Corporate M&A
Recent high-profile harassment cases in the Netherlands have brought to light the potential financial and reputational consequences for companies in which these allegations take place. For example, in February, a former Dutch international, Marc Overmars, resigned as sporting director of football club Ajax following harassment allegations, while a similar scandal has engulfed one of the country's most popular TV talent shows, The Voice of Holland. How can a buyer, when considering the acquisition of a company, avoid being blindsided and protect against these financial and reputational consequences?
This is a sensitive topic, and the seriousness of the issue and the importance to eradicate this unacceptable behaviour cannot be downplayed. But, in merger and acquisition (M&A) deals, it is important for prospective buyers to take measures to protect against having to bear the negative financial and reputational consequences of any harassment that has taken place at a target company.
In recent news, examples of harassment and unacceptable behaviour in the workplace have been on the rise in the Netherlands. For the victims, it has been an achievement that their voices are finally being heard and action is being taken. For companies, the adverse consequences of these cases can be severe, including claims for damages by victims, loss of revenue, replacement of key staff and reputational damages. Failing to adequately examine, identify and mitigate these potential risks in M&A deals is an oversight as these issues are relevant for buyers in nearly every business sector.
There are two important ways for a buyer to protect against these risks during an acquisition process: conducting a specific due diligence investigation and including appropriate warranties in the acquisition agreement, taking into account the knowledge of the target and the seller. If the buyer has sufficient bargaining power, it could try to negotiate unqualified indemnities or a right to rescind the acquisition agreement but these will likely not be acceptable for the seller. Hence, we will not discuss these types of solutions further in this Insight.
A change in the standard wording of warranties is imminent. Just as provisions regarding the adverse consequences of Covid-19 have become market standard, a review of harassment policies is expected to become a standard due diligence requirement and warranties in respect of such policies will become a regular addition to acquisition agreements.
The first way for a buyer to protect itself against the negative consequences of harassment, is to try and get a full picture of how the target currently handles allegations of harassment. First and foremost, as part of its due diligence, the buyer should review whether any complaints have been made regarding harassment. If so, this is obviously a key indicator for the buyer.
As has been made clear in recent harassment cases, the absence of formal complaints is not enough for a buyer to be comfortable that no harassment has occurred. It is, therefore, also important to review the HR manual and specifically check whether this provides for appropriate procedures in case of harassment. Separately, depending on the business in which the target operates, specific guidelines may be appropriate to ensure that everybody within the target understands how employees should behave towards one another. Lastly, it should be confirmed that employees have sufficient access to an (external) confidential counsellor to discuss allegations of harassment.
Even after confirming that appropriate procedures against harassment are in place on paper, examples in the press show that the buyer may want to explore further and get a better understanding of the culture of the target. If the culture does not allow for upward feedback or a safe place to file a complaint, or belittles the actual cases of harassment ("(s)he's just a flirt"), all the policies and procedures in the world won't make a difference. Hence, the buyer may want to try and perform employee surveys or interviews to get to the bottom of this. However, due to the usual confidentiality requirements of M&A transactions, this may not always be possible.
The inclusion of harassment related warranties serves two purposes: to provide protection where due diligence inquiries fall short and to force disclosure from the seller.
These warranties could be included as part of the employment warranties. It is generally acceptable for employment warranties to cover compliance with applicable labour and health and safety laws and codes of practice. The compliance warranties could be taken one step further to explicitly cover all laws and regulations, as well as internal policies, relating to harassment. An additional suggestion is to make sure that the warranty that provides that no complaints or allegations of harassment have been made by employees also includes complaints made (or threatened to be made) under the harassment policy.
Similarly, an expansion of the general compliance with law warranties may provide suitable protections. This should include compliance with laws and regulations concerning harassment, as well as no complaints (or threats thereof) under the relevant policies concerning harassment.
A seller will most likely not accept an unqualified warranty when it comes to allegations of harassment and may require that the warranty is qualified to the best of the seller's knowledge: but, if it is accepted, whose knowledge should be included? The knowledge of the HR manager should be included to ensure that information regarding harassment investigations fall within the scope of the knowledge qualifier. It is worth noting that complaints made to a confidential counsellor will generally only be deemed known once an investigation has started because prior to such investigation the complaint will only be known to the confidential counsellor and remains confidential.
Cases of harassment and unacceptable conduct in the workplace have unfortunately become too common. These cases are in all respects very difficult for the victims concerned but also have very serious financial and reputational consequences for the companies involved. Buyers will need to rethink the way they usually approach an acquisition and address these issues. The ways of addressing the risk of harassment cases are numerous, but extensive due diligence on the harassment policies of companies and the inclusion of warranties regarding compliance with harassment policies will need to become a regular part of M&A transactions.
