Incorporating the Weinstein warranty: How companies can reduce #MeToo risks in M&A
Before an M&A transaction, companies should also consider, as part of their due diligence process, how #MeToo risks can be reduced through enhanced due diligence and risk diversification guarantees, the extent to which management is reliable, and that operations will not be compromised by (sexually) inappropriate behaviour. A ruling in the Netherlands provides clarity. Ecovis explains.
Although the #MeToo debate has been ongoing for years, in May 2024, the court of Amsterdam ruled on this issue for the first time in the Netherlands in relation to a mergers and acquisitions transaction.
The case heard in the Netherlands
In this case (ECLI:NL:RBAMS:2024:2842), a managing director and sole shareholder sold his shares in a company to a private equity investor through an acquisition vehicle, in which the seller also becomes a minority shareholder via a roll over. The share purchase agreement (SPA) included risk-allocating warranties. The seller remains active as a managing director of the company. After the deal was closed, the seller was questioned by police following reports of sexually transgressive behaviour towards two (former) employees in incidents that occurred prior to closing. The buyer only became aware of these allegations afterwards. After the managing director’s dismissal, the buyer held the seller liable for a breach of warranties in the SPA.
“When drafting contracts for M&A transactions, #metoo risks must also be taken into account.”
Allard Schuering, Civil-law Notary, Kienhuis Legal – Member of ECOVIS International – Utrecht, Netherlands
The significance of the ruling for companies
The case underlines the need for thorough due diligence prior to closing. However, even due diligence may not always be effective as not all cases are actually reported or known. In addition, employees may be reluctant to speak out on these issues.
Therefore, it is advisable to include specific warranties in the SPA. A common choice is the so-called ‘information warranty’, where the seller affirms that all information relevant to the buyer has been disclosed. Additionally, general warranties, such as as “compliance with laws” can be extended to include not only the company’s compliance but also the compliance of its directors and/or employees. Directors are also expected to refrain from inappropriate behaviour, as they know that this could prevent a possible sale of the shares or a sale of the company.
The “Weinstein warranty”
In some cases, it can even be useful to adopt the so-called “Weinstein warranty”, where the seller declares that no allegations of sexual misconduct have been made against executives within the organisation.
Although this clause has already been standardised in the United States, it is only used sporadically in the Dutch M&A market. Given the increasing attention being paid to inappropriate behaviour, it is desirable for M&A practice in other countries to learn from this US warranty. Such provisions mean that buyers face less reputational legal risks in the course of their business. In a period where #MeToo situations are becoming more apparent, it is necessary that these provisions are implemented in M&A transactions.
