Handbook for lawyers - Chapter 1 - Mergers and acquisitions (M&A) and corporate restructuring

Chapter 1 - Mergers and acquisitions (M&A) and corporate restructuring

How can corporate and M&A lawyers work in a way that is consistent with the UN Guiding Principles on Business and Human Rights?

This chapter is part of a series of educational resources aimed at raising awareness among legal practitioners about the different ways in which business enterprises can become involved in adverse impacts on human rights and the roles and responsibilities of legal practitioners in helping their corporate clients to:

Orientation

Getting started

Preamble

Discussion exercises

CM Mendora Company (“CMMC”) is a company incorporated in the small island nation of Mendora.  Mendora is rich in mineral deposits. CMMC is the grantee of several mineral exploration licences from the Mendoran government and is the owner of a large bauxite mine in the east of the country.  CMMC was formerly a wholly owned subsidiary of Consolidated Minerals (“CM”), a company incorporated in Ruritania.  In November 2014, as part of a corporate restructuring of Consolidated Minerals, CMMC was sold to Mining Futures Company (“MFC”), a company also incorporated in Ruritania. The acquisition took place following a due diligence process arranged by MFC’s lawyers, which confirmed that the mineral exploration licences had been granted in accordance with Mendoran Law and that CMMC could assert legal title to relevant land and other assets.  The acquisition proceeded smoothly and, initially, operations at CMMC facilities carried on as normal.  However, recent events are giving rise to concern.  Local community groups have complained about pollution from the site of the bauxite mine.  According to local environmental inspectors, discharges remain within acceptable parameters, though this is disputed by community representatives. The dispute has attracted the attention of the local press.  In addition, community leaders have alleged a number of procedural irregularities in connection with grants of planning approval for the expansion of processing facilities at the mine, which they say did not properly take into account community concerns and, in particular, the rights of indigenous groups living nearby.  In recent days, there have been a number of protests at sites and facilities owned by CMMC, some of which have become violent. According to press reports, local residents are now exploring a legal challenge, not only to the mine expansion project, but to the initial grant of the mineral exploration licences also. In addition, a group of local fishermen have served documents on CMMC claiming civil damages for alleged damage to local freshwater fishing interests due to pollution emanating from the mine.

Q1. Can you identify the human rights that may have been adversely impacted in this scenario?

Q2. Have the business enterprises mentioned in this scenario been involved in any adverse human rights impacts by virtue of their activities and/or business relationships? If so, how?

Q3. What kinds of legal, commercial, financial and reputational risks might CMMC now face as a result of the adverse human rights impacts you have identified (see Qu. 1 above)?

Q4. What kinds of legal, commercial, financial and reputational risks might MFC now face as a result of the adverse human rights risks you have identified (see Qu. 1 above)?

Q5. What do the UN Guiding Principles on Business and Human Rights say about the responsibilities of (a) CMMC and (b) MFC to address the potential and actual adverse human rights impacts you have identified (see your answers to Qu. 1 and Qu. 2).

Q6. If you had been engaged by MFC as legal counsel on the purchase of CMMC from CM, what steps might you have recommended to ensure that any human rights risks were:

(a) properly identified; and

(b) adequately mitigated and addressed (including through contractual means);

in light of your client’s Corporate Responsibility to Respect human rights and in order to manage the legal, commercial, financial and reputational risks you have identified in your answers to Qu. 3 and Qu. 4 above?

In 2014, Sportswear For You Company, (“SFYC”), a manufacturer and retailer of sportswear and sports equipment, merged with Funtimes Company, (“FTC”) a manufacturer and retailer of children’s toys, to create a new company called Funtimes Sports Holdings (“FSH”). Two years later, the complicated process of integration is almost complete. However, some problems have emerged with several of the merged company’s most popular product lines. Last month, the campaigning group Action on Child Exploitation issued a press release claiming that its recent investigations into suppliers of toy components for FSH product lines have substantiated allegations of “child abuse on an industrial scale”. Moreover, more than 100 employees working for one of FSH’s sports-goods manufacturing subsidiaries have recently commenced legal action against that subsidiary alleging “Victorian working practices”. While the nature of these claims varies from case to case, many include claims for damages for sex discrimination and compensation for underpayment of wages over a long period.

