How the OECD Guidelines’ National Contact Point (NCP) complaints procedure poses reputational risks to companies, including in M&A transactions

Companies that do not understand and take appropriate steps to manage the risks of adverse human rights impacts in their operations or supply chain are increasingly running several potentially serious risks: regulatory, commercial, litigation and reputational.

One way in which the reputational risks for companies of underperformance on human rights is becoming more acute is through the mechanism of complaints made to National Contact Points (NCPs) established under the OECD Guidelines for Multinational Enterprises on Responsible Business Conduct (the “OECD Guidelines” or “Guidelines”).

In this Insight, we take a closer look at the role and relevance of NCPs and their potential impact on companies, including a recent NCP finding related to an M&A transaction.

What are the OECD Guidelines and what do they require?

The OECD Guidelines are a “soft law” instrument that set the international standard for how companies should approach responsible business conduct, covering areas such as human rights, labour rights and the environment. Aligned with the UN Guiding Principles on Business and Human Rights (UNGPs), the OECD Guidelines set the expectation that businesses respect human rights, meaning they should avoid infringing on the human rights of others and should address adverse human rights impacts with which they are involved.

Under the UNGPs / Guidelines, to fulfil these duties, businesses should undertake risk-based due diligence to identify, prevent, mitigate and account for how they address adverse human rights impacts in their own business and in their supply chain. The due diligence should be appropriate to their size, the nature and context of their operations and the severity of the risks of adverse human rights impacts.

Where companies have caused or contributed (through a business relationship) to adverse impacts on human rights, they have a duty, under the UNGPs / OECD Guidelines, to provide an appropriate remedy to those affected – whether directly or by using their leverage on a business partner for it to provide one.

What are NCPs and why do they matter?

Countries adhering to the OECD Guidelines, including the UK, must set up NCPs to promote the Guidelines and to resolve issues that arise from alleged non-observance. NCPs are a form of non-judicial grievance mechanism. On receiving and accepting a complaint, an NCP can use non-adversarial methods, such as mediation, to facilitate an agreement between parties; make recommendations to the company to better align with the Guidelines; and/or make a determination that the company’s conduct failed to observe the Guidelines’ expectations.

In practice, complaints about corporate breaches of the OECD Guidelines can be raised to the NCP, and the NCP deliberates and issues a public statement. A statement can detail the issues raised, the procedures the NCP used to examine the issues and the NCP’s conclusions, as well as recommendations to the companies on the implementation of the OECD Guidelines. Though not a legal process, NCPs’ statements are widely reported and have reputational consequences. Very often a complaint to an NCP brings parties together to agree a settlement prior to any statement being issued.

The NCP complaint procedure casts a wide net. Any individual or organisation with a “legitimate interest” in the matter in question can submit a case to an NCP. Potential respondent can be any business enterprise operating in or from a country that adheres to the OECD Guidelines. NCPs can hear complaints about both a company itself as well as its supply chain.

In the UK, the UK government is planning a refresh of the UK NCP – updating its name to the Office for Responsible Business Conduct and working to make it more effective in helping victims of corporate malpractice through a non-judicial grievance mechanism, as well as in supporting businesses to integrate responsible business practices. According to the UK NCP website, there are currently 11 open complaints currently that the UK NCP is handling.

What is the significance of the recent Norwegian NCP finding?

In June, the NCP in Norway issued a final statement in which it concluded that Aker BP's due diligence in its merger with Lundin Energy (now Orrön Energy) did not meet the human rights due diligence expectations of the Guidelines. The complaints were filed by eight civil society organisations on behalf of approximately 200,000 South Sudanese people; they claimed that Lundin Energy was involved in serious and repeated human rights violations in Sudan between 1997 and 2003, and that the merger undermined Lundin Energy’s ability to provide an appropriate remedy in respect of adverse impacts on human rights.

