The Weinstein case began as a Hollywood movement but has gained the momentum needed to change workplace culture and even corporate governance. Since the New York Times exposé,[1] Weinstein faces over 70 accusations of sexual misconduct, at least 14 police investigations, and a possible indictment.[2] Manhattan District Attorney Cyrus Vance is expected to present his case before a grand jury in the upcoming weeks.[3] The basis for Weinstein’s criminal liability is clear. Weinstein’s criminal liability is clear unlike his corporate liability.[4] Appropriately, the conversation now turns to the institutions that allowed these crimes. Specifically, do corporate directors have a duty in sexual misconduct cases?
The analysis begins with the fiduciary duties of care and loyalty held by all corporate directors. As co-chairman, Weinstein breaches his duty of loyalty by “intentionally act[ing]with a purpose other than that of advancing the best interests of the corporation”[5] Such bad faith can result from “any emotion [that]may cause a director to [intentionally]place his own interests, preferences or appetites before the welfare of the corporation,” including “hatred, lust, envy, revenge.”[6]
All of which are applicable to Weinstein’s case. By sexually harassing employees and potential employees, Weinstein abused his position of power.[7] His conduct can only be described as self-serving at the risk of the Weinstein Company’s business interests. [8] Only Weinstein Company can bring a claim for breach of fiduciary duties though.[9]
If the board refuses to act, investors can still file a derivative action on the company’s behalf.[10] Investors can prove the remaining directors could not have exercised proper business judgment.[11] However, the presumption of proper business judgment is difficult to overcome, as “the board’s decisions will be upheld unless it cannot be attributed to any rational purpose.”[12]
Alternatively, investors can bring a claim under In re Caremark Int’l.[13] Such claim requires a showing of bad faith through “sustained or systematic failure of a director to exercise reasonable oversight.”[14] While this standard is also difficult to prove, the severity and particularity of Weinstein’s case may satisfy it.[15] Weinstein repeatedly harassed employees and potential employees throughout the years. Accordingly, the board will be liable for failing to properly monitor Weinstein thereby allowing him to continue his sexual misconduct.[16]
In light of such a claim, the board will likely deny knowledge of the misconduct. Following initial allegations, the board immediately issued a statement, claiming Weinstein’s sexual misconduct and assault were “an utter surprise” and any “suggestion that the board had knowledge of this conduct is false.”[17] These statements contradict internal company records and interviews, which reveal that the Weinstein Company knew of his behavior for at least two years.[18] In 2015, David Boies, who represented Weinstein for his contract renewal, stated that the company knew about three or four confidential settlements with women.[19]
Further, Weinstein’s contract allegedly states that if he “treated someone improperly in violation of the company’s Code of Conduct,” he would be required to reimburse the company for settlement judgments and pay “liquidated damages of $250,000 for the first such instance, $500,000 for the second such instance, $750,000 for the third such instance, and $1,000,000 for each additional instance.”[20] In other words, the company could have profited from its breach of duty and Weinstein’s sexual misconduct.
The Weinstein scandal has led to conversations about whether liability contracts should be allowed. What is the balance between business and moral interests? That is, should corporate directors be held to a higher standard of care for sexual harassment claims? Moving forward, corporate directors should be held liable for gross allegations of sexual misconduct. Although not all cases will rise to the level of Weinstein’s, such liability will incentivize directors to instill a culture that disapproves of sexual misconduct at their own peril. [21]
[1] See Jodi Kantor & Megan Twohey, Harvey Weinstein Paid Off Sexual Harassment Accusers for Decades, N.Y. Times (Oct. 5, 2017), https://www.nytimes.com/2017/10/05/us/harvey-weinstein-harassment-allegations.html.
[2] See Richard Winton, Harvey Weinstein’s Accusers Sue His Company, Alleging it Enabled ‘Predatory Behavior,’ L.A.Times (Nov. 15, 2017, 4:25 PM), http://www.latimes.com/local/lanow/la-fi-ct-weinstein-co-lawsuit-20171115-story.html.
[3] Id.
[4] See Ted Johnson, Weinstein Scandal Triggers Questions of Corporate Liability and Even Complicity, Variety (Oct. 25, 2017, 2:48 PM), http://variety.com/2017/biz/news/harvey-weinstein-sexual-harassment-corporate-liability-21st-century-fox-1202598683/.
[5] Stone v. Ritter, 911 A.2D 362, 370 (Del. 2006) (finding that the board must act in bad faith to be liable for poor oversighting).
[6] Id.
[7] Daniel Hemel & Dorothy S. Lund, It May Not Matter What the Weinstein Company Knew, The Atlantic (Oct. 14, 2017), https://www.theatlantic.com/business/archive/2017/10/harvey-weinstein-company-legal-consequences/542838/.
[8] Id.
[9] Id.
[10] Id.
[11] See Aronson v. Lewis, 473 A.2d 805 (Del. 1984) (finding directors must be independent and disinterested).
[12] Brehm v. Eisner (In re Walt Disney Co. Derivative Litig.), 906 A.2d 27, 74 (Del. 2006) (quoting Sinclair Oil Corp. Levien, 280 A.2d 717 720 (Del. 1971)).
[13] In re Caremark Int’l, 698 A.2d 959, 972 (Del. Ch. 1996).
[14] Id.
[15] See Hemel & Lund, supra note 7.
[16] Id.
[17] Megan Twohey, Weinstein Company Was Aware of Payouts in 2015, N.Y.Times (Oct. 11, 2017), https://www.nytimes.com/2017/10/11/business/weinstein-company.html?_r=0.
[18] Id.
[19] Id.
[20] See Lynne Bernabel & Michael Ellement, Weinstein Scandal Highlights Employment Contract Questions, Law 360 (Oct. 31, 2017, 11:12 AM), http://www.law360.com.fordham.proxy.liblynxgateway.com /articles/979291/weinstein-scandal-highlights-employment-contract-questions.
