Category: Slovenia

Stock incentive schemes granted by listed or unlisted companies such as s stock options, stock appreciation, restricted shares and stock awards are a common way of rewarding employees. Employees participating in stock incentive schemes are subject to individual income tax.

The Financial administration of the Republic of Slovenia (FURS) has recognised an increasing trend in the payouts of such rewards from abroad. Since the taxation of these types of rewards changed recently they have issued guidance on the tax treatment of various payouts.

Namely, under the old rules, if a Slovenian employer did not bear the cost of rewards that were granted to its employee from abroad, he was not responsible for paying the taxes or social contributions on those rewards. The personal income tax and social security contributions had to be declared and paid solely by the individual – recipient of the reward. Since 2018, Slovenian employers have been obliged to pay all the social security contributions regardless of whether they were the ones bearing the cost of a reward from abroad or not. This represents not only an additional burden of paying social security contributions for the employer, but it also authorizes FURS to collect information on all rewards and to determine the social security contributions and personal income tax due.

According to Article 5 of the Personal Income Tax Act (ZDoH-2), an employee reward paid out from abroad is deemed as a benefit in kind derived from an employment relationship and therefore taxable as employment income in Slovenia.

Obligations regarding social security contributions are regulated by the Pension and Disability Insurance Act (ZPIZ-2). Specifically, Article 144 provides that any additional employment income (such as awarded shares) is included in the basis for calculating social contributions.

There is however a distinction between the obligation to report, calculate and pay social security contributions and personal income tax, which may lie with different legal entities depending on who bears the cost of such employee rewards: 

1. IF THE REWARDED SHARES ARE PAID BY A FOREIGN COMPANY:

When a foreign parent company rewards Slovenian employees in its subsidiary without charging these costs to the subsidiary, the Slovenian employer shall pay social security contributions and income tax for any kind of fringe benefits, which includes equity compensation rewards.

In this case, the Slovenian employer is not regarded as the payer of tax for such income but has to pay the social contributions on the employer’s and the employee’s behalf. Such an arrangement requires an agreement with the employee in advance so that any social security contributions paid by the employer on behalf of the employee are deducted from the employee’s salary.

The personal income tax is not paid through payroll but through a special monthly tax return of the employee that received the reward.

2. IF THE SLOVENIAN EMPLOYER REIMBURSES THE FOREIGN COMPANY FOR THE COSTS OF REWARDED SHARES:

If an income is provided to the employee by a foreign company and is borne by the Slovenian employer, who is considered to be the payer of tax for such income, then this employer is obliged to calculate the payment of personal income tax as well as social security contributions. 

SUMMARY

In stock incentives schemes where stock rewards are granted from abroad and the work is performed in Slovenia, there is a need to assess whether the Slovenian employer is considered to be a payer of tax for such reward or not.

If not, the personal income tax is not paid through payroll but with a special monthly tax return of the person liable for taxation. Also, the income will need to be grossed up if the net salary of the employee does not cover his tax and social security liabilities arising from the reward.  Social security contributions on the other hand are paid directly by the Slovenian employer in both cases, regardless of whether the cost of the share reward is paid by a foreign company or not.

By Janja Ovsenik, Partner and Head of the Tax Department, Miro Senica & Attorneys

 

Foreign investors of all types were increasingly interested in Life Science (LS) companies even before COVID-19 emerged. It is no wonder that Slovenian LS companies are of particular appeal, since this highly innovative community significantly contributed to Slovenia being ranked 21st in this year’s Bloomberg Innovation Index. Some say COVID-19 catalyzed the new deals this year, but they were more likely fostered by the new investment opportunities that keep popping up with each innovative solution offered by the relatively small (and relatively inexpensive) companies in Slovenia. The race to acquire these innovative scale-ups and start-ups has become increasingly competitive.

