M&A needs more human rights diligence

Author: Ashley Lee | Published: 1 Jul 2015
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The UN endorsing the Guiding Principles on Business and Human Rights makes clear that the private sector has obligations

Both strategic and financial investors must carry out human rights due diligence to mitigate litigation and reputational risk.

Corporate human rights violations carry enormous headline risk. Recent examples include the 2013 collapse of an apparel factory in Bangladesh, and the discovery that slave labour was used to produce feed for prawns sold by Walmart, Carrefour, Costco and Tesco.

In 2011 the UN endorsed its Guiding Principles on Business and Human Rights for the private sector. Since then, it’s become clear that the burden has shifted – at least partially – to companies, resulting in a greater focus on human rights diligence.

Clients are investing more time and money in human rights due diligence, observed Antony Crockett, international counsel at Hiswara Bunjamin & Tandjung, Herbert Smith Freehills’ associated firm in Jakarta.

"There are a lot of parallels in relation to anti-bribery due diligence, and what you do in response to those risks," he said. "However human rights due diligence can take longer and be more difficult than bribery and corruption because the legal framework is more complex."


  • Human rights due diligence is becoming more common and important in M&A deals;
  • Following the UN’s endorsement of the Guiding Principles on Business and Human Rights, corporates have become more cognisant of their human rights risks and obligations;
  • Financial investors who may lack visibility or the ability to monitor sites directly must be especially vigilant;
  • Problematic areas include land acquisition and labour.

Why now?

Part of the reason why this wasn’t traditionally a focussed on area of diligence was that nobody in the business community – including lawyers at corporate firms – thought about human rights as being connected to how business is done, said Crockett.

"It was considered a government issue, rather than something the private sector needed to be concerned about," he added. "The UN Guiding Principles changed that; while no laws have changed, they have raised people’s awareness."

While international law was thought to be sufficient to protect human rights, there are plenty of governments that don’t meet their obligations under human rights treaties.

"That leads to expectations on businesses, particularly multinationals, to fill that gap," he said. "In one sense the Guiding Principles impose a burden on companies to do what governments should be doing – not in the sense of regulating, but of taking steps to ensure that people’s human rights are protected."

Companies in the extractive sectors have been doing this for a long time, and have lawyers and other professionals who deal with human rights on a daily basis, Crockett added.

Human rights due diligence can take longer and be more difficult than bribery and corruption

But that isn’t the case for financial investors, who are generally based in financial centres and may not have the visibility or bandwidth to monitor their investments.

In particular, limited partners (LPs) in private equity funds are increasingly asking managers to acknowledge the Guiding Principles when investing; a human rights violation could damage both LPs and general partners’ (GPs) reputations.

What to look for

"Labour is probably the number one issue, while issues around land have been hugely problematic, especially with the explosion of agribusiness and huge acquisitions of land in the developing world," said Crockett.

Those issues apply not only to the asset or company that is being acquired, but also its supply chain; in the supermarket incident, the companies providing feed for the prawns were using slave labour.

Another issue is the complexity of human rights rules. "Human rights due diligence implies understanding the relevant international standards for protection of a particular human right, looking at the domestic law position in a particular country, and then trying to work out if there’s a gap," said Crockett.

"And if there is a gap, companies must then determine how they’re going to conduct business in the country so that international standards are respected."

While that sounds similar to anti-corruption diligence, the legal analysis for human rights is more complex. And companies aren’t always structured to deal with that.

Companies’ social performance and human right issues have, for a long time, fallen within the responsibility of the corporate-social responsibility (CSR) department, which isn’t typically staffed by lawyers or focussed on legal risks.

"But dealing properly with human rights risks requires an understanding of the relevant legal standards at both a domestic and international level," Crockett said. "This is something that corporate legal counsel will be forced to get to grips with."

See also

Asia M&A needs PR strategy

Private equity: a force for good for financial institutions?

UK’s senior managers regime tipped for global standard