Handbook for lawyers: Chapter 1

Legal transactional due diligence

Due diligence is a comprehensive investigation into, and assessment of, a company or business (or a group of companies or businesses) to determine:

• whether the price sought by a seller for the shares or assets is a fair one (and whether any price adjustments should be sought by the buyer);
• what risks and liabilities may exist (or may subsequently crystallise) for which the buyer/merger company/joint venture party/partner could become liable; and

In light of the above:

• the steps that could be taken to address these potential sources of liability and/or allocate legal risk or its consequences;
• potential obstacles to completion; and
• appropriate contractual protections for the parties (e.g. through representations and warranties, and indemnities).

Note: The key difference between transactional legal due diligence and human rights due diligence (in the sense used in the UN Guiding Principles on Business and Human Rights, is that transactional legal due diligence focuses on risks (i.e. legal, financial, commercial and reputational) to the relevant companies, businesses and/or assets, while human rights due diligence is concerned with risks to people (i.e. risks of having an adverse impact on human rights more generally, regardless of whether these represent a material risk to the enterprise itself). However, in practice these different risks can be inter-linked, as the presence of risks of adverse human rights impacts can pose a risk to the company’s bottom line, and the greater the severity of these risks, the greater the likelihood of legal liability and financial loss in practice. See further the discussion on severity and prioritisation towards the end of this section.

Human rights due diligence

Human rights due diligence is the process through which “an enterprise identifies the information it needs in order to understand its specific human rights risks at any specific point in time and in any specific operating context, as well as the actions it needs to take to prevent and mitigate them.”

OHCHR, ‘The Corporate Responsibility to Respect Human Rights, an Interpretative Guide’ , p. 31.

In the context of a share or asset purchase, human rights due diligence will help to ensure the buyer continues to meet its Corporate Responsibility to Respect human rights following completion, through the early identification of, mitigation of, and preparation for proper management of the relevant human rights risks. The Commentary to the UN Guiding Principles on Business and Human Rights recommends that human rights due diligence “be initiated as early as possible in the development of a new activity or relationship, given that human rights risks can be increased or mitigated already at the stage of structuring contracts or other agreements, and may be inherited through mergers or acquisitions” (See UNGP 17, Commentary).

Note: The key difference between transactional legal due diligence and human rights due diligence (in the sense used in the UN Guiding Principles on Business and Human Rights, is that transactional legal due diligence focuses on risks (i.e. legal, financial, commercial and reputational) to the relevant companies, businesses and/or assets, while human rights due diligence is concerned with risks to people (i.e. risks of having an adverse impact on human rights more generally, regardless of whether these represent a material risk to the enterprise itself). However, in practice these different risks can be inter-linked, as the presence of risks of adverse human rights impacts can pose a risk to the company’s bottom line, and the greater the severity of these risks, the greater the likelihood of legal liability and financial loss in practice. See further the discussion on severity and prioritisation towards the end of this section.

Legal transactional due diligence

Due diligence is a comprehensive investigation into, and assessment of, a company or business (or a group of companies or businesses) to determine:

• whether the price sought by a seller for the shares or assets is a fair one (and whether any price adjustments should be sought by the buyer);
• what risks and liabilities may exist (or may subsequently crystallise) for which the buyer/merger company/joint venture party/partner could become liable; and

In light of the above:

• the steps that could be taken to address these potential sources of liability and/or allocate legal risk or its consequences;
• potential obstacles to completion; and
• appropriate contractual protections for the parties (e.g. through representations and warranties, and indemnities).

Note: The key difference between transactional legal due diligence and human rights due diligence (in the sense used in the UN Guiding Principles on Business and Human Rights, is that transactional legal due diligence focuses on risks (i.e. legal, financial, commercial and reputational) to the relevant companies, businesses and/or assets, while human rights due diligence is concerned with risks to people (i.e. risks of having an adverse impact on human rights more generally, regardless of whether these represent a material risk to the enterprise itself). However, in practice these different risks can be inter-linked, as the presence of risks of adverse human rights impacts can pose a risk to the company’s bottom line, and the greater the severity of these risks, the greater the likelihood of legal liability and financial loss in practice. See further the discussion on severity and prioritisation towards the end of this section.

Human rights due diligence

Human rights due diligence is the process through which “an enterprise identifies the information it needs in order to understand its specific human rights risks at any specific point in time and in any specific operating context, as well as the actions it needs to take to prevent and mitigate them.”

OHCHR, ‘The Corporate Responsibility to Respect Human Rights, an Interpretative Guide’ , p. 31.

In the context of a share or asset purchase, human rights due diligence will help to ensure the buyer continues to meet its Corporate Responsibility to Respect human rights following completion, through the early identification of, mitigation of, and preparation for proper management of the relevant human rights risks. The Commentary to the UN Guiding Principles on Business and Human Rights recommends that human rights due diligence “be initiated as early as possible in the development of a new activity or relationship, given that human rights risks can be increased or mitigated already at the stage of structuring contracts or other agreements, and may be inherited through mergers or acquisitions” (See UNGP 17, Commentary).

Note: The key difference between transactional legal due diligence and human rights due diligence (in the sense used in the UN Guiding Principles on Business and Human Rights, is that transactional legal due diligence focuses on risks (i.e. legal, financial, commercial and reputational) to the relevant companies, businesses and/or assets, while human rights due diligence is concerned with risks to people (i.e. risks of having an adverse impact on human rights more generally, regardless of whether these represent a material risk to the enterprise itself). However, in practice these different risks can be inter-linked, as the presence of risks of adverse human rights impacts can pose a risk to the company’s bottom line, and the greater the severity of these risks, the greater the likelihood of legal liability and financial loss in practice. See further the discussion on severity and prioritisation towards the end of this section.