When structuring a deal and drafting the transaction documents, lawyers need to predict the worst-case scenarios, consider all matters, and prepare for every possible development. The current pandemic increased the need for this further and now we are expected to anticipate previously almost-un-imaginable changes of circumstances. Of course, it would hardly make sense to prepare for an alien invasion or a meteor strike, but, in the current climate – which will likely last well into 2021 – the areas that buyers and sellers of LS businesses in Slovenia focus most on when making a deal seem to be:

Financing of the Transaction. Due to the economic downturn, buyers often face difficulties obtaining financing (even if pre-approved) and a seller will not venture into negotiations unless the buyers can provide assurance they are financially sound. This is especially important in the split exchange and completion steps.

IP Due Diligence. In the LS sector, especially with start-ups and scale-ups, it is the IP value that buyers most want to acquire. Due to certain pitfalls in Slovenia’s IP protection system, it is no longer sufficient to limit the risks within the SPA – if IP is not protected or is insufficiently protected, the signing stage is never reached. The focus on IP assets is so strong that our office has developed specialized tools for IP vetting in LS transactions.

Issues with Valuation. Supply and demand for LS products and services no longer seem to follow the usual patterns. This of course affects the valuation processes, and these effects were further magnified during the lock-down in Slovenia (and the EU) which severely disrupted supply chains.

Adverse Material Changes. In the current market, investor/buyer appetite is increasingly likely to change, and MAC clauses are becoming more and more complex. Buyers now want an exit strategy not just in case of lower profitability or regulatory changes, but (and this is not limited to LS) also in case the IP becomes obsolete. Even more, they wish to introduce different types and scopes of force majeure clauses that, before, were rarely included in a transaction. It is becoming more and more difficult for sellers (and their lawyers) to limit the cases in which buyers can terminate.

Increasing Numbers of Asset Deals. Rather than acquiring a distressed business, buyers seek to set up the transaction as an asset purchase, which has the advantage of allowing them to carve out liabilities and obtain only the desired assets, such as IP and tech solutions.

Foreign Investment Regime. Based on our communications with the Ministry of Economic Development and Technology, it is clear that it does not wish to hinder direct foreign investment in Slovenia, but the relevant notification has already become a standard condition precedent and does affect most transactions in the LS sector.

While the general situation in the market remains uncertain – some even say unstable – due to the potential fundamental economic and social changes in the air, there are clear indications that M&A activity in the LS sector will at least remain at the current level. For Slovenia, this is not only an important sector, but also a very lucrative one. Hopefully, recent transactions will incentivize innovation, and thus complete the circle.

By Ales Lunder, Partner, and Sasa Sodja, Attorney at Law, CMS Slovenia

This Article was originally published in Issue 7.12 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

CMS has advised BeeIN on its successful participation in a two-phase public tender to obtain access to 5G frequencies organized by the Communications Networks and Services Agency of the Republic of Slovenia.

According to CMS, 5G frequencies will be used for the provision of critical machine-to-machine business communications. After two days of bidding, BeeIN closed the public auction — the second stage of the tender — with a successful bid of EUR 970,000.

BeeIN is a subsidiary of Iskratel, a provider of ICT solutions for the digital transformation of the telecommunication, transport, public safety, and energy industries. Iskratel is headquartered in Kranj, Slovenia, and currently employs over 900 people. 

The CMS Slovenia team included Partner Ales Lunder and Associates Tamara Zajdela and Robert Kordic.

“There is a lot going on at the moment, politics-wise,” says Rojs, Peljhan, Prelesnik & Partners Partner Ana Grabnar. “One of the coalition parties left the coalition and joined opposition parties in filing for a no-confidence vote for the government – that took place this week.”  The opposition did not gather the necessary majority; “surprisingly it gathered even fewer votes than predicted,” she says.

“The result is, rather confusing, as the current government is now formally a minority one, but de facto it seems it enjoys the support of the majority and will likely finish the term,” Grabnar points out. The next elections take place in about a year. 

Meanwhile, the focus is still on combating the coronavirus, which hit Slovenia quite hard in the second wave. Most legislative activity is thus primarily related to anti-corona measures (including restrictions on foreign investors in order to protect public interest projects), but Grabnar says there is movement in a few other areas as well. “There have been some recent changes to the Companies Act, and the Competition Act is set to be updated soon as well,” Grabnar says, noting that the activity is mainly related to the effort to harmonize Slovenia’s legal framework with that of the EU. “Some country-specific additions to the Companies Act include new restrictions on establishing entities in Slovenia,” she says, “the list of restrictions now includes some additional criminal acts or violations of tax and labor law.” Grabnar reports that the additions seem reasonable but will create an “additional bureaucratic burden for foreign entities establishing companies in Slovenia due to the obligation of filing necessary proofs.”

