Mergers and acquisitions

Mergers and acquisitions can change a company’s human rights risk landscape. Human rights issues identified through M&A due diligence may lead to a decision not to proceed with a transaction. However, more often these issues can be managed.

The earlier in the due diligence process human rights risks are identified, the better they can be managed. Early identification enables a company to assess both the risks and the capability of the target to manage them, to identify mitigation or other management options, and to incorporate the cost of these options into the price of the deal. Early identification also enables a company to take action to address the risks immediately following completion of the deal. Benefits to the company include improving the efficiency of the transaction, reducing costs (particularly regarding management of ongoing or legacy human rights issues), preserving he long-term sustainability of assets and ensuring a human rights action plan is built into the post-transaction integration process.

Business practitioners commonly confront a number of obstacles to integrating human rights into M&A processes. These include the short timeframe for due diligence, the traditional focus of due diligence on risks to the business (rather than risks to people) and opposition to increasing the number of matters that need to be addressed during the due diligence process. Undertaking a gap analysis between existing M&A processes and the UNGPs can help identify priorities and potential obstacles.

In some situations, it will not be possible to thoroughly assess human rights risks due to limitations imposed by the pace of the transaction and confidentiality concerns. In these situations, HSE performance can offer a rough barometer for human rights risk in the transaction. The earlier human rights considerations are included in the process, the more time there will be to assess – even at a high level – any human rights challenges associated with the target company.

It will also be important to raise awareness with, and build the capacity of, key teams to effectively integrate human rights into M&A processes. Sensitise key colleagues to the need to incorporate a focus on human rights risks to people, provide guidance on how to do this and discuss the value to the business of doing so.

Ideally, a representative of the human rights or corporate responsibility team will be ‘at the table’ from the earliest phases of M&A decision-making. It takes perseverance, but can enable human rights considerations to be incorporated into the M&A process from the beginning.

Whether or not this is in place, seek to strengthen human rights commitment and know-how amongst colleagues involved in the different phases of an M&A process. Think broadly about who may need to know what. For example, lawyers lead significant portions of M&A due diligence processes and can help build leverage in the company’s relationship with the target. Business development teams also play a key role. A mandate from the Board or Executive Committee can help build buy-in.

Using specific examples – ideally from the company’s own experiences – can help bring relevant colleagues and decision-makers on board. Some companies find it helpful to collaborate with colleagues from key teams to explore their role in integrating human rights into M&A processes. Guidance and processes can be co-developed with these teams to create a sense of ownership and buy-in to the end product. For example, guidance may cover how to identify the human rights implications of a transaction, assess (and cost) opportunities to manage any identified human rights risks and ensure these are included in the integration plan.

There can be tensions between human rights considerations and business opportunities. In these situations, it can be helpful to avoid human rights being perceived as inhibiting business development and growth. Recognise that those driving deals want to find solutions to problems and focus on what the company can do to manage the risks.

For more, see: Raising awareness, training and capacity building

Post-transaction integration plans (including priorities and timeframes) are critical to ensure effective management of human rights risks. Some business practitioners observe that integration is often the hardest part of M&A.

Identify any gaps in human rights risk management and areas where improvement is needed, then set priorities. Agree a clear allocation of responsibility for addressing gaps and strengthening key areas to a specific team, and maintain oversight of progress. Be realistic about the timeframe that will be needed to bring management of human rights risks into line with your company’s expectations – particularly where the target has a vast value chain. Cultural integration and organisational change also take time – you can’t fully integrate a company in 12 months.

Remember that the due diligence and negotiation processes offer valuable opportunities to assess the target’s human rights capacity – and to build the plan for integration into the agreement. 

Target companies may have significant expertise managing human rights risks. Look for opportunities to learn from their approach. Target companies may also have valuable internal talent and expertise that can be drawn on during the post-merger integration phase and beyond.