Header graphic for print

Focus on Regulation

New jurisdiction rules for Duty of Vigilance disputes

Four years after the enactment of the Duty of Vigilance Law, the French National Assembly adopted in first reading on 4 May 2021 the Climate and Resilience bill which clarifies in its Article 71 ter the question of which French court has jurisdiction over disputes relating to the Duty of Vigilance Law.

Background

The Duty of Vigilance for parent companies was introduced into the French Commercial Code by the Duty of Vigilance Law on 27 March 2017. The statute provides for French corporations with over 5,000 employees in France and/or over 10,000 employees worldwide (including affiliates’ employees) to set up, publish and implement a “vigilance plan”. The objective of such plan is to identify, anticipate and prevent human rights violations that might result from the activities of the parent company, its subsidiaries and controlled affiliates, as well as suppliers and subcontractors.

Case law uncertainty

As the Duty of Vigilance Law does not provide for any jurisdictional rules for disputes in such matters, this has given rise to conflicting interpretations in case law: while the Versailles Court of Appeal considered that commercial courts had jurisdiction on 10 December 2020, the Nanterre Judicial Court declared it – in its capacity to hear claims in civil matters – had jurisdiction on 11 February 2021.

French Minister of Ecological Transition, Barbara Pompili, explained that it would be useful to clearly specify whether Duty of Vigilance disputes fall under the jurisdiction of civil or commercial courts, to avoid seeing cases which progress is delayed due to pleas for lack of jurisdiction.

Upcoming solution

The French “Climate and Resilience” bill (the “Bill”) – resulting from the proposals of the Citizens’ Climate Convention which provides for various provisions ranging from energy renovation to the fight against land artificialisation, including, notably, the reinforcement of environmental criminal law – has been seen as an opportunity to put an end to the conflicting case law.

On 17 April 2021, during the review of the Bill by the French National Assembly, the MPs adopted several amendments as regards the Duty of Vigilance, and especially with respect to jurisdiction.

On 4 May 2021, the Bill was adopted in first reading by the French National Assembly. It provides, in its Article 71 ter, that a few designated civil courts will have jurisdiction with respect to matters related to the Duty of Vigilance. Future Article L. 211-21 of the French Code of Judicial Organisation should state that: “One or more specific designated civil courts shall hear actions relating to the Duty of Vigilance based on Articles L. 225-102-4 and L. 225-102-5 of the French Commercial Code”. It is planned that this amendment will be supplemented by a Decree designating the civil courts with jurisdiction, a priori the Paris Civil Court, and possibly that of Nanterre.

The Bill will now be submitted to the French Senate for consideration. The final vote on the Bill is expected in September 2021.

Please contact a member of Hogan Lovells’ Business and Human Rights group or your usual Hogan Lovells contact if you wish to discuss this development. We stand ready to assist companies from all industry sectors to assess how to adjust their processes and operations in this context.

Christelle Coslin & Margaux Renard

Indigenous peoples’ rights and large-scale development projects: Avoiding unexpected risks in the Americas

Indigenous peoples’ rights and large-scale development projects: Avoiding unexpected risks in the Americas

  1. Introduction

Many countries across the Americas are home to large indigenous populations: Mexico has around 25.7 million people, Guatemala, 6.5 million, Bolivia 5.4 million, the US 4.3 million and Canada, 1.7 million.  Such indigenous populations often live in territories that are earmarked for construction projects, which may lead to inevitable friction with state governments and subsequently, developers and investors.

The construction of large-scale construction projects such as hydroelectric power stations, electric pylons, dams, highways, pipelines, cement factories, and various extractive industries requires the acquisition, lease or transfer of land and/or natural resources to facilitate commercial investment, but such land may be inhabited or designated to indigenous communities.

Further, in many countries, some indigenous communities enjoy special protective rights over their land and/or natural resources under both domestic and international law.  Perhaps most integral to indigenous populations’ rights is the United Nations Declaration on the Rights of Indigenous Peoples (resolution 61/295) (the “Declaration“).  In particular, Article 19 of the Declaration provides that

States shall consult and cooperate in good faith with the indigenous peoples concerned through their own representative institutions in order to obtain their free, prior and informed consent before adopting and implementing legislative or administrative measures that may affect them“.

