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Focus on Regulation

Current Status Supply Chain Act (Germany)

The German government is planning to introduce a national Supply Chain Act. A corresponding draft bill is expected to be submitted to the cabinet for a decision in mid-March 2021 and is expected to be passed before the end of this legislative period. That timeline could mean that the act could come into force on 1 January 2023.

Which companies would be affected?

Companies based in Germany with more than 1,000 employees are covered by the current bill. Medium-sized companies would not be affected

  • From 1 January 2023, the act would apply to companies with more than 3,000 employees.
  • For companies with more than 1,000 employees, the act would apply from 1 January 2024.

What would this mean for affected companies?

Companies affected by the bill would be obliged to ensure that their suppliers also comply with human rights, in particular forced labor, child labor, discrimination, violation of freedom of association, violation of occupational health and safety, problematic employment and working conditions (working hours, wages, vacations, etc.), violation of land rights, damage to health and soil or air pollution.

  • The act would introduce the obligation to conduct a documented risk analysis to identify risks in their supply chain. A layered level of responsibility would apply:
    • For their own business operations and direct suppliers, companies under the draft bill must ensure that human rights violations do not occur. Companies would have to demonstrate that they are fulfilling their due diligence obligations by submitting a risk report to the Federal Office of Economics and Export Control (Bundesamt für Wirtschaft und Ausfuhrkontrolle).
    • For indirect suppliers in the chain down to the raw material supplier, a risk analysis would only be required if complaints from employees of the supplier reached the German company.
  • If companies became aware of a human rights violation, they would have to take remedial actions. Such remedial actions can include the duty to conduct investigations or terminate business relationships.
  • Companies would also be subject to a reporting obligation: Companies would have to report to the Federal Office of Economics and Export Control on how they analyze supply chain risks, incorporate prevention measures into business policy and take remedial actions and establish a grievance mechanism.

Consequences for violations

The act does not plan on introducing a new or stricter concept of civil liability for companies. In that regard, the current rules of liability would continue to apply. However, companies must expect fines of up to ten percent of their turnover (although the draft bills does not include specific values in this regard) and possibly exclusion from public tenders for up to three years.

Business and Human Rights: Recent panel discussion on the international, European and French landscape

On 21st January 2021, a roundtable was organised by the Association Française des Juristes d’Entreprises (AFJE), Doctrine and Le Grand Continent to discuss where Business and Human Rights issues stand.

Alongside Christelle Coslin, Partner in Hogan Lovells’ Paris litigation team and Co-Head of our Business and Human Rights group, this event gathered Aurélien Hamelle (General Counsel of Total Group), Antonin Lévy (Partner at Antonin Lévy & Associés law firm), and Pierre-Louis Périn (Professor at the Sciences Po Law School and Partner at Bersay law firm). The panel was moderated by Stéphanie Fougou, Honorary President of the AFJE and General Secretary of Ingenico.

The conference started with Christelle Coslin providing background information on the international landscape (for more detail: see the article Business and Human Rights: from an international impulse to European applications). She pointed out that, almost ten years after the adoption of the UN Guidelines on Business and Human Rights (“UNGPS”), the corporate responsibility to respect human rights was gradually shifting from a “soft” law standard to “hard” legal provisions and statutes through a transnational approach.

Christelle Coslin outlined that France took a pioneering role by becoming the first State to incorporate a duty of Human Rights vigilance into its legal corpus through a dedicated statute entitled the “duty of vigilance of parent companies and main contractor companies” (the “Duty of Vigilance Law”). Christelle Coslin also highlighted that Switzerland recently joined the ever-expanding list of countries that have enacted specific rules governing human rights due diligence by adopting a limited set of reporting and due diligence obligations specific to child labour and mining conflicts. Christelle Coslin eventually reminded that the European Commission launched a large new consultation* asking about the possibility of introducing a mandatory duty for all companies operating in the EU to conduct human rights and environmental due diligence across their supply and/or value chains.

Antonin Levy described recent case law decisions handed down in France regarding the implementation of the French Duty of Vigilance law and in particular on the domestic jurisdiction front.