Further notes:

(i) You will need to take local advice with respect to the design and implementation of due diligence investigations into human rights risks. This advice will need to cover questions such as:

• whether human rights due diligence is mandatory in certain circumstances, and, if so, what requirements must be met;
• what could be the consequences of a failure to carry out due diligence (or the failure to carry out thorough due diligence into specific human rights risks), for instance under the law of negligence?
• the legal consequences and risks (if any) associated with the use of specific human rights due diligence methodologies and techniques.

Guiding Principle 17, Commentary.

(ii) As noted above, transactional legal due diligence processes will focus on the human rights risks that pose the greatest risks for the financial standing and future performance and prospects of the relevant business activities and the enterprise itself, whereas human rights due diligence, carried out in accordance with the UN Guiding Principles on Business and Human Rights will focus, at first, on the potential human rights risks that are most severe (in terms of gravity, scope and lack of remediality). However, in practice, the more severe the risk of adverse human rights impacts, the greater the likelihood and severity of legal, financial, commercial and reputational risk. In other words, if both are done correctly, the human rights risks identified through human rights due diligence processes (on the one hand) and the human rights risks identified in the course of transactional legal due diligence (on the other hand) are likely to be similar. For further useful discussion on the concept of severity see OHCHR, ‘The Corporate Responsibility to Respect Human Rights, an Interpretative Guide’ , pp. 83-84.

For both kinds of processes, a human rights risk assessment will include a consideration of the likelihood of the relevant risks materialising. This is likely to include a consideration of factors such as:

• sector;
• operating context;
• country of operations;
• capacity of management to address the risk.

However, as the The Corporate Responsibility to Respect Human Rights, an Interpretative Guide points out, “a low probability of a severe human rights impact alone cannot justify reducing the priority of efforts to mitigate the risk. Instead, the remediability of the potential impact must be a key factor in determining the legitimacy of delaying such efforts. In sum, in the context of risks to human rights, the severity of actual or potential risks must be the dominant factor.” OHCHR, ‘The Corporate Responsibility to Respect, an Interpretative Guide’ , p. 83.

(iii) In practice, the role of lawyers in due diligence investigations into human rights risks will often be to flag areas of specific concern to the relevant department within the client organisation and/or to seek expert opinion and advice on specific issues such as stakeholder concerns and/or the views of civil society. Lawyers may not necessarily be involved in detailed fact-finding in relation to all of these issues (this may be assigned to appropriately informed and qualified specialists in the salient human rights issues), although lawyers would still take a critical role in analysing the outcomes of these investigations and advising on a practical course of action.

You will need to take local advice with respect to the design and implementation of due diligence investigations into human rights risks. This advice will need to cover questions such as:

• whether human rights due diligence is mandatory in certain circumstances, and, if so, what requirements must be met; and
• what could be the consequences of a failure to carry out due diligence (or the failure to carry out thorough due diligence into specific human rights risks), for instance under the law of negligence?
• the legal consequences and risks (if any) associated with the use of specific human rights due diligence methodologies and techniques.

The UN Guiding Principles on Business and Human Rights on the relationship between human rights due diligence and legal liability

“Conducting appropriate human rights due diligence should help business enterprises address the risk of legal claims against them by showing that they took every reasonable step to avoid involvement with an alleged human rights abuse. However, business enterprises conducting such due diligence should not assume that, by itself, this will automatically and fully absolve them from liability for causing or contributing to human rights abuses.”

Guiding Principle 17, Commentary.

As noted above, transactional legal due diligence processes will focus on the human rights risks that pose the greatest risks for the financial standing and future performance and prospects of the relevant business activities and the enterprise itself, whereas human rights due diligence, carried out in accordance with the UN Guiding Principles on Business and Human Rightswill focus, at first, on the potential human rights risks that are most severe (in terms of gravity, scope and lack of remediality) . However, in practice the more severe the risk of adverse human rights impacts, the greater the likelihood and severity of legal, financial, commercial and reputational risk. In other words, if both are done correctly, the human rights risks identified through human rights due diligence processes (on the one hand) and the human rights risks identified in the course of transactional legal due diligence (on the other hand) are likely to be similar. For further useful discussion on the concept of severity see OHCHR, ‘The Corporate Responsibility to Respect, an Interpretative Guide’, pp. 83-84.

For both transactional legal due diligence and human rights due diligence, a human rights risk assessment will include a consideration of the likelihood of the relevant risks materialising. This is likely to include a consideration of factors such as:

• sector;
• operating context;
• country of operations;
• capacity of management to address the risk.
  
  However, as the The Corporate Responsibility to Respect Human Rights, an Interpretative Guide points out, “a low probability of a severe human rights impact alone cannot justify reducing the priority of efforts to mitigate the risk. Instead, the remediability of the potential impact must be a key factor in determining the legitimacy of delaying such efforts. In sum, in the context of risks to human rights, the severity of actual or potential risks must be the dominant factor.” OHCHR, ‘The Corporate Responsibility to Respect Human Rights, an Interpretative Guide’, p. 83.

In practice, the role of lawyers in due diligence investigations into human rights risks will often be to flag areas of specific concern to the relevant department within the client organisation and/or to seek expert opinion and advice on specific issues such as stakeholder concerns and/or the views of civil society. Lawyers may not necessarily be involved in detailed fact-finding in relation to all of these issues (this may be assigned to appropriately informed and qualified specialists in the salient human rights issues), although lawyers would still take a critical role in analysing the outcomes of these investigations and advising on a practical course of action.

