Since taking office in January, President Trump has issued a number of executive orders targeting diversity, equity and inclusion (DEI) policies, programs and practices in the workplace (collectively referred to in this article as "DEI programs"). These executive orders are aimed at increasing government oversight over (and investigations into) DEI programs in the private sector, in addition to eliminating DEI programs in the federal government and the private parties contracting with (or receiving grants from) the federal government.
This has caused many private companies, including some of the
country's largest, to scale back or eliminate their DEI
programs and use caution in their communications and disclosures
relating to their DEI programs. To date, we are not seeing this
backlash against DEI programs in the United States put material
pressure on dealmaking activities, but we are seeing increased
scrutiny of target companies' DEI programs during the due
diligence process. An overview of the current DEI backlash and
recommended action items for buyers in an M&A transaction are
set forth below.
Current DEI backlash
In response to President Trump's DEI-related executive orders, in March, the U.S. Equal Employment Opportunity Commission (EEOC) issued guidance clarifying that it will be treating DEI-related discrimination claims in the same manner as other claims brought under Title VII of the Civil Rights Act of 1964 (Title VII), the federal anti-discrimination laws applicable to private employers. Specifically, the EEOC will be focusing on whether DEI programs consist of quotas or other attempts to "balance a workforce by race, sex or other protected traits", or otherwise result in disparate treatment for certain employees based on these characteristics. The EEOC guidance also described the types of DEI programs that would be considered unlawful, such as (1) allowing demographic characteristics to play a role in hiring, termination or promotion decisions; (2) limiting access to training, recruiting, networking or mentorship programs based on race, sex or another protected characteristics; or (3) conducting DEI trainings in a way that may be viewed as discriminatory or creating a hostile work environment.
In order to avoid being the subject of a government investigation, a number of large companies have rolled back or canceled their DEI programs.
Further bolstering the Trump administration's stance on DEI programs, in June, the U.S. Supreme Court ruled, in the case of Ames v. Ohio Youth Services, that a higher evidentiary standard should not apply when evaluating the so-called "reverse" discrimination claims by a member of a majority group (as opposed to a minority group). This ruling will likely embolden the plaintiffs' bar to pursue workplace reverse discrimination claims, including those relating to DEI programs.
The Trump administration and state attorneys general have launched a number of investigations into private entities that are allegedly promoting illegal discrimination through their DEI programs, including large law firms, private universities, media companies and financial institutions. Not unexpectedly, in order to avoid being the subject of a government investigation, a number of large companies have rolled back or canceled their DEI programs.
Action items for buyers in M&A transactions
Although the current backlash against DEI programs hasn't had a freezing effect on dealmaking activities, it has resulted in heightened scrutiny of target companies' DEI programs and workplace discrimination claims during the due diligence process. Buyers in an M&A transaction should be asking the following questions:
- Does the target company use gender, race-based or other DEI-related numerical quotas, targets or preferences in hiring, promotion or other employment decisions?
- Does the target company use, or has historically used, DEI-related metrics in executive bonus or other incentive compensation programs?
- Does the target company sponsor any DEI-related affinity groups, employee benefit programs or recruiting events that are limited to (or exclude) a particular group of employees based on gender, race or other protected characteristics?
- Does the target company have operations or workforce in jurisdictions outside of the United States, and if so, could the DEI programs that are permitted in one jurisdiction inadvertently run afoul of the legal requirements in another jurisdiction, such as where the participants or beneficiaries of those programs are not clearly defined?
If, based on these due diligence questions, the buyer concludes that the target company's DEI programs are problematic or could pose a potential risk, the buyer could mitigate the risk by including specific representations, covenants and indemnification rights in the transaction agreement.
Final thoughts
The parameters of a lawful DEI program will likely crystalize as courts around the country continue to weigh in on and interpret President Trump's executive orders and subsequent administrative actions. In the meantime, buyers in an M&A transaction should remain vigilant of target company DEI programs and the economic and reputational risks that they could present under the current political and legal landscape.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
