Megan Bisk Jennifer Cormier April 17 2019 Addressing #MeToo in M&A Ropes & Gray LLP | Corporate Finance/M&A - International Megan Bisk, Jennifer Cormier Corporate Finance/M&A IntroductionCorporate exposureTransactional #MeToo checklistTargeted diligence reviewStronger contractual protectionsBroader background checksTailored management arrangementsBeyond closingIntroductionTurn on a television, pick up a newspaper or scroll through social media and there is bound to be a story relating to the #MeToo movement. Allegations of sexual harassment, sex-based discrimination and sexual misconduct have dominated the headlines, but the effect of this movement goes far beyond the entertainment and media industries. Publicly traded and privately held companies in all industries are facing heightened reputational and legal risks, as employees are more likely to identify and report instances of misconduct or discrimination in the workplace (and such instances are more likely to become public). In the world of mergers and acquisitions, reputational and legal risks are ultimately risks to the bottom line – prompting private equity sponsors, institutional investors and strategic purchasers to focus on #MeToo issues when sourcing, diligencing and negotiating investments.Corporate exposureIn addition to incurring reputational harm when allegations of unlawful misconduct or discrimination become public (through a lawsuit or otherwise), an employer also faces potentially significant legal exposure when such claims are raised. For example, under Title VII of the US Civil Rights Act employers can be vicariously liable for a supervisor's acts of sexual harassment and may also be liable for such acts by non-supervisory employees (or even non-employee service providers). Remedies for violations of these laws include back pay, front pay, reinstatement, punitive damages, compensatory damages (eg, damages for emotional distress and medical treatment) and attorneys' fees. Similarly, accused employees may bring wrongful termination claims based on allegations that an employer mishandled the investigation of a complaint against them, which further counsels for exercising care in investigating such allegations.Legal exposure is not limited to traditional, direct claims under employment laws. Companies also face indirect civil liability for sexual harassment, sex-based discrimination or sexual misconduct. For example, shareholders of public companies have brought derivative suits alleging breaches of fiduciary duties in connection with sexual harassment allegations against key executives. In other cases, plaintiffs have asserted single-employer and corporate veil piercing theories (with varying degrees of success) in an attempt to hold parent companies or investors responsible for sexual harassment that occurs at a subsidiary or portfolio company.As the #MeToo era continues to unfold, the plaintiffs' bar is likely to become more aggressive and creative with their claims, while government agencies may become more rigorous in their efforts to enforce anti-harassment and anti-discrimination laws. Meanwhile, the departure of executives who engaged in misconduct but were otherwise critical to the business can hurtle companies into disarray, and key customer relationships can disintegrate amid negative publicity or industry chatter. Finally, allegations in this area can lower employee morale and productivity and can make the recruitment of talented individuals more challenging. The takeaway is clear for investors, strategic purchasers and target companies alike: companies that do not adequately prevent or respond to allegations of unlawful misconduct or discrimination may be risky investments.Transactional #MeToo checklistIn light of these risks, investors and strategic purchasers in all sectors should give appropriate weight to #MeToo issues throughout the deal process – from sourcing to consummation. The market has started to reflect this new focus – for example, it is becoming increasingly common to see representations and warranties that specifically reference sexual harassment claims, investigations and settlements in more competitive auction processes. To that end, the following checklist outlines certain steps that buyers (and their advisers) can take to better identify these issues and mitigate the related risks.Targeted diligence review Enhancements or add-ons to the standard diligence process include:asking specific questions about allegations, investigations and settlements to identify issues that have not resulted in formal litigation;enquiring about executives or key employees who have been the subject of sexual harassment, sex-based discrimination or sexual misconduct allegations, as well as any employees who have been the subject of more than one such allegation;requesting harassment prevention policies and information about reporting procedures (eg, employee hotlines) to identify potential weaknesses;reviewing claims histories under employment practices liability insurance policies; andsurveying workplace reviews on websites such as Glassdoor.Stronger contractual protections In a purchase or merger agreement, general litigation representations (which typically have materiality qualifiers and may be limited to formal or pending actions) may not be broad enough to pick up mere allegations and settlements, which can be critical in identifying a problematic executive or workplace culture. Specific representations that drive disclosure of these issues – with lookbacks and without materiality qualifiers – are being seen more frequently. In addition, it may be prudent to include #MeToo-specific protections for the period between signing and closing, such as a notification requirement with respect to any allegations against executives or key employees and a consent requirement with respect to any settlements.Broader background checks Background check vendors who are engaged for a transaction can generally be instructed to investigate workplace culture specifically, including through employee engagement surveys. Background checks can also be conducted on individual executives or key employees (subject to applicable law) and include specific checks into matters relating to sexual harassment, sex-based discrimination or sexual misconduct.Tailored management arrangements When employment agreements and equity awards are negotiated in connection with a transaction, buyers should consider requiring that the applicable documents include a representation that the executive or key employee has never been the subject of a sexual harassment, sex-based discrimination or sexual misconduct allegation, including at any prior employer. Any 'cause' definition could be drafted so that a breach of that representation would be grounds for immediate termination of employment (without payment of severance and with forfeiture of any equity on bad leaver terms). Structuring management arrangements with #MeToo issues in mind can help companies to avoid a scenario in which an employee who is fired for misconduct is entitled to receive significant financial benefits in connection with their departure and retain equity following departure (consequences which may, among other concerns, present significant public relations difficulties).Beyond closing Of course, attention to #MeToo issues in the transactional context should not end when a deal closes. Post-closing, investors may wish to ensure that companies:have appropriately shored up harassment prevention and other employment policies;are delivering harassment prevention trainings to managers and other employees (which is legally required in some states);have set up adequate reporting procedures; andare investigating and responding appropriately to allegations of misconduct.These ongoing investments in workplace culture can reap significant benefits – higher morale and employee productivity, fewer resources channelled towards defending claims and, ultimately, a stronger bottom line.For further information on this topic please contact Megan Bisk or Jennifer Cormier at Ropes & Gray LLP's Boston office by telephone (+1 617 951 7000) or email ([email protected] or [email protected]). The Ropes & Gray website can be accessed at www.ropesgray.com.