Pierre-Louis Périn then shared his views on the latitude given to companies to establish their own guidelines and action plans to comply with the French Duty of Vigilance Law.

Aurélien Hamelle reminded that the enactment into hard law of corporate social responsibility remains a work in progress while companies are more and more being held accountable for their social responsibilities, especially by non-governmental organisations (“NGOs”).

*Hogan Lovells is currently setting up a roundtable discussion with clients by the end of January to discuss this European consultation. Businesses’ input will feed into a response to the consultation to be prepared and issued by the Hogan Lovells Business and Human Rights group. Please get in touch with a member of Hogan Lovells’ Business and Human Rights group or your usual Hogan Lovells contact if you are interested in attending or would like to discuss in more detail this consultation.

The Business and Human Rights landscape is shifting – be part of the conversation

The European Commission has opened an important new consultation. It asks about the possibility of introducing a mandatory duty for all companies operating in the EU to conduct human rights and environmental due diligence across their supply and/or value chains. The duty would be enforced either by national governments or through national courts.

A new legal duty of this kind could have significant implications for businesses. It could require companies to put in place and maintain processes to prevent, mitigate and account for adverse environmental and human rights impacts, including regarding labour rights and working conditions. Depending on the outcome of the consultation, the proposed duty could apply:

  • throughout companies’ supply chains, encompassing the entire network established to produce and distribute a product, including companies’ subsidiaries, suppliers and even subcontractors;
  • throughout companies’ value chains, encompassing entities involved across the full range of activities that add value to raw materials in designing, producing and delivering a product to a customer; and
  • not only to companies established in EU Member States, but also to third-country companies carrying on business activities in the EU.

Companies have a lot to gain in terms of managing sustainability-related risks, increased legal certainty and a level playing field in the sphere of sustainable corporate governance. However, a due diligence duty along the lines proposed would create a new and potentially very wide field of regulatory compliance risk. It would also potentially create liabilities to anyone facing human rights or environmental harms arising out of companies’ operations and broader value chains.

Hogan Lovells is currently setting up a roundtable discussion with clients before the end of January to talk about the Commission’s consultation. Businesses’ input will feed into a response to the consultation. Please get in touch with your usual Hogan Lovells contact or a member of Hogan Lovells’ Business and Human Rights practice if you are interested in attending.

Key questions we intend to discuss include:

  1. What are the benefits and disadvantages for companies of a new human rights-based due diligence duty? (Consultation Question 3)
  2. What should the content of a new due diligence duty be? (Consultation Question 15)
  3. How could companies’ – in particular SMEs’ – due diligence burden be reduced? (Consultation Question 16)
  4. Should new due diligence rules apply to non-EU companies operating within the EU?  If so, what link should be required to make these companies subject to the rules? (Consultation Question 17)
  5. How should a new due diligence duty be enforced? (Consultation Question 19)

We would also be glad to assist any businesses in preparing their own responses to the consultation. Anyone interested in doing so is invited to get in touch with their usual Hogan Lovells contacts or a member of Hogan Lovells’ Business and Human Rights practice.

EU adopts a global human rights sanctions regime

On 7 December 2020, the EU adopted a global human rights sanctions regime. No individuals have been designated yet. Going forward, this means that companies should ensure that they conduct sanctions screening on all counterparties and business partners against the EU asset freeze list, even if those third parties are not located in a country specifically targeted by an EU sanctions programme.

On 7 December 2020, the EU adopted a decision and a regulation establishing a global human rights sanctions regime. The new regime is inspired by the 2012 Magnitsky Act in the U.S., named after Russian lawyer Sergei Magnitsky who died of mistreatment in a Russian prison. Similarly the UK introduced the Global Human Rights Sanctions Regulations in July 2020.

In contrast to the U.S. and UK, the EU did not previously have a non-country-based sanctions programme to address human rights violations.

Council Decision (CFSP) 2020/1999 sets out key policy and principles binding on the EU Member States and Council Regulation (EU) 2020/1998 sets out more detailed provisions that are directly binding on any person subject to EU jurisdiction. The accompanying Council press release states: “For the first time, the EU is equipping itself with a framework that will allow it to target individuals, entities and bodies – including state and non-state actors – responsible for, involved in or associated with serious human rights violations and abuses worldwide, no matter where they occurred.”

