The Association of Corporate Counsel (ACC) Docket
June’s Feature Article (2016), originally published here
Reprinted with the permission of Anna Triponel and the Association of Corporate Counsel as it originally appeared: Anna Triponel, “What Do Human Rights have to Do with Mergers and Acquisitions?”, ACC Docket June 2016: pp. 26-35. Copyright © 2016, the Association of Corporate Counsel. All rights reserved. If you are interested in joining ACC, please go to www.acc.com, call +1 202 293 4103 x360 or email firstname.lastname@example.org.
This article is based on the author’s work with companies that are members of Shift’s Business Learning Program.
Having been both a mergers and acquisitions lawyer and an advisor to John Ruggie, who developed the soft law standard for companies on human rights (embodied in the UN Guiding Principles on Business and Human Rights), I am frequently asked the following question by M&A professionals: What do human rights have to do with us, and how is this different from what we are doing already?
Through acquisitions, companies can inherit the practices of target companies that may in the past have negatively impacted, or continue to impact, workers or communities’ human rights. Through divestitures, sellers run the risk that their divested business be involved in negative impacts on people. Consider Meridian Gold, which acquired Brancote Holdings — the owner of a site in Argentina — for US$320 million. Although legal due diligence did not uncover any issues and the title to land was legal, Meridian Gold ended up with five years of litigation rising to the Argentinian Supreme Court, and lost its entire investment because the surrounding community opposed the use of the land for an open-pit gold mine. Consider Nokia, which suffered a significant hit to its reputation when news broke that its products and services had assisted the Iranian government’s efforts to imprison and harm political dissidents during the 2009 Iranian elections. Nokia had in reality divested the business six months prior to the elections to Iran Telecom, but public opinion was that a company selling a business that can cause significant harm should seek to limit the risk of such harm by incorporating restrictions during the sales transaction or selling to another buyer. Finally, consider American Sugar Refining, which acquired Tate & Lyle Sugars for £211 million in 2010. Subsequent to the transaction, Tate & Lyle Sugars was subject to a £10 million lawsuit in the UK High Court because a sugar supplier in Cambodia had relied on legal title acquired through corrupt practices.
These kinds of human rights risks are on the rise and companies are navigating increasingly unfamiliar waters in this area. Businesses are expanding into new higher-risk markets where legal regimes may not be as protective; increasing populations, inequality, and climate change render workers more vulnerable and access to resources more competitive; and social media enables the public to pass judgment on actions that take place thousands of miles away. These developments can translate into real costs for companies in the form of legal actions, complaints lodged with National Contact Points set up in Organisation for Economic Co-operation and Development (OECD) countries, and investor questioning and divestments. Costs can also include reputational damage from advocacy campaigns, consumer boycotts, operational delays, management distraction, and lost opportunities resulting from conflicts with communities.
These human rights risks are leading some companies to start to integrate consideration for human rights into their M&A processes. These companies are working on equipping their M&A teams to identify and address adverse human rights impacts that are connected to the target company or, in the case of a divestiture, that are, or may be, connected to the business being divested. They are working around the challenges inherent to M&A, such as high confidentiality and tight timing constraints, as well as a traditional focus on legal compliance, legal liability, and allocation of business risk.
There is no quick fix for integrating human rights into a company’s M&A processes. Revising due diligence checklists and crafting template representations and warranties alone will not work. As one senior M&A lawyer put it, “These changes are meaningless if M&A lawyers don’t understand what they are looking for and what their role is in the process.” Not only will integrating human rights into a company’s due diligence process entail reviewing additional inputs to due diligence, perhaps more importantly it entails a different way of reviewing information that is already collected, as well as the involvement of others in the business. Indeed, M&A lawyers are but one piece of the puzzle:
- Other professionals in the M&A team also play a crucial supporting role for their companies as business models change through mergers, acquisitions, and divestitures;
- Others in the company, for instance those working in corporate responsibility, sustainability, or procurement, commonly hold valuable information on human rights risks;
- The company’s board of directors and senior management decide on the company’s business strategy, which will include decisions on expansion and divestiture, which carry a certain level of human rights risk; and
- In the case of an acquisition, others in the company will be responsible for the acquired business moving forward, which could include integration to bring the business to the same standards as the buyer.
Little information is publicly available in this area and this article therefore captures insights from the process that is working well for leading companies advancing in this area. Although it is intended primarily for companies and their in-house M&A teams, it will also be relevant for law firms that are increasingly seeking to advise clients in this area, as well as other stakeholders interested in advancing business respect for human rights.
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