In addition, she says, the “environmental law permitting procedures are up for streamlining as well,” and that legislation designed to enable this is in the works.

Finally, Grabnar reports that infrastructure projects – some of which were commenced before the pandemic – are moving along “nice and strong.” According to her, “construction, logistics development, heating plant refurbishing and the like – it’s all going well and there is activity in the market.” She concedes that Slovenia’s unemployment rate was “a bit higher” this January than it was in December, or January of last year, but she says that “there are upticks expected.” According to her, “the real question is what will happen after the adopted anti-corona measures run out.”

Aleksandra Jemc Merc has been appointed Managing Partner at Jadek & Pensa in Slovenia.

According to Jadek & Pensa, Jemc Merc succeeds Jure Levovnik in the role, and she will manage the firm together with its founders Sreco Jadek and Pavle Pensa.

According to the firm, “Aleksandra Jemc Merc is the third longest serving partner at Jadek & Pensa, second only to the two senior partners/founders in tenure.” Jemc Merc’s primary areas of focus are IP Law and IP-related disputes, foreign investments, and corporate matters. She graduated from the University of Ljubljana Faculty of Law and has been with Jadek & Pensa since 2003.

In response to the COVID-19 pandemic, Slovenia swiftly introduced certain measures in the field of banking with the goals of promoting the liquidity of Slovenian businesses and stimulating the banks to support the country’s economic recovery. Such measures included mandatorily available 12-month moratoria on bank loans (further supported by a smaller-sized EUR 200 million state guarantee scheme for the moratoria-affected amounts), and a larger-scale EUR 2 billion state guarantee scheme for certain new bank loans. However, such measures proved less popular that expected.

According to the information shared by the Bank of Slovenia, by the end of June 2020, corporate borrowers filed moratorium applications for only approximately 5.6% of the total number of corporate loans, and the total amount of deferred liabilities in the period amounted to a modest EUR 365.4 million. Moreover, while by the end of June 2020 Slovenia’s banks reportedly received 1,200 applications for new liquidity loans, in a total amount of EUR 668 million, by mid-July 2020 only three new loan transactions had been backed by the state guarantee, worth a total of just EUR 16.5 million.

The modest success of these measures can be attributed to several factors.

The Slovenian regulations on mandatory moratoria left certain very material questions open to interpretation, such as how the moratoria should be treated in view of prudential requirements applicable to banks, what interest rates should be applied in case of margin ratchets, how to effect moratoria for loans secured with state or quasi-state guarantees where the banks are not allowed to change loan terms, and how the banks can achieve legal certainty in assessing whether or not the borrower’s application is grounded under the threat of high fines. The banks also faced certain incompatibilities between the national rules and the relevant EBA guidelines.

All of the above ambiguities, combined with the need to make significant adjustments to the banks’ IT systems, contributed to long approval processes. Consequently, many (particularly corporate borrowers) preferred negotiating private moratoria on a bilateral basis.

Implementing the state’s EUR 2 billion state guarantee scheme appears to have been even more challenging. Under the initial set of rules governing the scheme, it was (among other things) not clear how the banks would be enabled to check when the quota of EUR 2 billion is used up, which is obviously material for loan approval decisions; what was meant by the rule that the guarantee shall not exceed the loan term (which contradicts the essential purpose of a guarantee); and how to apply the unclear requirement that “bank and the state shall sustain losses proportionally and under the same conditions.” Additional uncertainty was created both by the possibility that instead of receiving a guarantee payment in cash the bank would receive state bonds (which from the perspective of prudential requirements may be less beneficial); and by the excessive penalty provisions providing that in case of borrower misrepresentations (which the bank cannot influence) the bank will lose the guarantee and may be required to not only return the benefit, but even to pay default interest on it.

