Hogan Lovells

Could private equity funds be liable for human rights breaches by a portfolio company? A recent decision by the UK Supreme Court increases the likelihood of this outcome. This blog looks at the judgment in Vedanta Resources PLC and anor. v Lungowe and others [2019] UKSC 20, considers what it means in practice for private equity funds and provides some practical tips on how to manage human rights related risk.

The case

Vedanta involved claims brought by Zambian farmers against a UK mining company and its Zambian subsidiary in relation to environmental damage (for detailed analysis, please see our blog on HL Regulation). Prior to the case it was thought that a duty of care was only owed by a parent company for the acts of its subsidiaries in certain, limited, circumstances.

The judgement

The Supreme Court rejected such limitations and found that the test for parent company liability is no different to that which applies where A owes a duty to C for the actions of B. Such circumstances will include: where, in published materials, a parent holds itself out as exercising a degree of supervision and control of its subsidiaries, even if it does not in fact do so; and, where a parent company takes active steps, by training, supervision and enforcement, to see that a group policy is implemented by subsidiaries.

What does the judgment mean for PE funds?

  • The principles of liability of a parent for the acts of its subsidiaries could equally apply to a private equity fund being liable for the acts of its portfolio companies.
  • Claims could be brought against UK funds or other funds with assets in common law jurisdictions such as countries in Anglophone Africa, the Indian Subcontinent, Australasia and North America.
  • The existence of a duty of care will hinge on what the fund says publically and the extent to which it takes responsibility for supervision and control of the activities of the portfolio company which give rise to a harm.
  • The Vedanta judgment has increased the likelihood of a duty of care being owed by a fund for the acts of its portfolio companies but a successful claimant would still need to prove breach and causation.

What should PE funds do in practice?

  • Review ESG/human rights and sustainability policies (as well as any other policies which could be read to impose obligations on the fund to prevent harm to a third party).
  • Check obligations undertaken are clear, realistic and focussed on process (e.g. carry out due diligence according to UN Guiding Principles), not outcomes (e.g. zero tolerance of modern slavery or human rights impacts).
  • Audit and document how obligations are being discharged, paying close attention to international and industry standards.
  • Where carrying out such due diligence represents a significant new undertaking, you should start with the particular assets which you consider to pose the greatest risk to rights holders.

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