1.8.5 Due diligence in business operations - human rights compliance

In order to test company conduct against (the new) CSR standards, a company can perform a due diligence investigation, i.e. a type of audit. The audit can be done throughout the whole organisation and can be extended towards its international supply chain. What we see with CSR evolving is a shift from using due diligence as a means to purely manage financial risks to a means for reputation management including human rights and corruption issues.

The term due diligence' is used for all sorts of processes, sometimes comprising an investigation pursuant to a legal duty, at other times because it is good business practice to do so. Due diligence basically refers to the level of effort and the quality of the investigation employed. The meaning originates from the American legal notion of applying all possible means to avoid non-compliance with legislation. It is a mature method in the securities law practice where a bank has to demonstrate that it has done its utmost to investigate the affairs of the company whose shares will be offered by the bank on the capital market. The ultimate purpose of the investigation is to ensure that a true and accurate (not-misleading) description of the company's business is presented to the market in the prospectus, i.e. the sales pamphlet.

Generally speaking, corporate and commercial law codes do not impose upon companies a duty to perform a due diligence assessment prior to entering into a transaction. However, it is common that commercial law requires a seller to disclose material information about the object of the sale to a potential buyer. Having said this, a buyer is also usually expected to actively solicit the seller for all information that he, as prospective buyer, considers to be of relevance to the transaction at hand. There is a large body of case law on disclosure and enquiry

duties.1

In the corporate practice of mergers and acquisitions, due diligence also plays an important role. Buyers conduct a due diligence investigation into the target company's business activities in order to understand how and where this target company does business, and to uncover the potential for synergies. In addition, due diligence aims to detect any undisclosed risks or liabilities. Due diligence examinations are conducted by professionals trained in different disciplines, e.g. lawyers and tax lawyers, accountants and bankers, environmental experts, actuaries and pension specialists, and experts with a technical or commercial background. They usually work as a team. Performing a (full) due diligence assessment when managing a corporate deal is considered best practice'. Acquiring a company without following this route can raise questions in respect of good business judgment.2

In international human rights law, courts and human rights bodies have applied the ' due diligence test' to judge the level of effort a State has put in: has the State enacted relevant laws and undertaken the necessary action to effectively protect the human rights of the people in its territory? The concept has been utterly stretched, i.e. a State is expected to actively protect the life of people by all means possible.

Regarding CSR, the Ruggie framework, mentioned in section 1.6.2 supra, also calls for due diligence by businesses in order to ensure adequate respect for human rights. In chapter 7, the Ruggie approach is explained and linked to existing corporate due diligence practices. The chapter aims to show that the human rights theme can be relatively easily embedded in corporate practice. The American Lacey Act banning the import, the trade in and the sale of illegal timber in the US and the draft EU Directive on illegal timber, both referred to in section 1.6.1 supra, also utilise the due diligence concept. Due diligence seems to be appropriate as a proactive means to fulfil new CSR standards and to prevent irresponsible corporate behaviour.