1. What are the similarities and differences between transactional legal due diligence and the human rights due diligence processes described in the UN Guiding Principles on Business and Human Rights?

2. In the context of a proposed merger or acquisition, when should (a) transactional legal due diligence and (b) human rights due diligence be initiated?

3. What legal (and other) developments are having an effect (or might be expected to have an effect) on the way human rights risks are approached in transactional legal due diligence? And why?

4. Are there techniques that have been developed for human rights due diligence that could usefully be adapted to the transactional legal due diligence context? What benefits might human rights due diligence approaches potentially offer to the transactional legal due diligence context? Might there be challenges too? If so, what might these be?

5. What are the potential legal consequences, in your own jurisdiction, of a failure to carry out (a) transactional legal due diligence and (b) human rights due diligence?

UN Guiding Principles on Business and Human Rights, http://www.ohchr.org/Documents/Publications/GuidingPrinciplesBusinessHR_EN.pdf, esp. Guiding Principles 17-22.

OHCHR, ‘The Corporate Responsibility to Respect Human Rights: An Interpretative Guide’

Monash University, OHCHR, UN Global Compact, ‘Human Rights Translated 2.0: A Business Reference Guide’ (Published in 2016), copy available here http://www.ohchr.org/Documents/Publications/HRT_2_0_EN.pdf

Shift & Mazars, UN Guiding Principles Reporting Framework, February 2015 (see especially p. 17)

United Nations Global Compact, ‘Integrating Concerns for Human Rights into the Mergers & Acquisitions Due Diligence Process: A good practice note endorsed by the UN Global Compact Human Rights working group on 26^th July 2013, https://www.unglobalcompact.org/docs/issues_doc/human_rights/Human_Rights_Working_Group/MandA_GPN.pdf

See further the various tools and resources available via the Business and Human Rights Resources Centre

This section is concerned with the investigation of human rights risks as part of transactional legal due diligence (as distinct from human rights due diligence). For a discussion of the similarities and differences between transactional legal due diligence and human rights due diligence see the Due Diligence Q&A above.

As a corporate/M&A lawyer, the better your understanding of the potential and actual human rights impacts of the business activities in question, the better equipped you will be to work with your client to develop strategies to address the legal, commercial, financial and reputational risks and ethical challenges that can arise from them.

In the sections below you will find some materials aimed at helping you develop an approach to identifying human rights risks as part of transactional legal due diligence prior to:

• a proposed acquisition (n.b. these resources are designed to be relevant and adaptable to a range of different acquisitions, whether by way of share sale or asset sale); and
• a proposed merger (i.e. by consolidation), partnership or joint venture (n.b. again, these resources are designed to be relevant and adaptable to a range of different transactions).

However, it will be up to you (in conjunction with your client, as appropriate given the nature of your lawyer-client relationship) to choose which resources, and which aspects of those resources, are most relevant to your particular transaction and the approach agreed with your client. In all cases, you will need to take local legal advice.

As a buyer’s legal counsel, you may encounter challenges in obtaining quality information relevant to human rights risks in the course of transactional legal due diligence. In addition to time and resource constraints, you may be constrained by confidentiality agreements between your client and the target, and/or, in the case of an auction sale transaction, by the information made available in the data room. In such cases, you will need to discuss carefully with your client, in light of local legal conditions and any contractual arrangements entered into, alternate ways of investigating areas of potential concern (e.g. through trusted proxies).

Heads of Terms: proposed acquisition of company or assets: potential human rights issues to consider

Explanatory notes: In order to provide clarification of the nature and scope of the proposed transaction, and the necessary steps towards completion, it may be convenient and advantageous for the negotiating parties to enter into a “heads of terms” for the contemplated share sale or asset sale during the preliminary stage. In light of the human rights issues identified thus far, you should consider the following:

Preconditions:

An important pre-condition to signing will be completion of satisfactory “financial, commercial and legal due diligence”. You should consider whether you may need to explicitly mention due diligence investigations into human rights risks here.

Due diligence:

The heads of terms may specify the kinds of documents, information and personnel that the purchaser will have access to in the course of the due diligence process. You should ensure that this wording is sufficiently wide to allow the buyer to carry out all of the due diligence investigations into human rights risks likely to be necessary in the circumstances (as agreed with your client). You should consider whether the time scales for completion of the various due diligence activities are sufficient and appropriately sequenced to enable identification of, and a proper understanding of, the different sources of human rights risks, particularly if specialist expertise is required.

Due diligence checklist: acquisition of company (share sale) or assets (asset/business sale): supplementary questions on human rights issues

Explanatory notes: The checklist below is designed to supplement a questionnaire designed for a wider due diligence process. Note, however, that:

(i) this example checklist is illustrative only. It is not exhaustive and will not identify all of the human rights issues that may be relevant to your particular transaction;

(ii) not all of these questions will be relevant in a given context; and those that are relevant will obviously need reviewing and adapting to suit the specific transaction and circumstances;

(iii) to ensure that the due diligence process is comprehensive in relation to human rights issues, you may need to draw on internal and/or independent external human rights expertise, and to consult with potentially affected groups and other relevant stakeholders;

(iv) this example checklist is subject to local legal advice.