Article 32 of the Declaration further provides that:

States shall consult and cooperate in good faith with the indigenous peoples concerned through their own representative institutions in order to obtain their free and informed consent prior to the approval of any project affecting their lands or territories and other resources, particularly in connection with the development, utilization or exploitation of mineral, water or other resources […] States shall provide effective mechanisms for just and fair redress for any such activities, and 24 appropriate measures shall be taken to mitigate adverse environmental, economic, social, cultural or spiritual impact.”

The Declaration therefore poses a considerable risk of causing delay and disruption to construction and engineering projects in the Americas, with a further resulting risk to international investment in those projects and territories.

To minimize the risk of that delay and disruption, and in order not to compromise international investment, developers should be aware of, and ensure compliance with, the relevant domestic and supranational regulatory frameworks that affect the rights of indigenous populations.  Such frameworks (and other legislation) implemented in Panama and Mexico to protect the rights of certain indigenous communities, and their subsequent impact on the development and construction of infrastructure projects, are described below.

  1. Preferential Access to Natural Resources

There has been regular friction between Panama’s indigenous communities, in particular the Ngöbe Buglé, and the Panamanian government since the discovery of Panama’s hydroelectrical potential in the 1970s.  In 1997, as a consequence of significant political pressure from the Ngöbe Buglé, the government passed Law 10, which established the Comarca Ngöbe Buglé, a semi-autonomous region in which the community were, for example permitted to elect their own officials, (referred to below as the “Shire“, being the English translation of “Comarca”).  Notably, under Article 10 of Law 10,  the Ngöbe Buglé were given preferential access to natural resources:

The sale of private estates, as well as existing improvements within the Shire, may be carried out as long as it is offered as the first option to the Ngöbe-Buglé Shire. . . . If this option right is not used and the transaction is perfected, the offeror will be empowered to sell to third parties, but for a price not lower than that offered to the Shire […]  (emphasis added).

Only land that had been privately-held before 1997 could be sold to private parties.

In Álvarez y Marín Corporación S.A v Panama, an ICSID Tribunal considered a developers’ requirement to comply with the Ngöbe Buglé’s entitlements to preferential access and Law 10 and other domestic protections more generally.

In 2009, a Costa Rican developer entered into an agreement for the acquisition of four private estates in Panama for the purpose of building an ecotourist project.  The acquisition was structured so that a special purpose vehicle, Desarrollo Ecoturístico Cañaveral, S.A. (“DECSA“), would purchase the estates from the relevant sellers, with the developer then buying shares in DECSA to the extent it would be the de facto owner of the estates.

Pursuant to Article 10 of Law 10, the owners of the four private estates were first required to offer their land to the Shire, but if the Shire rejected the opportunity to make a purchase they could then sell their estates to a third party, but for a price not lower than the price offered to the Shire.[1]

In the event, and despite the sellers and developer’s obligation to comply with Law 10, the estates were offered to the Shire, and later following the Shire’s rejection of the sales, DECSA, at the following prices:

Estate Number Price offered to the Shire (US $) Price offered to DECSA (US $)
86 75,000 70,000
443 70,000 55,000
788 15,000 12,000
949 65,000 60,000

 

Following the sale of the four estates to DECSA, the developer took possession of the land and hired local personnel to set fences and to survey the lands.  However, certain leaders of the Shire publicly cast doubt on the lawfulness of the land acquisition. The media echoed this news., which led to the government conducting investigations into the sale of the estates, culminating in a report which concluded that there were irregularities in the acquisition process.[2]  The report provoked a wave of indignation among the Ngöbe Buglé, and the occupation of the properties.

Alvarez y Marin subsequently issued proceedings,  seeking to enforce their rights as investors through ICSID arbitration against Panama under the Central America-Panama Free Trade Agreement and the Panama-Netherlands Bilateral Investment Treaty.  In particular, the developer argued that the government report frustrated its project, and deprived the investment of any value.

The Tribunal found that the four estates were located within the Shire, and further that their acquisition did not comply with Article 10 of Law 10. The estates were clearly offered to the Shire at a higher price than the price offered to DECSA. The Tribunal found that the developer’s failure to comply with  Law 10 was so grave that the foreign investors lost the international protection granted by investment treaties.[3]

The decision in Alvarez Marin demonstrates the need for investors to obtain specialist advice to ensure awareness of and compliance with even the most basic of local laws; in this case, the developers should have been aware that the price it paid for the four estates could not have been lower than the price offered to the Shire . The failure to obtain proper domestic advice creates unsurmountable risks and even severe financial loss.