According to the Council press release, the decision to establish an EU global human rights sanctions regime “emphasises that the promotion and protection of human rights remain a cornerstone and priority of EU external action and reflects the EU’s determination to address serious human rights violations and abuses”.

The regime covers serious human rights violations and abuses, including:

  • genocide;
  • crimes against humanity;
  • torture and other cruel, inhuman or degrading treatment or punishment;
  • slavery; and
  • extrajudicial, summary or arbitrary executions and killings.

The sanctions consist of:

  • an asset freeze for listed individuals/entities;
  • a prohibition to make funds or economic resources available to listed individuals and entities; and
  • a travel ban for listed individuals.

The regime targets:

  • individuals and entities responsible for or involved in serious human rights violations or abuses worldwide. It can also target individuals and entities associated with the perpetrators; and
  • it can target both state and non-state actors, regardless of where they are, and regardless of whether they commit violations and abuses in their own state, in other states or across borders.

The new regime will not replace existing geographic sanctions regimes, some of which already address human rights violations, but will enable the EU to target with greater flexibility and efficiency specific individuals responsible for human rights violations and abuses anywhere in the world.

As a result of these new measures, all funds and economic resources belonging to, owned, held or controlled by the targeted individuals and entities must be frozen, and no funds or economic resources can be made available, directly or indirectly, to or for the benefit of these individuals and entities. The measures can extend to non-designated entities that are more than 50% “owned” or “controlled” by the sanctions targets, and can also target individuals and entities “associated” with the sanctions targets. Going forward, this means that EU companies should ensure that they conduct sanctions screening on all counterparties and business partners against the EU asset freeze list, even if those third parties are not located in a country specifically targeted by an EU sanctions programme.

Next steps

Moving forward, it will be for the Council, acting upon a proposal from an EU Member State or from the High Representative of the EU for Foreign Affairs and Security Policy, to establish, review and amend the sanctions list. At this stage, no individuals or entities have been designated or publicly identified for potential listing under the new EU sanctions programme.

Please get in touch if you have any questions in respect of the EU global human rights sanctions regime.

You can read about the UK’s first sanctions designations under new global human rights sanctions regime here.

Switzerland: Responsible business initiative narrowly rejected despite gaining 50.7% of popular vote

The public referendum which took place on 29 November 2020 in Switzerland (see here  for further background information) rejected the proposed Responsible Business Initiative despite gaining 50.7% of the popular vote on 29 November 2020.

Due diligence obligation and liability for Swiss-based companies

Launched in April 2015 by a coalition of Swiss civil society organisations, the Responsible Business Initiative suggested the modification of the Swiss Federal Constitution to hold Swiss-based companies to account for human rights abuses committed abroad. Swiss-based companies would have been legally obliged to take into account respect for human rights in all their business activities, including activities conducted outside Switzerland, and may have faced associated liability and litigation risks attached to non-compliance with the obligation to carry out “appropriate due diligence”.

Under Swiss Law, a counter-proposal may be prepared by the Federal Council (i.e. Swiss Government) or the Swiss Parliament. The counter-proposal will eventually enter into force if accepted by the supporters of the initial proposal.

The Council of States (i.e. the Swiss Parliament’s upper house) and the National Council (i.e. the Swiss Parliament’s lower house) thus prepared diverging counter-proposals and the Swiss Parliament eventually issued a counter-proposal on 2 June 2020 which stood for a limited set of obligations concerning reporting and specific due diligence: the counter-proposal limits due diligence obligation to child labour and mining conflicts, with only public interest corporations being required to make a report.

Although the counter-proposal does not contain any liability rules for Swiss-based companies operating abroad, it foresees imposing a fine of up to 100,000 Swiss francs on any company violating the UN guidelines on business and human rights (UNGPs).

As the organisers of the Responsible Business Initiative did not withdraw their proposal, the Swiss due diligence initiative was set for public referendum on 29 November 2020.

Swiss public initiative rejected at ballot box

In Switzerland, a majority of both popular and cantonal vote is required for an initiative to pass. On 29 November, the RBI was narrowly rejected. While it reached 50.7% of the popular vote, it only received 8.5 of the required 12 regional majorities across the Swiss cantons.

