Adherence to CSR now key to deals

The rising potential of human rights cases and securities class-actions, along with some new Canadian regulations, show that if a company pays lip service to corporate social responsibility, it does so at its peril.

Indeed, lawyers tell me it’s becoming standard for them to include a review of a target firm’s public statements on CSR when they conduct their pre-transaction due diligence.

Digest that thought for a moment. Grandiose statements on CSR that might have once been dismissed as mere public relations fluff are now becoming red flags that could threaten pending M&A deals.

Due diligence traditionally focuses on flagging the legal risks that might emerge from a company’s contracts or financial obligations. A target company might express support for a set of voluntary third-party CSR protocols, but not give them much legal weight because they’re not binding contracts or laws. Yet signing on to these statements brings with it legal risk. A buyer will want to know whether a target company has lived up to its CSR commitments. Why buy a company that could carry with it the risk of a human-rights related lawsuit?

“Increasingly, there’s added value for lawyers to be able to spot those things while they’re doing traditional legal due diligence,” says Michael Torrance with Norton Rose Fulbright Canada LLP.

The importance of CSR for mining companies has changed rapidly. The government of Canada last year announced an “enhanced” CSR strategy that threatens to cut off diplomatic support to Canadian companies with operations overseas who fail to comply with some recognized international standards. We’ve also seen the RCMP and prosecutors charge Canadian companies with violations of anticorruption laws by allegedly bribing foreign officials at overseas operations.

But aside from government actions, mining companies are also under an increasing risk of private lawsuits. There are at least three of these cases before the courts. Toronto-based HudBay Minerals Inc. has been sued in Ontario on allegations that security personnel assaulted women at its mine in Guatemala. Vancouver-based Tahoe Resources Inc. was named in a suit that alleges the plaintiffs were shot at a protest near its mine in Guatemala. Three plaintiffs are suing Vancouver-based Nevsun Resources Ltd., alleging human rights violations at the firm’s Bisha gold mine in, as it is described in court records, “the rogue and essentially lawless state of Eritrea.”

None of those cases have advanced to trial and no allegations have been proven.

Firms may have a complete defence to any allegations. Even so, the issue should be whether companies are exposing themselves to potential claims by not keeping an eye on the CSR ball.

It’s not hard to picture how potential claims could expand beyond human rights and into hard dollars. If a company’s exposure to a human-rights claim hits its stock, you can see how that might trigger a securities class-action in which investors allege management made misstatements about the situation.

John Smith with Lawson Lundell LLP in Vancouver, says that as a general proposition, a company shouldn’t state what it’s going to do unless it plans to follow through. “That’s just good advice across the board,” Smith says. “Don’t say one thing and do another.”

That may seem ridiculously simple, but as with all things in law, things aren’t always as cut-and-dried as they seem at first blush. CSR is going through an interesting transition from public-relations exercise to something that triggers concrete legal liabilities.

Even then, however, it’s hard to pin down the legal responsibilities. It’s one thing for a public company to issue mandatory disclosure about events or risks that might be material to investors. But what about voluntary disclosures? What if a court determines that voluntary CSR compliance is akin to a form of advertising? The company making those statements would be held to the legal standard for false and misleading advertising. That’s a different legal test from those that might arise in the tort claims we’ve seen.

“CSR reporting has legal liability in a number of different manners,” says Stephen Pike with Gowling Lafleur Henderson LLP. “We’re not there yet in terms of understanding what those mean,”

While the precise nature of those legal responsibilities might be unclear, there’s no doubt there is some legal liability when a company makes a CSR commitment. The obvious response is to abide by the statements made.

Or as Mike Pickersgill with Torys LLP told Legal Post in December: “The magic rule is that if you build a system, you need to actually carry it out.”