One year ago, Ashley Judd accused media mogul Harvey Weinstein of sexual harassment in The New York Times. The article recounted a horrific incident from two decades ago—long before Judd became a household name—where Weinstein invited her to his hotel room under the guise of a business meeting and instead, appeared in a bathrobe and asked if he could give her a massage. The only thing more alarming than Judd’s story was the plethora of similar accounts, some of which were detailed in the Times’ story; and others, which came out in a tremendously brave aftermath we now know as the #MeToo movement.
Judd and other courageous women’s stories have not only shined a light on egregious abuses of power and years of pain, but they’ve provoked a massive upheaval to the status quo of workplace sexual harassment. But 12 months later, they’ve had an additional, arguably unexpected but important consequence: due diligence during merger agreements.
Known as “the Weinstein clause” on Wall Street, advisors are adding guarantees to business deals to legally ensure the quality and transparency of a company’s leadership. And particularly in the male-dominated world of finance, a business’s willingness to adapt to the #MeToo era goes a long way.
The stipulations aren’t lax, either. In certain negotiations, buyers are given the ability to retract some of the money spent on the transaction if inappropriate behavior comes to light and has a negative impact on business. The clause doesn’t discriminate against private or public company deals, and oftentimes involves putting as much as 10 percent of the total value of a transaction in escrow for potential social issues.
“Social due diligence is becoming more and more important and, particularly for founder-centric businesses, money is being put aside to address #MeToo issues,” Gregory Bedrosian, chief executive officer of boutique investment bank Drake Star Partners, told Bloomberg.
Another important distinction, as Bloomberg opinion writer Matt Levine points out, is that the Weinstein clause doesn’t necessarily mean a company has no misconduct allegations lodged against it. Instead, it gives senior leadership an opportunity to be transparent with a potential buyer by disclosing any relevant information. From here, the buyer can decide whether they want to proceed with the deal, thus making the Weinstein clause a tool of due diligence.
The clause helps bolster an open dialogue about potential business and reputational issues. And though in this case it’s tied to executive behavior, it could be something we anticipate expanding to other crisis areas?
Sure, current due diligence takes into account things like pending litigation, but what about the under-the-surface threats? What about potential IT risks resulting from a breach, environmental or community issues due resulting from the old leadership’s direction (i.e. the Wells Fargo scandal), pushback resulting from past lobbying activity, or unforeseen market volatility mid-deal?
Escrow accounts are a common tool to help minimize risk for the buyer in transactions, but I anticipate we’ll see them used more frequently — with contingency funds held for longer periods of time — as buyers seek to better prepare for reputational and communications crises.
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