Germany:
Update On German Compliance Legislation: Supply Chain Due Diligence Act Is Adopted, Corporate Sanctioning Act Fails
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At the end of the legislative period, important decisions on
central compliance legislative proposals of the German Federal
Government were made:
- On June 11, 2021, the German Federal Parliament
(Bundestag) adopted the “Act on Corporate Due
Diligence in Supply Chains” (Gesetz über
unternehmerische Sorgfaltspflichten in Lieferketten)
(Supply Chain Due Diligence Act
(Lieferkettensorgfaltspflichtengesetz;
“LkSG“)). The Federal
Council (Bundesrat) endorsed the Acton June 25, 2021. The
Supply Chain Due Diligence Act will enter into force on January 1,
2023. It requires German companies with 3,000 employees (from 2024:
1,000) to implement human rights-related and environmental related
due diligence standards (risk management, risk analysis, preventive
measures, remedial measures and grievance procedure) along their
international supply chains (see our Client Alert of March 29, 2021). It will
considerably increase the due diligence obligations of many
companies and have far-reaching effects on their risk management
and compliance systems. Through a change in the legislative
procedure, the scope of application concerning foreign groups of
companies was extended significantly and will now also include
branch offices of foreign companies with more than 3,000 (and from
2024 on: 1,000) employees.
Further impetus, especially with regard to the civil and criminal
liability of companies, can be expected from the European Union in
the future. The EU Commission works on a European Supply Chain
Directive. - Another compliance legislative proposal, however, failed. The
parties of the government coalition could not resolve the last
outstanding issues with regard to the Corporate Sanctioning Act
(Verbandssanktionengesetz)
(“VerSanG“; see Client Alert of April 30, 2020, and Client Alert of September 25, 2020). The
VerSanG was meant to introduce in Germany for the first time a
quasi-criminal sanctioning of companies, and, among other things,
define statutory requirements for internal investigations. It can
be expected that after the federal elections in fall 2021, the
attempt will again be made to create an Act focused on the
sanctioning of companies.
SUPPLY CHAIN DUE DILIGENCE ACT
Review
Already on March 3, 2021, the Federal Cabinet had adopted what
was then still called the Due Diligence Act, or the Supply Chain
Act (“Government
Draft“) (see our Client Alert of March 29, 2021). Following a
controversial political debate, the government factions of the
CDU/CSU and SPD in the Bundestag agreed on numerous changes to the
Government Draft. The Bundestag has adopted the Supply Chain Due
Diligence Act with those changes.
Changes in the Legislative Procedure
The most important changes relate to the following aspects of
the Supply Chain Due Diligence Act:
- Scope of application: The scope of application
of the Act was expanded. While the Government Draft only covered
domestic companies with more than 3,000 (from January 1, 2024:
1,000) employees, now also domestic branch offices of foreign
companies are included that typically employ more than 3,000 (from
January 1, 2024: 1,000) employees (Sec. 1 (1) LkSG). When
calculating the number of employees, for domestic companies,
employees seconded to foreign countries must also be taken into
account (Sec. 1 (1) LkSG).
By extending the scope of application of the LkSG to branch offices
of foreign companies, a demand from German business associations
was addressed, which feared competitive disadvantages and demanded
a ‘level playing field’. One question left open in the
legislative procedure concerns whether and how, not only the
domestic subsidiaries or branch offices, but also the foreign
parent company must observe the obligations arising from the
LkSG. - Protected legal positions (geschützte
Rechtspositionen): The list of environment-related obligations
was extended and now includes the import and export of hazardous
waste as well as trading in waste (Sec. 2 (3) LkSG). In this
way, violations of the Basel Convention on the Control of
Transboundary Movements of Hazardous Wastes and Their Disposal are
covered by the LkSG. - Own business area: According to the LkSG, when
a violation of protected legal positions or environment-related
obligations has occurred or is imminent, companies must, in
principle, take remedial measures in their own business areas that
end the violation (Sec. 7 (1) LkSG). The definition of the own
business area of a company was expanded to cover group-related
matters. While the Government Draft limited the company’s own
business area to the legal entity of the company, the LkSG now
stipulates that in group-related matters, the business area of the
parent company shall also include the activities of subsidiaries,
if the parent company exerts a “determinative influence”
(bestimmender Einfluss) on the subsidiary (Sec. 2 (6)
LkSG). The LkSG’s concept concerning group-related matters is
not aligned with the concept and legal standard (controlling
influence (beherrschender Einfluss) under German Stock
Corporation Act (Aktiengesetz) and defines
independent criteria for the assessment under LkSG. -
According to the recommended resolution and the report of the
Bundestag Committee for Employment and Social Affairs
(Bundestagsausschuss für Arbeit und Soziales),
“determinative influence” must be ascertained according
to the circumstances of the individual case. It requires that
exerting influence is legally possible. Moreover, economic,
personnel, organizational, and other legal aspects must be taken in
account. As examples for a “determinative influence,” it
names: (1) large majority shareholdings in subsidiaries, (2) a
group-wide compliance system, (3) assumption of responsibility for
process management in subsidiaries (for example, supply chain
management), (4) overlapping of personnel in the management,
or (5) delineation of a business area similar between parent
company and subsidiary. This could become particularly relevant,
among things, for parent companies with a matrix organization. - Civil liability: The LkSG states explicitly
that a violation of the due diligence obligations defined in the
Act does not establish a stand-alone civil law liability of the
company (Sec. 3 (3) LkSG). According to the recommended resolution
and the report of the Bundestag Committee for Employment and Social
Affairs (Bundestagsausschuss für Arbeit und
Soziales), the Act cannot be interpreted as so-called
protective law (Schutzgesetz), the violation of which
could result in claims for damages according to
Sec. 823 (2) German Civil Code
(Bürgerliches Gesetzbuch – BGB). The Bundestag
Committee for Employment and Social Affairs underlined in its
recommended resolution and its report that the LkSG should
primarily be enforced through
administrative proceedings and regulatory
offence procedures. However, according to
Sec. 3 (3) LkSG, civil law liability that already
existed under applicable law before the LkSG entered into force
shall remain unaffected. Whether, and under what circumstances,
such civil law liability exists is legally highly controversial and
very much depends on the individual case. - Due diligence obligations and risk analysis:
The Bundestag Committee for Employment and Social Affairs
emphasized in its recommended resolution and its report that,
according to Sec. 3 (1) LkSG, companies are indeed obliged to
conduct due diligence, but they must not guarantee that protected
legal positions are not violated. It underlined in its recommended
resolution and its report that only measures “within the scope
of what is actually feasible and appropriate” must be taken.