Target company’s approach to business and human rights generally (n.b. this section 4.1 relates to share acquisition only)

• Has the management of [the company] made a public policy commitment in relation to business and human rights?
• Does [the company] operate in accordance with a human rights code of conduct? Where is this documented and how is it conveyed to managers and staff? Is human rights training part of staff induction and/or training? Does [the company] report on its performance against that code of conduct? If so, are these reports externally verified? If so, is a recognised reporting framework used?
• Does [the company] report publicly on the human rights risks arising from or linked to its business and how it manages those risks? Is the report externally verified or benchmarked? If so, is a recognised reporting framework used? Is this reporting consistent with applicable law on public reporting and other requirements to disclose human rights risks?
• What has [the company] identified as its main sources of human rights related risk? What steps has [the company] taken to assess, address, mitigate and remedy any adverse human rights impacts identified?
• Does [the company] participate in any self-regulatory or industry-specific initiatives (or is the subject of the same) relating to business and human rights? If so, which? Have any comments been made about [the company’s] compliance (or non-compliance) with those initiatives? If so, what?
• Has the [target company] been the subject of (a) independent benchmarking or reporting initiatives (b) adverse press comment, (c) shareholder action or (d) public demonstrations or consumer boycotts as a result of adverse human rights impacts arising from its [business activities, products or services]?

Licences:

Have licences and permissions (including development and planning permissions) been awarded in accordance with local law? Were any objections raised to the grant of those licences on human rights or governance grounds, either during the application and grant process or subsequently? If so, what was the nature of those objections? How were they resolved? Does this accord with international standards?

Land/buildings/plant/site:

Were any inhabitants relocated in order for any site to develop? Is the site in the vicinity of habitation by groups with the status of indigenous peoples? Does the location of any plant or operations have the potential to negatively affect access by local inhabitants to water or other resources? Could the site or operations cause disruption to local farming or fishing or other sources of livelihood? Does the land have important cultural value to the local community?

Environment:

[Note: The questions below are intended to be supplementary to more general questions relating to compliance with local environmental law]. Do operations have the potential to negatively affect the local environment, for instance through the introduction of contaminants into the local air, soil, or water? Have any complaints been made in relation to the environmental impacts or performance of [the company/business]? If so, what was the nature of those complaints? How were they resolved?

Employees:

[Note: The questions below are intended to be supplementary to more general questions relating to compliance with local labour law]. Do workers receive training in relation to workplace health and safety? What percentage of the workforce is made up of (a) contract workers and (b) migrant workers? What are the policies of [the company/business] in relation to (a) contract workers and (b) migrant workers? What are the policies and practices of [the company/business] with respect to (a) freedom of association and (b) collective bargaining? What are the policies of the company/business on minimum age verification? What policies are in place regarding the involvement of workers under 18 in potentially hazardous work? How are workers recruited? Are sub-contractors used? If so, how are they remunerated, incentivised and monitored? Do workers have possession of and control over their passports and/or other identity documents? What steps does [the company/business] take to ensure that workers are properly informed about their labour rights and how they can be enforced? What opportunities are there for workers to raise concerns and grievances about the performance of [the company/business] in relation to labour rights?

Supply chain issues:

What steps are taken to ensure that suppliers of [the company/business] are compliant with internationally recognised labour standards including international prohibitions on the worst forms of child labour and forced labour? Is compliance with internationally recognised human rights standards a standard term of contract with suppliers? What steps are taken in respect of under-age workers found to be working in the supply chain and other human rights issues more generally?

Stakeholder engagement and community relations:

Does [the company/business] engage with or take advice from civil society organisations, non-governmental organisations or community representatives with respect to the human rights impacts of the site/operations? If so, how? What has [the company/business/management] learned from these processes?

Private security arrangements:

Are private security companies used [by the company/in connection with the business]? Are their staff and contractors independent of government influence? Are they appropriately regulated? Do they accept international voluntary standards applicable to this sector? Do private security personnel receive sufficient training with respect to the use of force? Have any complaints been received in relation to the performance of any private security providers or their employees? Is so, what was the nature of those complaints and how were they resolved?

Government actions and relations:

Have actions by government or State agencies in connection with [the company/business/assets] had (or might they have the potential to have) an adverse impact on the human rights of local inhabitants or others? What is the government’s record with respect to (a) human rights protection generally, (b) labour enforcement and (c) treatment of union representatives? What are the [company’s] policies with respect to engagement with governments and State agencies? What are the company’s policies with respect to supply of goods and services to governments and State agencies?

Further reading

Shift & Mazars, UN Guiding Principles Reporting Framework, February 2015

Heads of Terms: proposed merger (by consolidation), partnership or joint venture: potential human rights issues to consider

Explanatory notes: In order to provide clarification of the nature and scope of the proposed transaction, and the necessary steps towards completion, it may be convenient and advantageous for the negotiating parties to enter into a “heads of terms” for the contemplated merger, partnership or joint venture. In light of the human rights issues identified thus far, you should consider the following:

Preconditions:

An important pre-condition to signing will be completion to satisfactory “financial, commercial and legal due diligence”. You should consider whether you may need to explicitly mention due diligence in relation to human rights issues here.

Due diligence:

The heads of terms may specify the kinds of documents, information and personnel that the parties will have access to in the course of the due diligence process. You should ensure that this wording is sufficiently wide to allow the purchaser/investor/partner to carry out all of the due diligence investigations into human rights risks likely to be necessary in the circumstances (as agreed with your client). You should consider whether the time scales for completion of the various due diligence activities are sufficient and appropriately sequenced to enable identification of, and a proper understanding of, the different sources of human rights risks, particularly if specialist assistance is required.

