps the target has taken to combat sexual harassment;
- internal investigation reports and outcomes;
- feedback from employees who have exited the company;
- data on employee attrition – if the target has a high attrition rate as compared to the industry or among certain types of employees this could signal a potential problem.
The representation and warranties section of a deal agreement contains statements from one party to the other asserted to be factually correct and intended to induce the other party to enter into the agreement. Warranties are a promise of an indemnity if the representations are not true.
Within the context of employment, share-sale and merger agreements typically represent that a company has been in material compliance with the law, that employment related claims have not been instituted against the company, and so forth. Now it is becoming more common for buyers to seek representations from the seller about sexual harassment claims.
Here are a few variations of what we have seen these look like in practice:
(1) The addition of “sexual harassment” to the laundry list of employment laws that the seller represents that they are in compliance with as of a certain date.
(a) Except as has not had and would not reasonably be expected to have, individually or in the aggregate, a Company Material Adverse Effect, the Company and its Subsidiaries are, and since January 1, 2017 have been, in compliance with all Applicable Laws relating to labor and employment, including those relating to labor management relations, wages, hours, overtime, employee classification, discrimination, sexual harassment, civil rights, affirmative action, work authorization, immigration, safety and health, information privacy and security, workers compensation, continuation coverage under group health plans, wage payment and the payment and withholding of taxes.
– Bristol-Myers Squibb Company and Celgene Corporation merger; January 02, 2019.
(2) Requiring the seller to represent that a specific set of individuals (in the example below, officers and members of the board and employees at the Vice-President level or above) have not been subject to allegations of sexual harassment or sexual misconduct or the seller has not entered into a settlement agreement relating to such allegations by those individuals.
(e) From January 1, 2015 through the date hereof, except as would not individually or in the aggregate be expected to have a Material Adverse Effect, (i) no officer of the Company, member of the Company Board, or employee of the Company or any of its Subsidiaries at a level of Vice President or above (each, a “Covered Person”), has been the subject of any sexual harassment or other sexual misconduct allegations during and related to his or her tenure at the Company, and (ii) the Company has not entered into any settlement agreement related to allegations of sexual harassment or sexual misconduct by any Covered Person.
– GlaxoSmithKline plc tender offer for TESARO, Inc.; December 3, 2018
(3) Requiring the seller to represent that it has investigated all allegations of sexual harassment that it was made aware and taken appropriate action.
(f) The Company and each of its Subsidiaries has promptly, thoroughly and impartially investigated all sexual harassment allegations of which it is or was made aware. With respect to each such allegation with potential merit, the Company or its Subsidiary has taken prompt corrective action that is reasonably calculated to prevent further harassment. The Company does not reasonably expect any material liability with respect to any such allegations.
– Virtu Financial, Inc. and Investment Technology Group, Inc. merger; November 6, 2018
Thinking about Next Steps for Buyers
Before deploying these tactics, buyers are wise to think about potential implications and next steps.
If diligence reveals that the target has an issue with sexual harassment and the deal goes through, the buyer must be prepared to take steps to remediate since it now is aware that it has acquired a potential problem.
Careful consideration should be given to what remedy to seek and how damages will be calculated in the event that the seller made a misrepresentation. This is especially tricky as it is difficult to quantify potential legal liability within the context of sexual harassment claims, which in this day and age come with potential reputational damages.
Sellers Should take Action, Too
Sellers should not wait idly until confronted with this issue. The proactive seller can and should take steps to protect their interests as well. One thing sellers can do as a matter of good housekeeping is conduct pre-diligence before a sale negotiation even starts. This not only will allow sellers to take mitigating steps if they uncover any potential issues related to sexual harassment but also put sellers in the best position to respond to prospective buyers if and when asked about these issues.