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For Your Consideration: “The Weinstein Clause”

For Your Consideration: “The Weinstein Clause”

The evolving and increasingly important interaction between corporate management and socially conscious investors is often framed, accurately, as a meeting between opposing forces—one focused on profit, the other on the greater good. But it appears that we have found at least one thing that brings them all together: a loathing for Harvey Weinstein’s alleged misconduct.

The fallout from the litany of sexual abuse allegations against the Oscar-winning film producer helped sparked the #MeToo movement, ensnaring corporate titans like resort mogul Steve Wynn and celebrities like Kevin Spacey. Now, it appears that Weinstein can also enjoy the ignominy of inspiring a fundamental change in the way companies handle mergers and acquisitions.

According to a Bloomberg analysis of M&A activity, at least seven transactions done in 2018 have included “Weinstein clauses” laying out guarantees that executives haven’t engaged in illicit behavior. In some cases, companies are even putting money into escrow accounts to be claimed by buyers if allegations of misconduct arise after a sale is complete.

When Brookfield Asset Management agreed to acquire Forest City Realty, for instance, it made Forest City stipulate that:

To the Knowledge of the Company, in the last five years, no allegations of sexual harassment have been made to the Company against any individual in his or her capacity as an employee of the Company or Forest City Employer, LLC at a level of Senior Vice President or above.

Other recent transactions with Weinstein clauses include Del Frisco’s Restaurant Group Inc.’s acquisition of Barteca Holdings LLC and the purchase of RLJ Entertainment Inc. by AMC Networks Inc.

No, the Weinstein clause will not single-handedly solve the persistent problem of sexual harassment by senior executives. As its rapid adoption indicates, however, it is one business tactic that harmonizes the concern for corporate responsibility with concern for the company’s bottom line.

A growing class of investors continue to push companies to focus on environmental, social and governance (ESG) matters. Companies have been warned to shape up on ESG matters or face the prospect of major investment houses shipping dollars out of their stocks. The biggest one on the block, BlackRock, went so far as to codify new guidelines for proxy votes based on a company’s performance in areas such as board diversity, climate-change risk and executive compensation.

For ESG-sensitive investors, the anti-sexual harassment measures serve to discourage misbehavior and encourage companies to beef up their internal controls against it. Meanwhile, bean counters and more profit-oriented investors get the peace of mind of knowing their companies have some protection against any unseemly surprises that might come to light once they consummate a deal. All without getting involved in nasty litigation.

Just how much impact Weinstein clauses have on life in the executive suites of Corporate America remains to be seen. But they now seem to be standard operating procedure in M&A transactions. And in the distressing #MeToo era, it sure is nice to find something that everyone can agree on.

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