Q1. Can you identify the human rights that may have been adversely impacted in this scenario?

Q2. Have the business enterprises mentioned in this scenario been involved in any adverse human rights impacts by virtue of their activities and/or business relationships? If so, how?

Q3. What kinds of legal, commercial, financial and reputational risks might FSH now face as a result of the adverse human rights impacts you have identified (see Qu. 1 above)?

Q4. What do the UN Guiding Principles on Business and Human Rights say about the responsibilities of (a) FSH and (b) FSH’s sports-goods manufacturing subsidiary to address the potential and actual adverse human rights impacts you have identified (see your answers to Qu. 1 and Qu. 2).

Q5. If you were FSH’s legal counsel, what steps would you recommended to your client to ensure that human rights risks are:

(a) properly identified; and

(b) adequately mitigated and addressed (including through contractual means);

in light of your client’s Corporate Responsibility to Respect human rights and in order to manage the legal, commercial, financial and reputational risks you have identified in your answers to Qu. 3 and Qu. 4 above?

In 2010, as part of a large-scale programme to privatise State-owned assets, the Renewable Futures Company (“RFC”) purchased a number of hydroelectric generation assets in the State of Aurelia, including the Big Gorge Hydro Station (“BGHS”) in the west of the country. While the financial and operational performance of these assets has been satisfactory so far, the managers of the BGHS have raised concerns about security around that plant. In recent days, the facility has been the site of a number of protests by local community groups, complaining that public safety measures that have been taken in the vicinity of BGHS are impeding their access to water, which is having a serious effect on local agriculture and fisheries and, ultimately, the sustainability of local communities. As a precautionary measure, representatives of management at the facility have been in touch with the local police chief who attributes the disquiet to “a bunch of local troublemakers who need to learn some respect for the law”.

Q1. Can you identify the human rights that may have been adversely impacted in this scenario?

Q2. Have the business enterprises mentioned in this scenario been involved in any adverse human rights impacts by virtue of their activities and/or business relationships? If so, how?

Q3. What kinds of legal, commercial, financial and reputational risks might RFC now face as a result of the adverse human rights impacts you have identified (see Qu. 1 above)?

Q4. What do the UN Guiding Principles on Business and Human Rights say about the responsibilities of RFC to address the potential and actual adverse human rights impacts you have identified (see your answers to Qu. 1 and Qu. 2).

Q5. If you had been engaged by RFC as legal counsel on the purchase of BGHS from the State of Aurelia, what steps might you have recommended, to ensure that any human rights risks were:

(a) properly identified; and

(b) adequately mitigated and addressed (including through contractual means);

in light of your client’s Corporate Responsibility to Respect human rights and in order to manage the legal, commercial, financial and reputational risks you have identified in your answers to Qu. 3 and Qu. 4 above?

In 2008, Big Machinery Engineering Inc, (“BME”), acquired a 40% interest in a joint venture with the Heavy Machines Company, (“HM Co.”). The commercial purpose of the joint venture is the manufacture and export of tractors and earthmoving equipment. The joint venture vehicle is the New Generation Plant Company (“NGP Co”), a company incorporated in Novistrania. Today, BME maintains its 40 percent interest in NGP Co, HM Co. holds a 40 percent interest and the remaining 20 percent shareholding is held by NS Investments, a company owned by the Novistranian State. Over the past few years, production has grown steadily and NGP Co has been successful in developing export opportunities for its specialist machines. However, NGP Co has also been involved in a long-running industrial dispute with its employees over working conditions and pay. Although rights of freedom of association and collective bargaining are protected under Novistranian law, union leaders have complained of intimidation and threats from Novistranian authorities and, in the last week, a union leader was arrested for reasons that were never publicly disclosed and severely beaten whilst in police custody. In addition, NGP Co has just been served with legal documentation relating to a class action by residents of the neighbouring country of Molvania, on the basis that machinery manufactured by NGP Co has been used in illegal land clearing operations in that country which, it is claimed in court documents, have had a devastating effect on forest dwelling indigenous peoples.

Q1. Can you identify the human rights that may have been adversely impacted in this scenario?

