Mandatory Due Diligence – Threat or Opportunity?
Proposals on mandatory due diligence – part 7: written by Harmen Goudappel
In this blog we will continue to explore the different proposals on mandatory due diligence in Europe. After zooming in on the Dutch and German proposals and their relationships to the proposal for a European Directive in the last two parts of this series, this blog will focus on the differences between the Loi sur le devoir de vigilance (hereinafter: French Vigilance Law) and the European Directive. In that context, the main focus will lay on the scope of the two proposals.
The French Vigilance Law obliges companies of a certain size to draft a due diligence plan. The goal of this plan must be: the identification of risks and the prevention of severe violations of human rights and fundamental freedoms, serious bodily injury, environmental damage and health risks. Based on the UNGPs and the OECD-guidelines, the due diligence plan has to include the first five steps of the due diligence cycle, as worked out in the OECD Due Diligence Guidance. Furthermore, the company has to publicly disclose this plan and its implementation.
The personal scope of the French Vigilance Law is limited. Only companies that meet either one of the following criteria for two consecutive financial years are bound by the provisions of that law. Firstly, it applies to companies that employ at least 5.000 people and have their headquarters in France. Secondly, it applies to companies that employ at least 10.000 people and are headquartered outside of France. If these criteria are compared to those of the European Directive, it can be noticed that the threshold for applicability of the French vigilance law is higher than the threshold of the Directive. For applicability of the European Directive, companies need to employ at least 500 people and have a turnover of more than €150 million, or in case of businesses active in ‘high impact sectors’ (textiles, agriculture and minerals) at least 250 employees and a turnover of over €40 million. It is estimated that about 17.000 companies meet the criteria of the Directive, while only about 250 companies meet the criteria of the French Vigilance Law.
Besides the personal scope, it is also important to look at the scope of business activities covered by the due diligence obligation in both laws. That is because it determines how many other companies will be indirectly affected by the due diligence process through their relationship with a larger enterprise. The French Vigilance Law and the European Directive seem to be somewhat similar in this aspect. Both stipulate that due diligence must be carried out in relation to the company’s own activities, those of its subsidiaries and those of entities with whom there exists an ‘established business relationship’. However, for both laws it is not yet clear what this last concept exactly entails. In this way, potentially millions of companies will be involved in the due diligence obligation. It seems necessary to further define the concept in the draft of the European Directive, to ensure that the scope of the Directive will not be dependent on case law. Over time, the European Directive will also come into effect in France and equate potential differences.
To summarise, the personal scope of the French Vigilance Law is smaller than that of the European Directive, so less companies are obliged to conduct due diligence. However, without a clear definition, the term ‘established business relationship’ could have the effect of extending the due diligence obligation in both laws to many more companies. How this will eventually turn out, mainly depends on the European legislator.