Thinking beyond M&A litigation risks: quasi-judicial mechanisms and human rights

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M&A lawyers are well aware of the importance of assessing the possibility of litigation when their companies (or clients in the case of external lawyers) are acquiring new companies. No company likes to get sued, and even less so when this relates to actions taken by a predecessor.

We have discussed elsewhere that anticipating and quantifying litigation risks is increasingly challenging to do when it comes to a target company’s human rights-related actions: we now have a surge in human rights-related litigation and law suits against companies for allegations of past human rights violations, resulting in acquisitions that can end up costing significantly more than anticipated.

At the same time, it is no easy task for plaintiffs to bring these kinds of law suits. They cost money, they are lengthy, and they give rise to a whole host of important legal questions. Plaintiffs are therefore increasingly turning to other mechanisms to shine a spotlight on companies’ human rights-related conduct overseas. Enter quasi-judicial mechanisms.

Quasi-judicial mechanisms are not courts per se. Rather than applying legislature-approved rules and procedures, they follow their own pre-established rules and procedures. Rather than relying on state-sponsored enforcement, they rely on other methods of enforcement. However, they are generally viewed as similar to law suits. Investors, governmental authorities and business partners pay attention to them, and therefore so too do companies subject to them.

These quasi-judicial mechanisms are not looking at whether companies have complied with the law: instead, they are looking at whether companies have met human rights-related standards, which may or may not be captured in law. Some examples of quasi-judicial instances are as follows:

  • National Contact Points (NCPs) are government-supported offices whose core duty is to advance the effectiveness of the OECD Guidelines for Multinational Enterprises (the Guidelines). These Guidelines provide for a specific responsibility on companies to seek to respect human rights, including in their extended value chain. This means that plaintiffs can resort to NCPs to hold companies to account for their activities impacting upon human rights taking place in far-flung places.
  • The Compliance Advisor Ombudsman (CAO) receives complaints from people affected by projects in which the International Finance Corporation (IFC) and the Multilateral Investment Guarantee Agency (MIGA) play a role. Rather than relying on applicable national laws, the CAO reviews companies’ conduct against the IFC Policy and Performance Standards on Environmental and Social Sustainability.
  • Quasi-judicial mechanisms also include complaint mechanisms of other multilateral financial institutions such as the European Bank for Reconstruction and Development, the Inter-American Development Bank and the European Investment Bank.

M&A activity and quasi-judicial mechanisms are increasingly intertwined. Quasi-judicial mechanisms can be used to bring complaints against a company for activities previously undertaken by a company it has acquired. Quasi-judicial mechanisms can also play a role in a company’s decision to divest of a business. Here are four examples:

  • POSCO’s purchase of Daewoo International: In the 1990s, Korean trading company Daewoo International expanded its purchasing of Uzbekistan’s cotton. In 2010, South Korean steel producer POSCO acquired Daewoo. Four years later, a number of civil society organisations lodged an instance at the Korean NCP against Daewoo alleging that the company had breached the Guidelines by purchasing cotton produced in Uzbekistan, despite its awareness of on-going state-sponsored forced labour in the country. While not accepting the specific instance, the Korean NCP recommended that the company continue to monitor the situation and engage in dialogue and co-operation with the government of Uzbekistan and other stakeholders. This led to pension funds from a range of countries (e.g., Sweden, UK, Denmark, Poland) engaging with Daewoo to encourage the company to contribute to improved labour conditions in the cotton industry.
  • Sale of the Westin Hotel coordinated by Natixis: In 2015, workers of the Westin Long Beach Hotel in California informed their managers that they wished to launch an organizing campaign to join a Californian trade union called UNITE HERE. The hotel was owned by a public pension fund in Utah and managed by French management company Natixis (through its American subsidiary, AEW Capital Management). The trade union brought an instance with the French NCP against Natixis for the hotel’s violation of freedom of association and the right to collective bargaining of workers. Although Natixis did not own the Westin hotel, the hotel was in its value chain and therefore it had a certain responsibility for human rights under the OECD Guidelines. The French NCP conducted mediation between the companies and the workers. The public pension fund decided to sell the hotel, with AEW Capital Management’s support. A new buyer was selected that made a commitment to social dialogue and allowed the workers to unionise immediately post-sale.
  • Sale of Wilmar’s Indonesian subsidiary: The IFC had made a number of investments in the Asian agribusiness group Wilmar International. In 2011, the IFC Compliance Advisor Ombudsman received complaints from communities in Indonesia related to land disputes with a fully owned subsidiary of Wilmar, palm oil company PT Asiatic Persada. The CAO proceeded with mediation between Wilmar, its subsidiary and the communities, resulting in mediation agreements between the companies and the communities. Two years later, Wilmar sold its subsidiary and the new owners decided to withdraw from the mediation agreements. The CAO strongly condemned Wilmar for selling its subsidiary amidst mediation discussions, without seeking to put a contingency plan in place for affected communities as part of the sale.
  • Sale of G4S’ US subsidiary: British security company G4S had a US subsidiary, G4S Government Solutions division, that ran facilities at the Guantánamo Bay US naval base. In March 2013, British security company G4S announced its decision to sell this division, noting that a significant part of the rationale was due to the fact that, as a non-American company, the US government had prohibited it from having any control or influence over this American division. In between the announcement and the sale (that took place in 2014), civil society Reprieve brought an instance against G4S in front of the UK NCP noting that the provision of these support services was inconsistent with the Guidelines. In particular, Reprieve pointed to the human rights violations taking place at Guantanamo Bay. The UK NCP reviewed the instance and recommended that the complaint be submitted to the US National Contact Point since the subsidiary had been sold to a buyer based in the US.

More than ever, civil society organisations are seeking to hold companies to account for the adverse impacts on human rights connected to their business, including where the activities took place under prior management and in far-flung places. They increasingly resort to quasi-judicial mechanisms to do so, and this trend is set to continue. Understanding how these mechanisms work and how companies can meet the expectations of these mechanisms will in turn help M&A lawyers better advise their companies.