Future governance of merged company, partnership or joint venture:

The heads of terms may set out, in outline form, the arrangements for future governance of the merged company, partnership or joint venture. This may cover issues such as rights of access, audit, inspection, reporting obligations and arrangements for cooperation in the resolution and/or remediation of issues. This may provide an opportunity for early discussion and clarification of the ethical standards (including human rights standards) the merged company, partnership or joint venture will operate to, and the manner in which decisions on such matters will be taken and issues resolved.

Due diligence checklist: mergers (by consolidation), partnerships and joint ventures: supplementary questions on human rights issues

Explanatory notes: The checklist below is designed to supplement a questionnaire for a wider due diligence process in the context of a transaction where existing companies and/or businesses are to be merged into a new vehicle (e.g. a merged company, joint venture vehicle or partnership).

Note, however, that:

(i) this example checklist is illustrative only. It is not exhaustive and will not identify all of the human rights issues that may be relevant to your particular transaction;

(ii) not all of these questions will be relevant in a given context, and those that are relevant will obviously need reviewing and adapting to suit the specific transaction and circumstances;

(iii) to ensure that the due diligence process is comprehensive in relation to human rights issues, you may need to draw on internal and/or independent external human rights expertise, and to consult with potentially affected groups and other relevant stakeholders;

(iv) this example checklist is subject to local legal advice.

Approach of prospective partners to business and human rights generally

• Has the management of [the partner company/business] made a public policy commitment in relation to business and human rights?
• Does [the partner company/business] operate in accordance with a human rights code of conduct? Does [the partner company/business] report on its performance against that code of conduct? If so, are these reports externally verified? If so, is a recognised reporting framework used?
• Does [the partner company/business] report publicly on the human rights risks arising from or linked to its business and how it manages those risks? Is the report externally verified or benchmarked? If so, is a recognised reporting framework used? Is this reporting consistent with applicable law on public reporting and other requirements to disclose human rights risks?
• What has [the partner company/business] identified as its main sources of human rights related risk? What steps has [the partner company/business] taken to assess, address, mitigate and remedy any adverse human rights impacts identified?
• Does [the partner company/business] participate in any self-regulatory or industry-specific initiatives (or is it the subject of the same) relating to business and human rights? If so, which? Have any comments been made about [the partner company/business]’s compliance (or non-compliance) with those initiatives? If so, what?
• Has the [the partner company/business] been the subject of (a) independent benchmarking or reporting initiatives, (b) adverse press comment, (c) shareholder action or (d) public demonstrations or consumer boycotts as a result of adverse human rights impacts arising from its [business activities, products or services]?

Licences:

Have licences and permissions (including development and planning permissions) been awarded in accordance with local law? Were any objections raised to the grant of those licences on human rights or governance grounds, either during the application and grant process or subsequently? If so, what was the nature of those objections? How were they resolved? Does this accord with international standards?

Land/buildings/plant/site:

Were any inhabitants relocated in order for any site to develop? Is the site in the vicinity of habitation by groups with the status of indigenous peoples? Does the location of any plant or operations have the potential to negatively affect access by local inhabitants to water or other resources? Could the site or operations cause disruption to local farming or fishing or other sources of livelihood? Does the land have important cultural value to the local community?

Environment:

[n.b. these are intended to be supplementary to more general questions relating to compliance with local environmental law]. Do operations have the potential to negatively affect the local environment, for instance through the introduction of contaminants into the local air, soil, or water? Have any complaints been made in relation to the environmental impacts or performance of [the partner company/business]? If so, what was the nature of those complaints? How were they resolved?

Employees:

[n.b. these are intended to be supplementary to more general questions relating to compliance with local labour law]. Do workers receive training in relation to workplace health and safety? What percentage of the workforce is made up of (a) contract workers and (b) migrant workers? What are the policies of [the partner company/business] in relation to (a) contract workers and (b) migrant workers? What are the policies of [the partner company/business] in relation to (a) freedom of association and (b) collective bargaining? What are the policies on minimum age verification? What policies are in place as regards the involvement of workers under 18 in potentially hazardous work? How are workers recruited? Are sub-contractors used? If so, how are they remunerated, incentivised and monitored? Do workers have possession of and control over their passports and/or other identity documents? What steps does [the partner company/business] take to ensure that workers are properly informed about their labour rights and how they can be enforced? What opportunities are there for workers to raise concerns and grievances about the performance of [the partner company/business] in relation to labour rights?

Supply chain issues:

What steps are taken to ensure that suppliers of [the partner company/business] are compliant with internationally recognised labour standards including international prohibitions on the worst forms of child labour? Is compliance with internationally recognised human rights standards a standard term of contracts with suppliers? What steps are taken in respect of under-age workers found to be working in the supply chain or other human rights issues more generally?

Stakeholder engagement and community relations:

Does [the partner company/business] engage with or take advice from civil society organisations, non-governmental organisations or community representatives with respect to the human rights impacts of the site/operations? If so, how? What has [the partner company/business] learned from these processes?

Private security arrangements:

Are private security companies used by [the partner company/business] in connection with [its business]? Are their staff and contractors independent of government influence? Are private security personnel appropriately regulated? Do they accept international voluntary standards applicable to this sector? Do they receive sufficient training with respect to the use of force? Have any complaints been received in relation to the performance of any private security providers or their employees? If so, what were the nature of those complaints and how were they resolved?

