Inherited Human Rights Risk - The Importance of Human Rights Due Diligence in M&A Transactions

Abstract: To date, there is no international ‘hard law’ instrument creating legally binding obligations for corporations. Instead, corporate activity is regulated by domestic law and ‘soft law’ standards on corporate responsibility and human rights. Increased pressure from various stakeholders combined with new regulatory developments illustrate that this might however, be changing. As increasing trends of globalization allow companies to operate transnationally, the concept of human rights risk has started to gain traction. New case-law in several jurisdictions has illustrated that the shield of limited liability that traditionally has served as a safety net for parent companies may no longer be as efficient, and that parent companies may in fact soon be facing responsibility for the human rights impacts of their foreign subsidiaries. It is therefore vital that companies seeking to undertake a merger or an acquisition integrate human rights aspects in their initial due diligence to avoid assuming human rights issues that might be embedded in the target company’s operations. Although the purchaser in M&A transactions can seek contractual protection against risk through incorporating warranties and indemnities, these are often limited to financial and legal risks, and may not always prove sufficient in the case of human rights complications. As reflected in the United Nations Guiding Principles on Business and Human Rights (UNGPs), companies should therefore conduct a thorough human rights due diligence to avoid becoming accountable for unwarranted liabilities. This will allow the purchaser to identify potential risks connected to human rights impacts that may expose the purchaser to severe financial, legal, commercial and reputational damage.