As a result of recent high profile and newsworthy political, economic and social developments, a number of global trends, in respect of risk mitigation and buyer protection, have emerged and we are seeing such trends arising on an increasing number of mergers and acquisitions (M&A). Such trends include:
- Social due diligence/the ‘Weinstein’ clause: rarely has a social event caused such repercussions across the globe. The movement has been a global phenomenon and not something that one would necessarily associate with corporate law. However, as we discuss below, warranty and indemnity protection in respect of such issues is becoming increasingly common.
- Sanctions: sanctions are an extremely topical issue at the moment. We consider the United States “Specially Designated Nationals” list and the corresponding due diligence that we would recommend is conducted. As this is such a high profile and pertinent issue, we also consider whether certain issues which could arise should potentially be “deal breakers”.
- Cryptocurrency: the growth of cryptocurrency has been fairly staggering and it is therefore becoming increasingly important to consider whether it will impact an M&A transaction. We consider some of the key issues and also the added risk of price volatility.
In this alert, we consider the appropriate due diligence and warranty and indemnity protections, which potential buyers should carefully consider, where appropriate, in order to protect themselves from such issues. Sellers should also be wholly aware of these factors and the fact that they are likely to be asked to provide such protections. The below is also a very useful basis for sellers to use when considering what pre-emptive measures could be taken/issues which could be rectified prior to commencing a sale process.
1. Social due diligence/ Weinstein Clause
Conducting social due diligence is becoming increasingly common in M&A transactions. Parties are becoming more aware of the need to identify potential reputational risk factors, early on in a transaction, in order that such risk can be ‘priced’ into the deal. For example, to allow Athenahealth Inc (a US$6.1 billion health-technology company) to explore a potential sale or merger, Jonathan Bush (its co-founder) was forced to step down as Chief Executive Officer following a serious of misconduct allegations involving a number of women.
The ‘#MeToo’ scandals, which have dominated recent headlines, have resulted in so-called ‘Weinstein’ clauses being included in sale and purchase contracts (SPAs). Over the past six months or so sellers have more frequently been asked to provide representations, warranties and/or indemnities in respect of the behaviour of their management teams. According to data compiled by Bloomberg, at least seven deals announced this year, involving public companies, included such protections.
A typical representation may provide that the target and any relevant group companies (the Target) confirms that nobody has accused certain managers, executives or directors, in particular anyone who manages a large number of employees, of sexual harassment.
For example, the sale of tapas chain, Barteca Restaurant Group, to Del Frisco’s Restaurant Group Inc. in June 2018, included specific language citing a date since which there had not been any allegations against managers or executives.
If sexual misconduct issues, that could damage the businesses' reputation, are identified during due diligence then, given the reputational consequences, this could be a deal breaker for the buyer. Alternatively, the buyer could seek an indemnity, from the selling party, in relation to any loss which it incurs. Given the nature of such losses – i.e. reputational harm and potential loss of contracts - a buyer should try to ensure that such an indemnity also covers indirect and consequential losses.