However, deficiencies in the law were not the only hindering factor. According to Slovenian banks, ever since the epidemic the demand for liquidity loans has been objectively low. First, businesses have received several other state incentives, such as subsidies for employees who were temporarily waiting for work, payment of certain social contributions for employees, and so on. Second, companies have been reluctant to incur additional loans, as no matter how cheap, they still need to be repaid. If a company does not know if, when, and how it will be able to compensate for lost orders, its ability to repay is unpredictable as well.

Since the measures were first adopted, Slovenia’s Government has adopted (and corrected) certain implementing regulations, remedying some of the uncertainties. Significant implementation efforts have been rendered by the SID bank (the Slovenian export and development bank which was entrusted with handling the operative tasks on behalf of the State) in cooperation with Ministry of Finance, the Slovenian Banking Association, and the Slovenian banks. Following these developments, the guarantees should generally qualify as CRR-eligible collateral, and, consequently, the state-guarantee-backed loans should become more attractive for Slovenian banks.

It is hoped that the legislative framework concerning the state-backed guarantees is now sufficiently evolved to encourage the banks to support the liquidity of Slovenian businesses and economic recovery, particularly in the event the economic situation deteriorates further due to the second wave of the epidemic.

By Mia Kalas, Partner, Selih & Partners

This Article was originally published in Issue 7.11 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

Iris Pensa, Borut Leskovec, and Domen Romih have been promoted to partner at Jadek & Pensa.

In the same promotion round, Nastja Merlak was promoted to Managing Associate.

Iris Pensa, who joined the firm in 2008, heads the Labor Law practice at Jadek & Pensa, and also specializes in the fields of Constitutional and Human Rights law. According to J&P, “apart from being an experienced litigator and advisor to both local and international clients, she also acts as mediator. At Jadek & Pensa she is responsible for acting in accordance with the ten principles of the UN Global Compact from the field of human rights, labor standards, environment, transparency, and anti-corruption, which she bears in mind in all her services and advice to clients.” Pensa has an LL.M. from the University of Ljubljana. 

J&P describes Borut Leskovec as having “many years’ experience and a long list of references in the fields of business dispute resolution, in particular shareholder disputes and M&A related disputes, such as squeeze-outs.” According to the firm, “Borut also heads Jadek & Pensa’s Public Procurement practice and is an established professional in the field of public procurement law and public procurement-related disputes. He is focused on alternative dispute resolution and negotiations, and favors forward-looking and value-creating solutions to business-related disputes.” He too is a graduate of the University of Ljubljana. 

Domen Romih heads J&P’s Tax practice. Before joining J&P in 2016, he spent two years with BDO Savetovanje and eight years with Simic & Partnerji. He holds an LL.B. from the University of Maribor. 

Information on record-high gun-jumping fines, imposed by national competition protection authorities, flooded the law-oriented news over the past years. It seems that countries like Poland (e.g. case Gazprom), France (e.g. case SFR-Altice), the UK (e.g. case PayPal), Mexico (e.g. case BAS Projects Corporation and other companies), and even Zimbabwe (e.g. case Innscor Africa) are all following the pattern of enhanced supervision of merger notification obligation and pre-closing activities of the parties, involved in M&A, and increasing amounts of fines.

Even though the gun-jumping is not specifically defined in EU competition regulation, it is used in all Member States, including Slovenia, concerning mergers. The most typical example of gun-jumping occurs when a threshold, prescribed by national law or the Merger Regulation for merger notification, is met, however, the acquiring company fails to notify merger to national competition protection authority or, in case of transaction with EU dimension, it fails to notify merger to EU Commission. The term gun-jumping is also used for a situation, when acquiring company does not respect the so-called “standstill obligation” and effectuates the transaction pre-closing, i.e. before obtaining the merger clearance.

Different types of pre-closing activities representing gun-jumping can be recognized not only as a breach of Merger Regulation but also as a breach of Article 101(1) of the Treaty on the Functioning of the European Union.