Q2. Have the business enterprises mentioned in this scenario been involved in any adverse human rights impacts by virtue of their activities and/or business relationships? If so, how?

Q3. What kinds of legal, commercial, financial and reputational risks might NGP Co. now face as a result of the adverse human rights impacts you have identified?

Q4. Assume you are legal counsel to BME. What kinds of legal, commercial, financial and reputational risks might your client now face as a result of the adverse human rights impacts you have identified?

Q5. What do the UN Guiding Principles on Business and Human Rights say about the responsibilities of (a) NGP Co and (b) BME to address the potential and actual adverse human rights impacts you have identified (see your answers to Qu. 1 and Qu. 2).

Q6. If you had been engaged by BME as legal counsel on the establishment of the joint venture with HM Co (including the purchase of the shareholding in the joint venture company NGP Co) what specific steps would you have recommended, to ensure that any human rights risks were

(a) properly identified; and

(b) adequately mitigated and addressed (including through contractual means);

in light of your client’s Corporate Responsibility to Respect human rights and in order to manage the legal, commercial, financial and reputational risks you have identified in your answers to Qu. 3 and Qu. 4 above?

Practical resources for corporate and M&A lawyers

Pre-engagement checks and screening

Due diligence

Preamble

Resources

Contract checklists

Follow up and supplemental legal services

In-house lawyers perform a key role in the fulfilment of the Corporate Responsibility to Respect human rights.  The kinds of business and human rights-related activities in which you may be involved as in-house counsel include:

  • providing training and current awareness briefings to management and staff on human rights-related issues and developments;
  • providing updates to the board and management teams on human rights related risks affecting the business;
  • analysing of human rights risks in the supply chain and opportunities for leverage to increase opportunities for prevention and mitigation of those adverse human rights impacts;
  • advising on and providing legal support in connection with human rights-related issues arising in the negotiation and implementation of a range of transactions e.g. joint venture agreements, supply agreements;
  • legal support and advice in connection with the establishment and maintenance human rights policies and/or due diligence processes, including advice on the management of human rights risks identified in the course of those due diligence processes and any remediation that might be necessary;
  • advising on and providing legal support in relation to whistle-blower policies and related mechanisms, approaches or processes;
  • advising on and providing legal support in relation to the maintenance of an ethical risk log or integration of human rights into a holistic company risk reporting framework (including review of internal and supply chain performance against “best practice” and/or company standards);
  • advising on and providing legal support in relation to a supplier code of conduct;
  • advising on and providing legal support in connection with policies in respect of identification, assessment, supervision and monitoring of human rights risk management (including but not limited to legal compliance) by suppliers, service providers and other contractors and business partners;
  • advising on and providing legal support in relation to the establishment and maintenance of company-level, site-level and/or operational grievance mechanisms;
  • advising on and providing legal support in connection with engagement with those identified by the business enterprise as having an interest in its performance with respect to human rights issues and its management of human rights-related risks, such as employees, suppliers, consumers, and local communities.

There are a number of supplemental post-completion services, related to business and human rights issues, that you could discuss with your client following completion of a transaction. These will depend on the nature of your client’s business activities and your on-going lawyer-client relationship, but could include:

  • training and current awareness briefings on human rights-related issues and developments;
  • the inclusion of human rights as a regular agenda item in lawyer-client relationship discussions and meetings;
  • legal support and advice in connection with human rights-related issues arising in the negotiation and implementation of further transaction agreements (e.g. joint venture agreements, supply agreements;)
  • legal support and advice in connection with on-going human rights policies and/or due diligence processes;
  • legal support and advice in connection with the establishment and maintenance of company-level, site-level and/or operational grievance mechanisms;
  • legal support and advice in connection with engagement with those identified by the business enterprise as having an interest in its performance with respect to human rights issues and its management of human rights risks, such as employees, suppliers, consumers, and local communities or other business partners.

Further reading and resources

In this section you will find a list of further reading and resources prepared by external sources that are relevant to the issues discussed in this chapter. This list will be updated from time to time. If you have any suggestions as to further materials that would be of interest to lawyers working in the corporate/M&A field please contact us.