The complete prevention of all human rights risks is not required
under the LkSG. Companies must do neither that which is legally nor
factually impossible (for example, in the case of untraceability of
commodities when buying at commodity exchanges). A further relief
relates to Sec. 5 (1) LkSG, according to which companies must
analyze and identify the human rights and environmental risks in
their own business area and at direct suppliers. According to the
final version of Sec. 5 (3) LkSG, the results of the risk analysis
do need to be communicated to the relevant decision-makers in the
company. However, unlike the Government Draft, the LkSG does not
establish a separate obligation of relevant decision-makers to take
into account the results of the risk analysis when making
decisions. - Remedial measures: The remedies measures to be
taken in the case of violations are set out in more concrete terms.
- The Government Draft of the LkSG already required that remedial
measures in the company’s own business area in Germany must end
the violation of positions protected under the LkSG. In addition,
now the obligation is established that the remedial measures in the
own business area in group-related matters (that is, specifically,
in subsidiaries or at legally non-independent locations) and abroad
must end the violation “as a rule” (Sec. 7 (1) LkSG).
This is supposed to take into account the circumstance that abroad,
the actual and legal, or, respectively, statutory framework
conditions are not always given to end the violation. In these
cases, it should remain possible for the company to pursue business
activities abroad despite the violation of legal positions
protected under the LkSG. Nevertheless, remedial measures must be
taken in order to minimize the violation. - The LkSG specifies that, in principle, a business relationship
with a direct supplier must not be terminated because the State in
which the direct supplier is located has not ratified or
implemented into national law the contracts under international law
covered in the LkSG (Sec. 7 (3) LkSG), and that the direct
supplier is therefore not subject to any statutory obligations in
this respect. This circumstance must, however, be included in the
risk analysis by the companies, and must be addressed through other
appropriate preventive and, as the case may be, remedial
measures.
- The Government Draft of the LkSG already required that remedial
- Indirect suppliers: The LkSG now defines more
precisely when companies must fulfill due diligence obligations
with respect to indirect suppliers on an ad hoc basis. Such ad hoc
due diligence obligations must be fulfilled when the company gains
substantiated knowledge, i.e., when factual indications exist, that
make it appear likely that there is a violation of human rights or
an infringement of an environmental obligation at indirect
suppliers (Sec. 9 (3) LkSG). Furthermore, the term appropriate
preventive measures is more precisely defined with respect to the
indirect causer of the violation. Such appropriate preventive
measures include the implementation of control measures, support in
the prevention and avoidance of a risk, and the implementation of
branch-specific or cross-industry initiatives that the company has
become part of.
Preview
For an efficient implementation within a company, the new
regulations of the LkSG should be compared with corresponding
requirements of other legal systems (e.g., the French “loi de
vigilance” from the year 2017, the “Child Labor Due
Diligence Law” of the Netherlands from the year 2019, as well
as the British “Modern Slavery Act” from the year 2015)
and the common features and the differences identified. The
management should take precautionary measures to constantly monitor
the internal risk management and to adjust it to the new
requirements accordingly. Whether the Federal Office for Economic
Affairs and Export Control (Bundesamt für Wirtschaft und
Ausfuhrkontrolle), the authority responsible for enforcement
and monitoring, will make use of the opportunity to publish
practical cross-sector or industry-specific handouts, remains to be
seen.
CORPORATE SANCTIONING ACT
(VERBANDSSANKTIONENGESETZ)
For the time being, there will still be no Corporate Sanctioning
Act in Germany. The relevant regulatory framework continues to be
defined through the Administrative Offences Act
(Ordnungswidrigkeitengesetz – OWiG), which already enables
a sanctioning of companies in the case of company-related crimes
and administrative offences.
Although there was consensus at the level of the Federal Cabinet
with respect to the draft of the Corporate Sanctioning Act, in the
end the concerns of the parliamentarians could not be totally
eliminated.
In view of the international tendency (among others, at the
level of the OECD (Organization for Economic Co-operation and
Development)) towards more stringent criminal responsibility for
companies, it is to be expected that the next federal government
will again put a variant of the Corporate Sanctioning Act on its
agenda.
The authors would like to thank Mr. ass. iur. Martin
Scheuermann for his assistance in the preparation of this
contribution.
Because of the generality of this update, the information
provided herein may not be applicable in all situations and should
not be acted upon without specific legal advice based on particular
situations.
© Morrison & Foerster LLP. All rights reserved
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