As in several countries worldwide, increasing focus on sanctioning the gun-jumping can also be detected in EU Commission decisions since 2017. Namely, in 2019 EU Commission fined company Canon with EUR 28 million fine due to implementation of the acquisition of Toshiba Medical Systems Corporation before notification to and approval by the Commission. A year before, in 2018, the EU Commission fined Netherland based company Altice with EUR 124.5 million fine, for the same violations in the acquisition of telecommunications operator PT Portugal.

How about Slovenia?

As in the other EU Member States, merger notification to the Slovenian Competition Protection Agency (Agency) is required in Slovenia when certain thresholds, prescribed by the Prevention of Restriction of Competition Act (Act) are met due to M&A transaction. The Act also lays down the standstill obligation, prohibiting the acquiring company to effectuate the transaction before obtaining the merger clearance.

But does the Agency fixate to pre-closing conduct of companies in M&A transactions as other competition watchdogs worldwide and does it follow the same practice of escalating fines?

As the review of recent Agency’s decisions shows, yes.

Since 2012 there were six mentionable cases in which the Agency imposed fines for gun-jumping. All of them sanctioned failure to fulfil mandatory merger notification obligation and breach of the standstill obligation.

In 2012 the Agency imposed two fines for gun-jumping, namely a fine of EUR 48,677.98 to the company PUP in the acquisition of KARBON and a fine of EUR 108,589.36 EUR to the company IGEM concerning the acquisition of the company PUP.

In 2014, the Agency detected gun-jumping in the acquisition of the company Pršutarna Lokev and fined Celjske mesnine with a fine in the amount of EUR 157,000, as well as in the acquisition of PCK, where it imposed a fine of 208,752 to Topdom.

Interestingly, all of the above fines were significantly lowered by the District Court of Ljubljana, namely in all cases by half and in the case of Topdom to a total of EUR 49,703.

The most notorious case of gun-jumping in Slovenia was the acquisition of company Costella by Agrokor in 2016. the Agency imposed a fine in the record amount of EUR 53,9 million, which was decreased to EUR 1 million by the District Court of Ljubljana in 2020. However, the court’s decision is not yet final as both, Agrokor and the Agency announced an appeal. 

A pattern of increasing fines imposed for gun-jumping can thus be detected also in Slovenia. However, in all cases, the Agency detected gun-jumping only when a company failed to notify merger, but so far there was no case when the Agency would sanction only the breach of the standstill obligation. Despite this, we can expect that the Agency will continue to intensify its control of pre-closing conduct of companies in M&A transactions. Therefore, special attention should be paid not only to the notification obligation but in all phases of the transaction: from the disclosure of sensitive data in the due diligence process, drafting of covenants on the ordinary course of business in the interim period down to the preparation of integration of companies’ businesses.

By Maja Subic, Head of Competition Law Practice, and Nina Krajnc, Associate, Miro Senica and Attorneys

The need for social distancing has come to the fore in 2020. Due to the global pandemic of the coronavirus disease, we had to suddenly find different solutions in our everyday life to make as little physical contact with each other as possible. Most areas of our daily lives were affected by some adjustments and the operation of corporate bodies of the company has been no exception to the changing reality.

To facilitate the participation of shareholders at the general meeting, the Slovenian legislature introduced the possibility of so-called electronic general meetings into Slovenian law already in 2009. The main characteristic of electronic general meetings is that shareholders can attend the general meeting by electronic means without their physical presence.

Only a few companies have implemented the possibility of holding electronic general meetings into their Articles of Association, thus electronic general meetings have not been frequently carried out in practice.

A real and genuine need to organise general meetings without the physical presence of shareholders came to the forefront in 2020 as a result of circumstances not directly related to the economic or political aim of promoting the involvement of shareholders in the corporate decision-making process as was the initial intention of the law in 2009.

In November 2020 the Slovenian legislature adopted the Act Determining the Intervention Measures to Mitigate the Consequences of the Second Wave of COVID-19 Epidemic (hereinafter “Intervention Act”) which introduced the option of “virtual” general meetings. The reason for complementing the existing regulation of (electronic) general meetings was to enable general meetings in the era of the epidemic when the rules of social distancing must be observed. The principal difference between the electronic and the virtual general meeting is that the virtual general meeting is fully carried out in the digital environment. Hence, the introduction of the virtual general meeting represents an important new development of Slovenian law that requires additional attention.

