The #MeToo movement, jumpstarted by the sexual misconduct allegations against film producer Harvey Weinstein, has led to a sea change in how companies address and handle inappropriate behavior in the workplace. Indeed, over the last few years, we have seen the swift removal of very high-profile filmmakers, television figures, politicians, chefs and financial and public relations executives from their positions. Seeing the potentially devastating effects of a #MeToo claim – from public relations crises, to expensive lawsuits and other lasting harm, businesses are taking action to minimize the future occurrence of such behavior. This includes additional training, implementing better policies and mechanisms for addressing complaints, and increasing insurance coverage for sexual harassment. Because one #MeToo claim could substantially impair value, buyers are also now worried about acquiring a company in which sexual harassment claims have occurred or may be lurking and are increasingly focusing on understanding any potential exposure through more robust due diligence in addressing any such exposure in the definitive purchase agreement through so called “Weinstein Reps” or “MeToo Reps.”

It is customary for sellers in M&A transactions to make representations about ongoing litigation or threats of litigation, but prior to the #MeToo movement internal complaints and allegations were rarely addressed. Thus, if there was an allegation of sexual misconduct that had been resolved, a buyer may not have learned about it prior to closing (or may not have had adequate recourse if one surfaced after closing) because prior to the #MeToo movement, settled or old claims likely did not have to be disclosed in diligence or in response to the representations being made. In order to better protect their investment from the significant and sometimes insurmountable costs of a Weinstein-like public relations scandal, buyers are starting to require sellers to make specific representations regarding settlements and any claims (regardless of whether they ever led to litigation) of Weinstein-like allegations and the handling of such settlements and claims. Some of these so called “#MeToo Reps” may be limited to key management, employees or agents that are in the public eye. The main purpose for inclusion of these representations is so that the buyer can learn of these claims before closing, evaluate whether to proceed with the transaction and, if so, the financial impact of the claims. Additionally, if a disclosure is not made but should have been made, these representations provide the buyer with a claim against the seller. For known claims, this protection may be in the form of a purchase price reduction or separate escrows of a portion of the purchase price as security for any such claims (or costs associated with a #MeToo revelation about such claims) that may arise after the closing of the transaction. Of course, valuing the cost of these claims can be difficult.

There could be adverse consequences associated with including these representations, however, such as the effect of disclosure of allegations on the accused and others that may prove to be false. So, while it is rapidly becoming a market trend to conduct more extensive diligence on and ask for representations regarding #MeToo claims, care must be taken with the information disclosed and how it is handled and used.

#MeToo diligence and #MeToo Reps are prudent practice for buyers, if managed properly and with due care. Parties to an M&A transaction should, therefore, be prepared to conduct and respond to diligence regarding any such claims and negotiate #MeToo Reps and applicable associated purchase price adjustments or specific indemnities and escrows.