As a result, the counter-proposal adopted by the Parliament will automatically enter into force in 2021. Civil society actors expressed their disappointment but recognised that the counter-proposal does at least support the responsibility of businesses and the respect of human rights and the environment.

Switzerland has now joined the ever-expanding list of countries that have enacted specific rules governing human rights due diligence, even if this obligation is strictly limited to certain topics. We will follow with great interest how the counter-proposal will be applied when it comes to the criminal sanctions for non-compliance with the UNGPs.

Christelle Coslin & Margaux Renard

Switzerland: a public referendum on human rights due diligence for Swiss-based companies

As expected, a public referendum as regards the Responsible Business Initiative (“RBI”) – i.e. a proposal launched in April 2015 by a coalition of Swiss civil society organisations on mandatory human rights due diligence for Swiss-based companies – will take place on 29 November 2020.

Due diligence obligation and liability for Swiss-based companies

The RBI takes the form of a suggested amendment to the Swiss Federal Constitution, which would result in the introduction of a new Article 101a “Responsibility of business” in the Constitution. Under the amendment, Swiss-based companies would be legally obliged to take into account respect for human rights in all their business activities, including activities conducted abroad, and may face the associated liability and litigation risks attached to non-compliance with the obligation to carry out “appropriate due diligence”.

Scope of due diligence obligation and liability for Swiss-based companies

Under Swiss Law, a counter-proposal may be prepared by the Federal Council (i.e. Swiss Government) or the Swiss Parliament. The counter-proposal eventually enters into force if accepted by the supporters of the initial proposal.

The Council of States (i.e. the Swiss Parliament’s upper house) and the National Council (i.e. the Swiss Parliament’s lower house) prepared diverging counter-proposals. While the Council of States’ counterproposal stood for a limited set of obligations concerning reporting and specific due diligence and contained no liability rules, the National Council’ counter-proposal focused on general parent company liability rules and broad due diligence obligations.

Although the organisers of the RBI stated they would withdraw their initiative if the stricter counter-proposal – with parent company liability rules and broad mandatory due diligence – were adopted, the Swiss Parliament voted on 2 June 2020 for the softer approach with due diligence obligations limited to child labor and mining conflicts and which does not contain any liability rules.

Swiss due diligence initiative set for a public referendum

As a result, the organisers of the RBI did not withdraw their proposal. Swiss voters will thus have to go to the polls this Sunday (29 November 2020) to decide whether the RBI should be accepted or rejected. If the RBI is dismissed by the Swiss population, the counter-proposal adopted by the Swiss Parliament would enter into force.

This means that, regardless of which of the proposal or counter-proposal prevails in the vote, Switzerland will definitely join the countries having enacted a body of rules regulating human rights due diligence next week.

 

The EU Commission’s study on options to regulate directors’ duties and corporate governance

The EU Commission recently published a study on options to regulate directors’ duties and corporate governance which argues that short-termism reduces long-term sustainability of European businesses. The purpose of such study is to contribute in reaching the United Nations Sustainable Development Goals (UNSDGs) adopted in 2015 and the objectives defined by the Paris Agreement on climate change.

In that regard, while communicating the European Green Deal, the EU Commission highlighted the fact that corporate governance should address the issue of sustainability in the decision‑making process.

Study on sustainability in EU corporate governance

In that context, the EU Commission recently published the study on options to regulate directors’ duties and corporate governance which argues that short-termism reduces long-term sustainability of European businesses.

According to the EU Commission’s study there is not any defined threshold above which one can state that the focus on short term is excessive. Short-termism is evaluated in relative terms by (i) assessing the evolution over the time span of the amount of net corporate funds being used for pay-outs to shareholders (in the form of dividends or shares buybacks) compared with the evolution of the amount used for the creation of value over the life cycle of the firm and (ii) comparing between different companies, sectors or countries

This study thus aims at (i) identifying the causes of short-termism in corporate governance and (ii) assessing their relationship with current market practices and/or regulatory frameworks as well as (iii) finding potential EU solutions, including through common EU rules.