  1. Indigenous consultation

In addition to signatories to the Declaration’s obligation to obtain the express consent of any indigenous communities prior to the approval of any development project that would affect that communities’ lands or territories, various states have also implemented domestic legislation requiring states to engage in consultation with indigenous communities prior to the commencement of projects too.

The Second Chamber of the Mexican Supreme Court established that the right to an indigenous consultation is a fundamental prerogative to safeguard the free determination of communities, and their cultural rights. The Chamber found the consultation necessary when certain situations have a significant impact on indigenous groups, including:

  • the loss of territories and traditional lands;
  • eviction from their lands;
  • resettlement;
  • the depletion of resources necessary for groups’ physical and cultural subsistence;
  • the destruction and contamination of groups’ traditional environment;
  • negative health and nutritional impacts upon groups; and
  • social and community disorganization.

Elsewhere, indigenous communities’ right to consultation is enshrined in various other international and national legislation, including:

  • American Convention on Human Rights: “Pact of San José, Costa Rica” signed at San José, Costa Rica, on 22 November 1969, Art. 23;
  • International Labor Organization Convention 169 on Indigenous and Tribal Peoples Convention of 1989 (ILO Convention No. 169), Art. 6;
  • Constitution of Colombia, Arts. 330 y 104;
  • Constitution of Mexico, Art. 2.B.II and IX
  • Hydrocarbons Law of Mexico, Art. 120;and
  • Electric Industry Law of Mexico, Art. 119.

Although the Hydrocarbons Law of Mexico and Electric Industry Law of Mexico were both only passed in 2014, Mexico had already entered into international treaties which provided for indigenous communities’ rights of consultation, and international developers were required to be mindful of such treaties.  Such requirements led to Dutch pension fund manager PGGM’s abandonment of an opportunity to invest in the Eólica del Sur wind power project in Oaxaca, Mexico after several years of delays caused by community resistance, including due to a lack of consultation with the indigenous population.  PGGM subsequently withdrew €250 million from the project.[4]

Although the Eólica del Sur project has now been completed, PGGM’s withdrawn investment illustrates the risks posed by a developer’s non-compliance with legislation governing indigenous communities’ rights; such legislation should not be underestimated.

  1. Next steps

It is clear from the above two examples that developers should be mindful of indigenous communities’ rights when planning construction projects in the Americas.  To avoid or mitigate risks, developers should consider whether a project may engage indigenous people’s rights at the outset of development, and whether such communities are entitled to special protective rights: do they have preferential access to natural resources?  Should they be consulted in advance of the project?  Will the state agency responsible for the consultation conclude the process in a timely manner?  Developers should further be aware of who should carry out any indigenous consultation and who their counterpart will be.  Further, it is important to consider the scope of any force majeure clause, particularly with respect to the specified list of events said be outside a developer’s control, for example acts or omissions of the state agency responsible for the consultation.  In any case, the best advice for a developer is to anticipate risks and understand the international and national framework governing a project.

[1] 253-254

[2] 288, 290

[3] 296, 309-314, 326, 330, 334

[4] Renewables Now, “Dutch pension fund quits much-delayed 396-MW wind project in Mexico” https://renewablesnow.com/news/dutch-pension-fund-quits-much-delayed-396-mw-wind-project-in-mexico-report-523075/

Growing convergence towards a hard law duty of care in the EU

Recent years have seen a general move towards increased accountability and responsibility obligations imposed on businesses to respect human rights and prevent adverse impacts throughout the value chain. Nearly ten years after the adoption of the UN Guiding Principles on Business and Human Rights (“UNGPS”), mandatory human rights due diligence initiatives are on the rise both at the Member States and EU levels.

Within Member States

France propelled itself to the forefront of BHR regulation by imposing binding obligations on companies in relation to human rights due diligence, with the very broad law on the “duty of vigilance of parent companies and main contractor companies” back in 2017.

In summary, this statute provides that French corporations with over 5,000 employees in France and/or over 10,000 employees worldwide (including the employees of affiliates) are to set up, publish and implement a “vigilance plan”. The objective of such plan is to identify, anticipate and prevent human rights violations that might result from the activities of the parent company, its subsidiaries and controlled affiliates, and suppliers and subcontractors.