Government actions and relations:

Have actions by government or State agencies in connection with [the partner company/business] had (or might they have the potential to have) an adverse impact on the human rights of local inhabitants or others? What is the government’s record with respect to (a) human rights protection generally, (b) labour enforcement and (c) treatment of union representatives? What are the [the partner company/business]’s policies with respect to engagement with governments and State agencies? What are [the partner company/business]’s policies with respect to supply of goods and services to governments and State agencies?

Further reading

Shift & Mazars, UN Guiding Principles Reporting Framework, February 2015

In this section you will find information and suggestions as to different ways you may be able to address, through contractual means, the human rights risks you have identified as part of the due diligence process. These are presented in a generic way, for you to consider alongside your usual standard templates and precedents.

For ease of reference, the resources in this section have been divided by reference to four main types of transaction:

• share sale and purchase;
• asset sale and purchase;
• joint ventures; and
• divestment (i.e. of a company or of assets).

Note: The information and suggestions below relate to the management and allocation of legal, financial and commercial risks (including, potentially, the legal, financial and commercial risks that can result from reputational damage).  For more information on how reputational damage can create legal, financial and commercial risks see here. You and your client should be aware, however, that under the UN Guiding Principles on Business and Human Rights, the human rights responsibilities your client may have inherited from a seller as a result of a merger or acquisition (i.e. the “corporate responsibility to respect human rights”) cannot be transferred contractually, and will remain the ultimate responsibility of the buyer (see further Guiding Principle 17, Commentary).  For further information on the distinction between the corporate liability to respect human rights under the UN Guiding Principles and legal liability, see here.

Further notes:

(i) You may have noted that there is an overlap between “divestment” and the first two categories (i.e. (a) share sale and purchase and (b) asset sale and purchase).  The reason for this is that the first two categories take a buyer’s perspective. The latter approaches human rights risks from the perspective of a seller.  It will be up to you (in conjunction with your client) to choose which resources, and which aspects of those resources, are most relevant to your particular transaction and your client’s needs.  Obviously, in each case, these resources must be tailored to the transaction in question, and specifically in light of the human rights risks identified in the course of the due diligence process and your client’s instructions and circumstances;

(ii) The checklists and drafting notes below are intended to be illustrative, not exhaustive.  All of the suggestions below are subject to local legal advice.

Purchase Price

Explanatory notes: If you are acting for the buyer, you should discuss carefully with your client, in light of the human rights risks identified in the course of due diligence, the likely budget for remedying any adverse human rights risks which the target company may have caused or contributed to and, in light of this, what adjustments should be made to the purchase price.

Conditions precedent: share sale and purchase agreement: potential human rights issues to consider

Explanatory notes: Because of the time required to obtain all necessary regulatory and corporate consents, there may be a time gap between the execution of the sale and purchase agreement and the completion of the sale. Conditions precedent provisions in the share sale and purchase agreement set out the matters that must be concluded before the sale and purchase will take effect.

Actions required in light of outcomes of due diligence investigations:

In the event that the buyer’s due diligence investigations into human rights risks have uncovered areas of risk which could be mitigated or remedied by the seller prior to the transfer of ownership, consider whether it would be appropriate to include specific mitigation or remedial actions as conditions precedent to the sale.

Representations and warranties: share sale and purchase agreement: potential human rights issues to consider

Explanatory notes: As part of a share sale, the seller(s) will give warranties on a range of matters relating to the company and its status, performance and, in some limited cases, prospects. A warranty in this context is a statement from seller to buyer, designed to give assurance that certain facts are true, or that certain things will happen. Together with indemnities (see below) they are an important way of allocating risk between the seller and buyer. The inclusion of representations and warranties with respect to human rights risks can be a useful way of eliciting information about human rights risks, and clarifying the nature and scope of human rights risks identified in the course of due diligence investigations. However, they will usually be pared back in the course of a negotiation and, in any event, are no guarantee that losses arising from human rights risks that were undisclosed or which crystallise post-completion will be recoverable from the seller (e.g. in the event of seller insolvency, etc). You will need to discuss carefully with your client, in light of the relevant circumstances, the scope of the warranties, their limitations in specific circumstances and the resources that may be needed to ensure that subsequent liabilities arising from adverse human rights impacts can be met.

Warranties as to human rights risks:

If you are acting for the buyer, you should discuss carefully with your client, in light of the human rights risks identified in the course of due diligence, what human rights-related matters may need to be specifically covered in the warranties to ensure that the responsibility for addressing those risks, and any liabilities that arise in respect of them, are allocated in an appropriate manner. Some human rights risks may be covered by general warranties (e.g. relating to the procedures for grants of licences, and the number and status of regulatory complaints or legal claims against the company).  Some human rights risks may be covered in warranties relating to environmental and/or labour standards and performance. However, in some transactions a more tailored approach may be needed.  Areas identified as high risk (because of the scale, scope and/or irremediable character of the adverse human rights impacts) may require a specific set of warranties.  Risks that may need to be addressed explicitly in warranties may include, depending on the nature of the transactions, the relevant sector and other circumstances:

• risks associated with the use of private security providers;
• risks of serious environmental harm;
• risks of serious privacy breaches;
• risks arising from poor supply chain management; and
• risks of “complicity” in government action that could amount to abuses of human rights.

Indemnities: share sale and purchase agreement: potential human rights issues to consider

Explanatory notes: In addition to seeking warranties about factual matters relevant to the company’s status, performance and prospects, a buyer may request an indemnity from the seller in respect of specific matters identified as part of its due diligence investigations, to shift the risk of a particular matter or event to the seller and to allow the buyer to recover certain costs and financial losses that may materialise subsequent to the sale in respect of that matter or event. Such indemnities are often used where a warranty given in the share sale and purchase agreement may not allow a buyer to recover e.g. because the buyer had knowledge of the matter before signing.

