![\"Harvey](\"http:\/\/images.new.law.com\/contrib\/content\/uploads\/sites\/394\/2017\/10\/101817Harvey-Weinstein.jpg\")
Harvey Weinstein.<\/i>\n<\/figure>\n
Delaware legal observers this week acknowledged the possibility that derivative litigation stemming from damning allegations of sexual misconduct against Hollywood producer Harvey Weinstein<\/a> could spill into the Delaware Court of Chancery<\/a>, which would have jurisdiction over suits\u00a0involving the Delaware-incorporated company Weinstein helped to found.<\/p>\n However, critical questions remained regarding Weinstein Co.\u2019s\u00a0corporate governance structure and the\u00a0veracity of a yet-uncorroborated media report\u00a0indicating that the company\u2019s board may have\u00a0known about Weinstein\u2019s alleged history of sexual harassment but still worked contractual protections into his 2015 employment agreement.<\/p>\n Multiple attorneys, though, confirmed in interviews that Weinstein Co. board members could potentially be vulnerable to shareholder litigation under the Caremark<\/em> <\/a>theory, which exposes directors to liability for corporate harm if they were aware of a systemic problem\u00a0but failed to act.<\/p>\n \u201cThe first thing that comes to mind is\u00a0Caremark<\/em>,\u201d said Francis G.X. Pileggi, vice chair of Eckert Seamans Cherin & Mellott\u2019s commercial litigation practice. \u201cWho else on the board knew about these things and when did they know about them?\u201d<\/p>\n Weinstein Co.\u2019s film and television businesses have spiraled in recent weeks after\u00a0The New York Times<\/a>\u00a0and\u00a0The New Yorker<\/a>\u00a0ran scathing reports detailing allegations that Weinstein, a powerful movie producer, had sexually harassed and assaulted women in the industry for decades.<\/p>\n Weinstein has denied sexually assaulting women, and has\u00a0reportedly checked into a facility known for treating sex addiction.<\/p>\n Weinstein, who founded Weinstein Co. with his brother in 2005 after leaving Miramax, formally resigned from the company Tuesday, after the board ratified its decision to terminate him, according to media reports. But top Hollywood talent and\u00a0sponsors for shows in the firm\u2019s TV business have already distanced themselves from the firm in the wake of the allegations, leading to doubts that the company would be able to continue in its present form.<\/p>\n On Monday, private equity firm Colony Capital said it was in talks to buy Weinstein Co. at what is expected to be a significant discount.<\/p>\n Compounding Weinstein Co.\u2019s troubles, TMZ reported<\/a> on Oct. 12 that Weinstein\u2019s 2015 contract included liquidated damages provisions, which stated that Weinstein would reimburse the company for settlements related to sexual misconduct and then pay an escalating penalty for subsequent settlements or judgment.<\/p>\n Delaware Business Court Insider and other news outlets have not independently verified the report, and a Weinstein Co.\u00a0representative\u00a0has since disputed TMZ\u2019s interpretation of the contract.<\/p>\n Still, Pileggi said, if that reading of the contract is accurate, it could support allegations that the board\u00a0was aware of \u201cpervasive and ongoing\u201d wrongdoing and serve as\u00a0crucial ammunition for a plaintiff looking to make a claim under what is commonly considered to be the most difficult corporate law theory for a Delaware plaintiff to succeed on.<\/p>\n \u201cIt at least raises questions under\u00a0Caremark<\/em> about whether these were red flags that were ignored,\u201d Pileggi said.<\/p>\n Lawrence Hamermesh, a corporate law professor at Widener University Delaware Law School, questioned TMZ\u2019s interpretation, but also acknowledged that such contractual provisions, if they existed, would be deeply troubling\u2014and \u201calmost criminal\u201d\u2014evidence against the Weinstein Co. board.<\/p>\n \u201cIt would make it fairly easy to allege that \u2026 somebody of authority in the company was aware of the problem,\u201d he said.<\/p>\n But Hamermesh cautioned that Weinstein Co.\u2019s status as a tightly held company meant that it was less\u00a0prone\u00a0to derivative litigation because shareholders in private firms are often more familiar with corporate decision-making than investors in large\u00a0public companies.<\/p>\n \u201cIt\u2019s not likely to be one of these cases where people are looking at the board, asking, \u2018Where were you,\u2019\u201d he said.<\/p>\n It was not clear how the Weinstein Co. had structured its corporate governance apparatus, since private firms are not required to disclose that information publicly.\u00a0To\u00a0even have standing to bring the suit, however, a plaintiff would have to be an equity investor in the firm, but not a member of its board.<\/p>\n Even then, practical concerns may weigh against filing derivative litigation.<\/p>\n Investors often hold large stakes in private\u00a0firms like Weinstein Co., and it may be in their financial interest to simply allow the company to be sold for the best possible price.<\/p>\n Also, given Weinstein\u2019s stature and reputation in Hollywood, potential plaintiffs would either have to admit that they knew about\u00a0Weinstein\u2019s alleged misconduct or be forced to publicly defend an assertion that they were completely oblivious to it. The former may sink a derivative claim, and the latter could be untenable for a Weinstein Co. investor, likely to be a deep-pocketed player in the Hollywood film industry.<\/p>\n As of Wednesday, no derivative suits had been filed in Delaware.<\/p>\n Tom McParland can be contacted at 215-557-2485 or at tmcparland@alm.com. Follow him on Twitter @TMcParlandTLI.<\/em><\/p>\n<\/p><\/div>\n Harvey Weinstein. Delaware legal observers this week acknowledged the possibility that derivative litigation stemming from damning allegations of sexual misconduct against Hollywood producer Harvey Weinstein could spill into the Delaware Court of Chancery, which would have jurisdiction over suits\u00a0involving the Delaware-incorporated company Weinstein helped to found. However, critical questions remained regarding Weinstein Co.\u2019s\u00a0corporate governance structure … <\/p>\n
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