Investors in start-ups are putting young companies under increased scrutiny to ensure they have a clean record on sexual harassment. How effective are these so-called #MeToo clauses, asks David Greenhalgh?
The Financial Times recently reported that investors in tech start-ups are increasingly including so-called #MeToo clauses in investment agreements.
The clauses are designed to include a warranty from the company to the investor that there have been no complaints around sexual harassment issues, with an obligation to disclose any such future complaints.
Broadly speaking, parties to a commercial contract are free to agree to whatever terms they like, provided that such terms are not illegal. There is no reason, therefore, why a warranty or obligation of this type, properly drafted, would not be legally enforceable.
As with many contractual provisions, the practical difficulty for the enforcing party is knowing about and proving breach.
Are they effective?
The effectiveness of these clauses will depend on what remedies are available to investors if a start-up is in breach. Typically, a party seeking to bring a breach of warranty can only recover damages for which they will need to show that they have suffered loss.
The most likely loss to the investor will be damage to reputation, which is inherently difficult to quantify. So, the financial value of a potential claim might not be sufficiently large to deter the start-up from taking the risk of attempting to cover up a harassment complaint.
If the company is in breach of a representation that there have been no such complaints in the past – and it becomes apparent that that representation was untrue – then the investor could potentially pull the investment altogether.
If there is a contractual obligation to report any such future complaints, this may well incentivise the start-up to work on avoiding any such complaints arising in the first place.
Disgruntled employees who are aware of any obligation for the company to report such matters to the investor may well use the threat of making a formal complaint as tactical leverage to try and get a good exit package.
Deciding to disclose
What happens in the event that the start-up does comply with a #MeToo clause, for example by disclosing to the investor at an early stage the details of alleged sexual harassment in their workplace?
Investors may include supplementary terms that, in the event of an incident of sexual harassment, there will be some form of penalty.
However, this would seem slightly counter-productive; a start-up would be less likely to disclose if it meant the application of a penalty or perhaps even termination/recoupment of the investment and may result in a start-up covering up such an incident.
One would hope that the intention of investors in including a #MeToo clause is to encourage start-ups to think about taking preventative measures to ensure that sexual harassment doesn’t happen at all, and to offer support in dealing appropriately with such incidents if they do arise.
A start-up problem?
The start-up dealing with a relevant complaint would need to be very careful about what it disclosed to the investor in terms of protecting the confidentiality and personal data of the employees concerned.
The growing inclusion of #MeToo clauses in contracts with start-ups may raise questions about the working practices of such companies.
Is the more informal working environment of start-ups more fertile ground for inappropriate behaviour – perhaps with staff working long hours and frequently socialising together?
Does the lack of an HR function (as may often be the case with smaller start-ups) mean a lack of proper procedures and policies in place to deal with conduct?
Do victims of sexual harassment feel less comfortable about raising an issue for fear that word will spread quickly in a more close-knit workplace? For some companies, particularly the smallest start-ups, the answer to those questions may well be “yes”.
However, there is another good reason why the focus of #MeToo clauses is on start-ups: investment.
By their very nature start-ups require investment to grow and therefore they need to attract investors. Investors will expect to have a close relationship with the start-up and will be keen to protect their reputation.
Although #MeToo clauses may be starting life in start-up investment contracts, increasingly sexual harassment enquiries are being conducted as part of due diligence in larger scale investments and mergers and acquisitions of big corporations.
A real change?
The emergence of #MeToo clauses in commercial agreements and the increasing inclusion of sexual harassment enquiries in corporate due diligence hints at a cultural shift in the approach of businesses to this type of behaviour.
Of course, companies will be eager to maintain and protect their reputations but regardless of the motivation, one hopes that positive change will come from employers taking sexual harassment more seriously.
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