Financial liabilities arising from human rights risks:

If you are acting for the buyer, you should discuss carefully with your client whether there are any human rights risks identified in the course of due diligence for which specific indemnities should be sought from the seller, in order to allow the buyer to recover any financial liabilities that it incurs as a result of the materialisation of such risks following the sale. Depending on the nature of the risks involved and the outcome of negotiations, these losses could include not only fines and damages awards (and associated legal costs), but also clean-up costs, costs of fact finding and investigative efforts, costs of technical consultants, costs of remediation programmes, costs of implementation of compliance or prevention orders and/or improvement of systems and controls, costs of training programmes, costs of restoration of cultural property and costs of subsequent stakeholder and community engagement efforts.

Covenants to completion: share sale and purchase agreement: potential human rights issues to consider

Explanatory notes: Covenants to completion are included in the share purchase and sale agreement where there is a split exchange/completion to protect the buyer from adverse consequences of actions taken by the seller with respect to the business in the period between signing of the sale and purchase agreement and completion. These covenants typically impose constraints on the seller with respect to expenditure, disposal of assets, and entry into new contractual obligations.

Management of human rights risks to completion:

If acting for the buyer, you should consider whether any specific covenants should be included with respect to the management of human rights risks in the period between signing and completion.

Further note: For instance, the parties to the transaction could develop and agree on an action plan to mitigate and address existing human rights risks.

Purchase price

Explanatory notes: If you are acting for the buyer, you should discuss carefully with your client, in light of the human rights risks identified in the course of due diligence, the likely budget for remedying any adverse human rights risks which the target business or the seller of the relevant assets/business (whichever is applicable) may have caused or contributed to and, in light of this, what adjustments should be made to the purchase price.

Conditions precedent: asset/business sale and purchase agreement: potential human rights issues to consider

Explanatory notes: As with a share sale, conditions precedent provisions in the asset/business sale and purchase agreement will set out the matters that must be concluded before the sale and purchase will take effect, in the event that there is a time gap between the execution of the sale and purchase agreement and the completion of the sale.

Actions required in light of outcomes of due diligence investigations: 

In the event that the buyer’s due diligence investigations into human rights risks have uncovered areas of risk which could be mitigated or remedied by the seller prior to the transfer of ownership, consider whether it would be appropriate to include specific mitigation or remedial actions as conditions precedent to the sale.

Representations and warranties: asset/business sale and purchase agreement: potential human rights issues to consider

Explanatory notes: As part of an asset/business sale, the seller(s) will give warranties on a range of matters relating to the business and/or assets. A warranty in this context is a statement from seller to buyer, designed to give assurance that certain facts are true, or that certain things will happen. Together with indemnities (see below) they are an important way of allocating risk between the seller and buyer. The inclusion of representations and warranties with respect to human rights risks can be a useful way of eliciting information about human rights risks, and clarifying the nature and scope of human rights risks identified in the course of due diligence investigations. However, they will usually be pared back in the course of a negotiation and, in any event, are no guarantee that losses arising from human rights risks that were undisclosed or which crystallise post-completion will be recoverable from the seller (e.g. in the event of seller insolvency, etc).  You will need to discuss carefully with your client, in light of the relevant circumstances, the scope of the warranties, their limitations in specific circumstances and the resources that may be needed to ensure that subsequent liabilities arising from adverse human rights impacts can be met.

Warranties as to human rights risks:

If you are acting for the buyer, you should consider carefully with your client, in light of the human rights risks identified in the course of due diligence, what human rights issues may need to be specifically covered in the warranties to ensure that the responsibility for addressing those risks, and any liabilities that arise in respect of them, are allocated in an appropriate manner. Some human rights risks may be covered by general warranties (e.g. relating to the procedures for grants of licences, and the number and status of complaints or legal claims against the company). Some human rights risks may be covered in warranties relating to environmental standards and performance.  However, in some transactions a more tailored approach may be needed. Areas identified as high risk (because of the scope, scale or irremediable character of the adverse human rights impacts) may well require a specific set of warranties.  Risks that may need to be addressed explicitly in warranties include:

• risks associated with the use of private security providers;
• risks of serious environmental harm;
• risks arising from poor supply chain management; and
• risks of “complicity” in government action that could amount to abuses of human rights.

Indemnities: asset/business sale and purchase agreement: potential human rights issues to consider

Explanatory notes: In addition to seeking warranties about factual matters relevant to the status, ownership and condition of the relevant assets and/or business, a buyer may request an indemnity from the seller in respect of specific matters identified as part of its due diligence investigations, to shift the risk of a particular matter or event to the seller and to allow the buyer to recover certain costs and financial losses that may materialise subsequent to the sale in respect of that matter or event. Such indemnities are often used where a warranty given in the asset sale and purchase agreement may not allow a buyer to recover e.g. because the buyer had knowledge of the matter before signing.

Financial liabilities arising from human rights-related risks:

If you are acting for the buyer, you should discuss carefully with your client whether there are any human rights risks identified in the course of due diligence for which specific indemnities should be sought from the seller, in order to allow the buyer to recover any financial liabilities that it incurs as a result of the materialisation of such risks following the sale. Depending on the outcome of negotiations, these losses could include not only fines and damages awards (and associated legal costs), but also clean-up costs, costs of fact finding and investigative efforts, costs of technical consultants, costs of remediation programmes, costs of implementation of compliance or prevention orders and/or improvement of systems and controls, costs of training programmes, costs of restoration of cultural property and costs of subsequent stakeholder and community engagement efforts.

