Rapidly after the UN Guiding Principles were endorsed at the highest UN levels in 2011, setting a clear expectation of all companies to consider and manage human rights impacts they could be connected to throughout their business regardless of applicable national laws, leading companies started to think about what this human rights responsibility meant in practice when acquiring new businesses or divesting old ones.
Today, the field has moved on even further. We are witnessing a significant change: the question of why lawyers should do this is being replaced by how they should do it.
It’s no longer about the ‘why’
There are a variety of reasons that explain why a large number of companies, followed closely by law firms, are meaningfully asking themselves how they can strengthen their M&A processes to look beyond legal compliance to capture human rights risks.
We now have a number of laws that expect or require companies to conduct human rights due diligence, including in their operations overseas and with their business partners. And this direction of travel will only continue. Combine these expectations of multinational companies in their home jurisdictions, with the applicable laws on the ground in host countries that may fall short of international standards, and we see that the traditional “compliance with laws” representation provided by sellers in the course of M&A transactions provides little comfort to buyers.
Rise in law suits
We now have a surge in law suits against companies for allegations of past human rights violations, including those that took place on the target company’s watch. A number of recent studies observe the increase in human rights-related litigation cases and remark on the high financial costs of such law suits, including the damage to a company’s reputation and credit rating, no matter the final court decision. The rapid increase in these law suits and the uncertainty surrounding them make it particularly challenging to anticipate and quantify them, resulting in acquisitions that can end up becoming significantly more costly than anticipated.
We now have investors that are increasingly engaging with, ranking – and even ready to divest from – companies based on their human rights behaviour. An acquisition can change the company’s risk profile in the eyes of investors overnight. It can lead the buyer to become a high investment risk, warranting increased engagement from its investors and/or a decrease in the investors’ rankings, or even removal from rankings and divestments.
We also have companies that are committing publicly to integrating human rights due diligence into their M&A transactions, and that are pushing the boundaries of the use of contracts to do so. There are a number of reasons for companies choosing to do this, including a desire to meet their internal values and/or to meet international expectations of them under the UN Guiding Principles, as well as protecting their reputation and positioning themselves as a brand of choice – both for future employees as well as potential customers. Protecting one’s reputation is a particularly important driver for seeking to consider human rights risks when it comes to divestitures. This is particularly noteworthy since much of a company’s leverage as a seller is typically lost post-contract.
There is also an increasing risk to a company’s operations where human rights risks are not considered. Post-acquisition, this can lead to unanticipated stoppages to operations, community protests, worker strikes or consumer boycotts. This can even lead to the need to exit the acquired project.
In addition to these reasons, considering human rights risks is also increasingly expected of lawyers as the business world they are advising is rapidly evolving. The International Bar Association (IBA) specifically elaborates on this in its practical guide for business lawyers, and M&A is one practice area in particular where lawyers play a role in shaping a company’s ability to respect human rights.
The challenges: why there is no easy solution
Any M&A lawyer undertaking this work will know, there are some very real challenges to integrating human rights into M&A processes in a systematic and business-friendly manner. To be successful, an approach to integrating human rights into M&A needs to acknowledge these challenges, and build on them so that the proposed process reflects the essence of how M&A transactions are conducted. Although there are others, the most significant hurdles that I see are as follows:
- The tight timing and confidentiality on M&A deals makes it particularly challenging to take the time to fully assess human rights risks;
- Considering human rights risks entails taking an approach which is fundamentally different to how lawyers are traditionally trained;
- The difficulty of quantifying the materiality of human rights risks leads to human rights risks going unidentified;
- M&A transactions are typically premised on compliance with applicable laws, often based on information provided by the target company and local counsel; and
- Internal silos decrease the company’s ability to assess human rights risks in the course of the transaction.
Recognising the inherent challenges to weaving consideration for human rights into M&A process does not mean we should not do it: quite the contrary, it increases the need for it. Having full knowledge of these barriers will in turn help support M&A lawyers in doing so, in a sustainable and business-friendly way, while staying true to the expectations on them when it comes to human rights respect.
Fives steps to take now
Here are five key steps companies can take now to consider human rights risks as part of their M&A transactions:
- Anticipate where the business is going, and tailor the human rights and M&A strategy accordingly;
- Build the case for considering human rights in the course of the transaction before the target company is in sight;
- Build the knowledge of M&A lawyers to understand the basics of what makes a deal higher risk when it comes to human rights and equip them with the support, tools and processes needed to build on this knowledge;
- Find ways of breaking down internal silos between M&A and those in the business that have visibility into how these risks manifest.
- Identify where the human rights responsibility companies are subject to differs from an approach grounded on legal liability, and find ways of navigating this new reality.
M&A lawyers play a significant role in helping a company meet its responsibility to respect human rights, especially where a company may be seeking to acquire businesses operating in countries that fall short of international standards. At the same time, the responsibility cannot fall on their shoulders alone. At the end of the day, the transaction-specific due diligence and contract protection can only go so far: post-closing, the leverage with the other side is lost. The work of addressing human rights impacts once an entity is acquired will then fall to the integration team within the buying company. Ultimately, the robustness of a company’s broader human rights due diligence approach, and how it is rolled out to the entire business, is crucial to helping ensure this company can meet legal requirements, both current and upcoming, as well as international expectations.
For further commentary and concrete examples, see my Practical Law article, Human Rights and M&A: It’s no longer about the ‘why’; it’s now about the ‘how’.