As for the root causes of short-termism, the study points out seven “key problem drivers” which are grounded in EU regulatory frameworks and market practices. The first problem would be that directors’ duties and company interests are interpreted narrowly and tend to favour short-term maximisation of shareholder value. Moreover, the study identifies a growing pressure from investors to focus on short-term benefits rather than long-term investments. It also appears that companies lack strategic perspective over sustainability and their current practices do not address sustainability risks and impacts. The actual board remuneration structures and the current board composition would incentivise short-term financial returns and would not fully support a shift towards sustainability. In addition, corporate governance frameworks and practices would not take into account the long-term interests of stakeholders in the decision-making process, and there is an alleged lack of enforcement of directors’ duties regarding the long-term interests of the company.

EU intervention

The study thus identifies three specific objectives that should be pursued by any future EU intervention to tackle the issue of short-termism and its cross-border effects such as climate change and pollution: (1) strengthening the role of directors in pursuing their company’s long-term interest, (2) improving directors’ accountability for their business conduct and the sustainability of their corporate governance and (3) promoting corporate governance practices contributing in the sustainability of companies.

For these measures to be taken, the study favours a “hard legislative” option, that is to institute a minimum of common rules that would promote the creation of long-term value. These rules could be adopted on the basis of Article 50(1) and (2)(g) of the Treaty on the Functioning of the European Union (TFEU), which allows the EU to coordinate safeguards to protect the interests of companies’ members and other stakeholders to reach freedom of establishment. EU intervention could also be based on Article 114 of the TFEU, which gives the EU the competence to adopt measures to harmonise regulations to ensure the proper functioning of the internal market.

Likely positive impacts of EU intervention

The EU Commission foresees a number of positive impacts resulting from its new propositions. EU intervention would create more legal certainty and level playing fields as to the necessary measures that should be taken to achieve sustainability in corporate governance. It would also give more leverage to business partners to comply with human rights commitments at all stages of the supply chain. Moreover, the Commission maintains that reaching sustainable objectives in corporate governance would improve the productivity, the profitability and the attractiveness of EU companies. Framing long-term decisions could also make EU businesses less vulnerable to short-term economic and social changes and to sudden crises such as the COVID-19 pandemic. Finally, this would also benefit to the economy and to the society as a whole, as increasing investments for innovation, research and technological development would generate macro-economic growth and help the transition to sustainability.

A public consultation on sustainability and corporate governance should be held in the coming months to inform on the EU Commission’s legislative proposal in this regard. Businesses should keep an eye out for the potential enactment of new EU rules increasing directors’ duties which will likely impact the enforcement of businesses’ policies to prevent any adverse human rights impacts that may be associated with their activities.

 

Ongoing discussions at UN level on a draft international treaty binding businesses on Human Rights related due diligence and obligations: Major changes introduced by the Second Revised Draft

The Second Revised Draft of the legally binding instrument on business and human rights was released in August 2020 by the Chairperson of the Open-ended Intergovernmental Working Group on Transnational Corporations and other Business Enterprises with respect to Human Rights (OEIGWG). It is a step forward before the adoption of a UN Legally Binding Instrument in the field of business and human rights. Please see our previous reports on these discussions at the bottom of this post.

A broader scope

The Second Revised Draft includes State-owned enterprises in the definition of legal entities undertaking business activities which clarifies that domestic business activity is covered by the Draft Treaty. It also refers to “business relationship” instead of “contractual relationship”, a term formerly used in the Revised Draft which was perceived as a limitation to the multiple ways in which companies relate to one-another. Continue Reading

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Consumer IoT – European Commission initiates inquiry into the consumer Internet of Things sector

The European Commission (“Commission”) has launched an antitrust sector inquiry into the Internet of Things (“IoT”) sector for consumer-related products and services within the European Union. The Commission is looking to develop a better understanding of how this fast-moving sector works and some of the potential issues that may arise from a competition law perspective.  The regulator intends imminently to send requests for information to a range of players in this sector and already plans to publish a preliminary report on its findings in the spring of 2021. As such, the inquiry offers companies in the IoT sector an opportunity to steer the Commission’s approach to competition in this area.

Continue Reading