 Covenants to completion: asset/business sale and purchase agreement: potential human rights issues to consider 

Explanatory notes: Covenants to completion are included in the asset/business sale and purchase agreement where there is a split exchange/completion to protect the buyer from adverse consequences of actions taken by the seller with respect to the business and/or assets in the period between signing of the sale and purchase agreement and completion.  These covenants typically impose constraints on the seller with respect to expenditure, disposal of assets, and entry into new contractual obligations.

Management of human rights risks to completion:

If acting for the buyer you should consider whether any specific covenants are required with respect to the management of human rights risks in the period between signing and completion. For instance, in the context of an asset/business sale, job security and protection of employment rights may (depending on the relevant transaction and the operation of applicable law) be potential areas of concern.

Introduction: This section is concerned with the contractual means by which the parties to a joint venture can ensure that human rights risks associated with the joint venture’s activities are properly identified and addressed.

Joint ventures can take many legal forms, though they are typically characterised by shared ownership, shared management and governance and the sharing of resources, risks and returns. This section assumes that the assets and business of the joint venture will be owned by a special purpose corporate (or partnership) vehicle, but there is a separate agreement between the owners (“shareholders”) to describe how the joint venture company will be run, how decisions relating to the business of the joint venture will be taken, to regulate sales of shares in the joint venture company and to provide some level of protection for minority shareholders.

Joint venture/shareholders’ agreements: potential human rights issues to consider

Obligations of the joint venture parties to each other with respect to human rights risk management and information exchange:

In light of the findings from the various due diligence investigations conducted by parties prior to the transaction, you should consider carefully with your client whether specific provisions are needed with respect to on-going management by the shareholders and joint venture company of any human rights risks, e.g. through a requirement to adhere to a human rights or ethics code of conduct.  If any of the joint venture parties is a State-owned entity, particular attention will need to be given to the possibility of legal risks arising for other joint venture partners under legal theories of “complicity”.  You should consider whether, in addition to the more general provisions requiring exchange of information on regulatory matters, there may be a need for specific provisions on the exchange of information between the joint venture parties in relation to their implementation of, and compliance with, human rights standards (i.e. voluntary codes of conduct as well as legally enforceable standards).  If so, you should also consider whether any human rights-related issues and problems (if any) should give rise to termination of the joint venture agreement and winding up of the joint venture company (see further 18.6 “Termination” below) and, if so, which.

Human rights impact assessment, monitoring and performance tracking:

You should consider whether provisions are needed with respect to human rights impact assessment, monitoring and performance tracking by the joint venture company, in light of the human rights risks connected to the joint venture company’s business activities.

Human rights reporting:

The publication of regular reports on the identification and management of human rights risks associated with a business enterprise is a regulatory requirement in some jurisdictions. In any event, the shareholders’ agreement provides an opportunity for joint venture parties to record their agreement with respect to human rights disclosure and/or reporting by the joint venture company.

Access to information:

For business activities with higher levels of human rights risk, joint venture parties will need regular access to information with respect to the management and remediation of any such risks, in order to understand and manage their own levels of exposure. You should consider what kinds of reporting and access to information requirements would be appropriate in light of the level of risk identified and how this should be managed.

Management actions requiring consent of joint venture parties (i.e. shareholders): 

Another way that shareholders can limit their exposure to human rights risks is by prohibiting certain actions or decisions by the joint venture company without their prior consent.  You will need to consider, in light of the risks involved, whether there are matters relating to human rights risk that to ought to be vetted by the shareholders and/or approved in a specific manner.  Some human rights related risks will be covered by more general provisions (e.g. settlement of legal claims and disputes).  However, more explicit provisions may be needed in relation to actions that may substantially increase the levels of human rights risk, or create new sources of risk, for instance:

• the engagement of private security providers;
• the entry into contracts (e.g. supply contracts) by the joint venture company with certain governments or State agencies; or
• undertaking new business activities in operationally challenging contexts (e.g. conflict affected areas).

Termination:

You should consider whether there are any events relevant to, or connected with, adverse human rights impacts that should trigger the termination of the joint venture.

As with any other kind of legal risk, legal risks arising from adverse human rights impacts of business activities will transfer from a seller to the buyer on completion of a sale (subject to any overarching legal agreements between the seller and the buyer as regards the appropriate allocation of risk).

Regardless of the legal position, a seller may still face reputational and/or financial risks following the sale as a result of:

• adverse human rights impacts associated with the company or assets prior to the sale of the relevant company or assets;
• the sale itself (e.g. if the sale was perceived as having taken place as part of a strategy to avoid or limit liability for past adverse human rights impacts); or
• the subsequent conduct of the buyer (e.g. where the buyer’s use of the relevant assets or management of the relevant business or company worsens the adverse human rights impacts associated with those assets, or the relevant business or company.

If you are acting for a seller in relation to a proposed divestment of a company or assets where the relevant business activities of that company or the relevant assets have had (or have the potential to have) significant adverse human rights impacts, you will need to consider carefully with your client:

• the kinds human rights risks that could potentially arise following (or as a result of) the divestment of the relevant company or assets;
• the reputational and/or financial consequences that could flow from them;
• whether those risks can be mitigated through contractual means (e.g. through appropriate undertakings or indemnities from the buyer); and
• if not, the appropriate course of action (e.g. whether to proceed with the sale).