To ensure effective protection of fundamental rights, individuals’ safety and environment, the statute provides that parent companies may be held liable in the scope of civil proceedings for any damage resulting from non-compliance, i.e. failing to prevent human rights violations through the effective implementation of a well-designed vigilance plan.

Other countries around the EU are contemplating adopting similar routes with some support from the business community:

  • Last February, 60 companies addressed a letter to the Belgian government, asking for a national legal framework compelling enterprises to take responsibility in human rights and environment-related matters.
  • The same suite of events happened in Luxemburg. In the context of parliamentary debates about a potential Luxembourgian legislation on due diligence and the duty of care in human rights matters, 32 companies have expressed themselves in favour of the adoption of such a legal framework.
  • In early March, Germany took an even bigger step and is close to joining the circle of European countries having adopted a “hard law” legislation on the duty of care (see our previous post in this regard here). According to the text adopted by the German Council of Ministers , companies with more than 1,000 employees will be given a permanent duty of care. In case of misconduct, companies must expect fines between € 100,000 and € 800,000. Companies with more than € 400 million in annual turnover must expect fines of up to 2% of their annual turnover. If the text is approved by the Bundestag (German Federal Parliament), the law is expected to be implemented in two stages: first it will come into force on 1st January 2023 for companies with more than 3,000 employees, then on 1st January 2024 for those with more than 1,000 employees.

Latest developments at EU level

This shift from soft to hard law is also being observed at the level of the European Union itself, where an ambitious legal project on due diligence and duty of care is being discussed.

The European Commission opened an important 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. A Hogan Lovells team led by Christelle Coslin, Liam Naidoo, Julia Marlow and Kevin O’Connor has submitted a response to the European Commission consultation on their sustainable corporate governance initiative. You can read the response in full here.

Concurrently, on 10 March 201, members of the European Parliament approved an own-initiative report proposing that companies be responsible for analysing human rights risks in their supply chain and publishing their due diligence strategy. This would apply to multinational corporations, small companies listed on the stock exchange, and small companies operating in high-risk sectors. In addition, all companies seeking access to the European single market would be asked to prove that they respect human rights and environmental due diligence obligations.

The results of the European Commission’s consultation and the European Parliament’s initiative are likely to lead to new EU legislation in this area.

Please get in touch with a member of Hogan Lovells’ Business and Human Rights group or your usual Hogan Lovells contact if you wish to discuss this evolution. We stand ready to assist companies from all industry sectors to assess how to adjust their processes and operations in this context.

 

 

Current Status Supply Chain Act (Germany)

The German government is planning to introduce a national Supply Chain Act. A corresponding draft bill was approved by the cabinet on 3 March 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.

It shall be assessed by 30 June 2024 whether the bill should also apply to companies with less than 1,000 employees.

What would this mean for affected companies?

Companies affected by the bill would be obliged to take appropriate measures to ensure that their suppliers also comply with environmental and 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 conduct a risk analysis and take appropriate measures to prevent human rights violations. Companies would further have to provide access to a reporting mechanism and issue a declaration of principles on respect for human rights. They 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) that would also have to be published on the companies’ websites.
    • For indirect suppliers in the chain down to the raw material supplier, a risk analysis would only be required if the German company became aware of potential violations. According to the draft bill, an indirect supplier is any supplier that is not a direct supplier and whose supplies are necessary for the manufacture of the company’s product or the provision and use of the relevant service.
  • If companies became aware of a human rights violation, they would have to take appropriate remedial actions immediately. 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 whether supply chain risks were identified. If companies identified risks, they would have to provide further detail on how they analyze supply chain risks, incorporate prevention measures into business policy and take remedial actions and establish a reporting mechanism. They would also have to provide information on their declaration of principles.

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 heavy fines of € 100,000 to € 800,000. Companies with an annual turnover of more than € 400 million must expect fines of up to 2% of their annual turnover.

Additionally, companies receiving a fine of more than € 175,000 may be excluded from public tenders for up to three years.

Furthermore, the draft bill intends to simplify the possibility of legal actions in case of a human rights violation. Specifically, according to the draft bill, individuals claiming human rights violations shall be able to entrust NGOs with the judicial enforcement of their rights.

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.