The Norwegian NCP concluded that while the Aker companies had human rights policies in place and conducted business, financial and legal due diligence on the transaction—which encompassed some aspects of human rights due diligence—the due diligence did not adequately and independently address the risk that the transaction would have an adverse impact on the victims’ right to an effective remedy. The NCP concluded that human rights due diligence in connection with M&A must have a broader scope when the circumstances indicate that the transaction may have other negative impacts on the human rights of those affected: in this instance, the scope of the human rights due diligence must cover the risk of negative impacts on the right to an effective remedy for the victims.

Based on its conclusions, the NCP recommended in relation to the merger that Aker BP should carry out human rights due diligence related to the transaction in line with the Guidelines – among others, by reviewing the steps that were taken; assessing the company’s role and involvement with and engaging with stakeholders to identify, negative impacts; and putting in place mitigating or remedial actions. The NCP stated that as an example Aker BP could use its leverage to encourage its business relationship to participate in processes to provide for remedy—here, that could entail Aker BP seeking to engage with Orrön Energy and its main owners to facilitate a process where possible remedial actions are explored.

The NCP also recommended, in general, that the Aker companies should ensure effective implementation of policies on human rights due diligence in relation to M&A, and highlighted again the importance of meaningful engagement with stakeholders as part of such due diligence.

What does this mean for companies?

The NCP complaints procedure, though not a legal penalty, is an avenue for real reputational damage to companies. It also poses potentially significant administrative and financial implications for companies. NGOs and other interested parties may use the NCP procedure as one part of an advocacy campaign, which may ultimately result in formal legal proceedings against companies in certain jurisdictions.

M&A can be a high-profile event and will often attract scrutiny from the public, investors and regulators. Human rights (and environmental) due diligence is becoming a more mainstream part of M&A transactional due diligence, given the risks involved for buyers. The Norwegian NCP example discussed in this article suggests that human rights due diligence should be used in transactions as a matter of course. In the context of M&A, the UNGPs state, “Human rights due diligence should be initiated as early as possible in the development of a new activity or relationship, given that human rights risks can be increased or mitigated already at the stage of structuring contracts or other agreements, and may be inherited through mergers or acquisitions”. (See UNGP Principle 17, Commentary.)

To minimise possible exposures, companies with the help of legal advisers should regularly review their policies and practices—both in their own operations (including foreign subsidiaries) and their value chains—against the Guidelines to ensure alignment. The point about value chains is important, as NCPs have shown an increased willingness to hear complaints about companies’ supply chains.

Also important is the extent of the due diligence and the necessity to go beyond the normal scope of business and legal due diligence so far as it relates to human rights. In other words, the expectation of the Guidelines is that companies will not only consider the economic impact and liabilities derived from known or alleged violations (and as in this case, the ability to contractually and structurally ringfence them within Lundin Energy), but also to gain a full understanding of the impact of the transaction itself and how it may affect victims’ rights to an effective remedy after the transaction has concluded.

Non-judicial, or “soft-law”, mechanisms can be due diligence blind spots that reach beyond the balance sheet. Smart acquirers should not only consider what an asset is worth but should also assess and identify who might be watching. A due diligence process that is found lacking can point to broader governance issues and risk management weaknesses. Legal advisers can advise on how to incorporate appropriate NCP-related grievance assessments into due diligence frameworks, as well as on mitigation strategies including public remediation commitments and stakeholder engagement protocols.

A public finding of non-compliance with the Guidelines can have a tangible effect on a company’s M&A readiness, including:

• impact on investor confidence – this might be reflected in access to and cost of capital, and could lead to divestment by an investor with a responsible investment policy;
• share price;
• complications or timing impact for post-transaction integration; and
• shareholder activism and demands for changes in management or strategy.

As ESG considerations increasingly shape deal strategy, M&A professionals must treat complaints mechanisms like NCPs not as peripheral concerns, but as central indicators of a target’s social licence to operate.

For further guidance and tailored advice on anything discussed in this briefing, please get in touch with Kerry Stares or with your usual Charles Russell Speechlys contact.