As environmental, social and governance (ESG) considerations continue to gain global importance in the context of mergers and acquisitions (M&A), many buyers are requiring human rights in their due diligence processes.

TAKEAWAYS

• As the international legal framework around environmental, social and governance (ESG) issues continues to change, conducting human rights diligence in the context of mergers and acquisitions (M&A) also continues to evolve.
• Companies and potential buyers are becoming increasingly sensitive to the risk of doing business in countries that lack respect for human rights and humane labor conditions.
• By identifying and addressing human rights risks during the diligence phase of an M&A transaction, buyers can mitigate risks and protect their reputations.

Over the past several years, environmental, social and governance (ESG) considerations have gained global importance in the context of mergers and acquisitions (M&A). Corporations, customers, regulators and investors are increasingly demanding the integration of ESG factors into the decision-making processes of businesses with regards to M&A in an effort to enhance business opportunities, protect reputations and mitigate risks. In today’s globalized economy, many companies rely on a complex web of supply chains that span multiple countries. Beginning with the exposure of China’s crimes against Uyghurs and other Muslim ethnic groups in Xinjiang and compounded by Russia’s recent invasion of Ukraine, there has been a renewed push for global brands to take their ESG efforts more seriously. As a result, companies and potential buyers are more sensitive to the risk of doing business in countries like China where labor costs are much lower than in other developed countries but where there is simultaneously a lack of respect for human rights and humane labor conditions.

Conducting human rights diligence in the context of an M&A transaction involves the process of assessing a target’s human rights risks and impacts, as well as its compliance with applicable laws and international standards related to human rights. This diligence includes assessing the effectiveness of a target’s human rights policies and procedures (or lack thereof) and identifying the specific risks associated with the target’s operations, business relationships and supply chains. Some examples of human rights policies include anti-human trafficking and slavery policies, non-discrimination policies and anti-harassment policies. Human rights diligence also includes identifying any potential human rights violations or incidents that could negatively impact the buyer’s reputation or result in the buyer’s acquisition of associated financial and legal liabilities.

The following are some practical steps that an acquiring company could take in conducting effective human rights diligence in the context of an M&A transaction:

• Identify specific human rights risks associated with the target’s operations, business relationships and supply chains by researching the countries and political systems in which the target and its suppliers operate, reviewing publicly available information (i.e., media reports, SEC filings, annual reports, sustainability reports), conducting interviews with key officers and stakeholders and engaging with local communities. In order to preserve attorney-client privilege for any findings when conducting such due diligence, it is important for M&A counsel to advise clients to communicate such findings to counsel as soon as they are discovered.
• Conduct due diligence to assess the target’s human rights profile by reviewing the company’s human rights policies, procedures and codes of conduct, including any training programs. This diligence should include on-site inspections and interviews with employees.
• Conduct due diligence on the target’s history of labor law violations, worker strikes and compliance with applicable labor laws. This involves identifying the local laws around labor and human rights and any gaps in compliance with such laws or regulations.
• Understand all industries associated with the target’s business since each industry presents its own ESG issues. For example, conducting diligence on a target in the textile industry should focus on social factors such as forced labor, child labor and poverty wages. Conducting diligence on a target in the real estate industry should involve review of the company’s non-discrimination policy against tenants and its history of disposing of hazardous waste and the environmental impact of construction.

As the international legal framework around ESG issues continues to change, conducting human rights diligence in the context of M&A also continues to evolve. Investors and businesses are increasingly viewing ESG diligence as a critical component of mitigating risk and driving financial success. By identifying and addressing human rights risks during the diligence phase of an M&A transaction, buyers can mitigate risks and protect their reputations.

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