The Intervention Act now provides that the option of holding the virtual (and electronic) general meeting does not have to be stipulated in the company’s Articles of Association. With the consent of the supervisory board, the management can decide that the general meeting will be held virtually without the physical presence of shareholders or their proxies and other participants. To carry out a virtual general meeting, the management has to determine the rules relating to such general meeting which have to be made available to the shareholders.

The virtual general meeting can be carried out only under certain conditions. Firstly, the company has to ensure the transmission of the video and audio of the entire general meeting in real-time. The company also has to arrange the requisite conditions for determining the identity of shareholders or their proxies. Furthermore, the shareholder voting process has to be possible by the use of electronic means and the conditions for secure electronic communication have to be provided. Finally, the management has to ensure that shareholders can exercise their right to be informed about the company’s affairs by the use of electronic means.

The Intervention Act also sets forth exemptions concerning the challenging of the resolutions which were adopted at the virtual general meeting. Namely, immediate notification of the intention to challenge a resolution is not required at the virtual general meeting. Also, resolutions which were adopted at the virtual general meeting cannot be challenged based on alleged infringement of rights resulting from malfunctions of technical means, unless such technical malfunction was the result of serious negligence or intent by the company convening the virtual general meeting. Challenging the resolutions based on an alleged infringement of the shareholder’s right to be informed also cannot rest solely on the restrictions of such right that are a result of carrying out the general meeting in virtual form.

The introduction of the virtual general meeting should be considered as a welcome improvement of Slovenian legislation. On the other hand, it should be pointed out that the Intervention Act limits the possibility of convening virtual general meetings only to the time of the COVID-19 epidemic. Since virtual general meetings can attract and encourage a wider circle of shareholders to participate in a company’s decision-making process and determine its goals, thereby contributing to the overall corporate governance of Slovenian companies, virtual general meetings should be considered as an option also in the future post-epidemic times, which will hopefully come very soon.

By Katja Sumah, Partner, and Luka Rzek, Associate, Miro Senica and Attorneys

Supply chains have been in focus throughout 2020, and not only thanks to COVID-19. Earlier this year, the European Commissioner for Justice, Didier Reynders, announced that in 2021 the Commission would propose legislation on mandatory corporate due diligence covering human rights and environmental risks across a business’s supply chain. The discussion around the introduction of a new (harmonised) aspect of corporate accountability comes at a time when certain Member States, including France and the Netherlands, have already adopted their own (national) legislation on mandatory human rights due diligence in recent years.

More recently, in September 2020 the European Parliament’s Committee on Legal Affairs published a report together with a proposal for the adoption of a Directive on corporate due diligence and corporate accountability. This newsletter briefly summarises the key features of this far-reaching draft directive.

Key points of the draft directive

What is the objective of the proposed directive?
The draft directive is aimed at preventing and mitigating adverse human rights, governance and environmental impacts throughout an undertaking’s entire value chain, as well as ensuring that undertakings can be held accountable for these risks and that anyone who has suffered harm in this regard can effectively exercise the right to obtain remedy.

According to the draft directive, establishing an EU-wide due diligence framework would create a “level-playing field” and could foster the emergence of a “global standard for responsible business conduct”. To this end, the draft directive establishes minimum requirements for undertakings to identify, prevent and mitigate appropriate risks occurring throughout their value chain.

Which businesses would the regime target?
The proposed framework would cover:

• all undertakings governed by the law of a Member State or established in the territory of the Union, as well as
• limited liability undertakings governed by the law of a non-Member State and not established in the territory of the Union when they operate in the internal market selling goods or providing services.

The regime would apply to all undertakings (including those providing financial products and services), regardless of their size or sector of activity and of whether they are publicly owned or controlled undertakings. Member States may, however, decide to exempt micro-enterprises.

What risks are covered?
The undertakings would be required to perform due diligence of their value chain within the following risk areas:

• Human rights risks, defined as impacts that may impair full enjoyment of internationally recognised human rights as expressed inter alia in the International Bill of Human Rights, Charter of Fundamental Rights of the EU, key ILO conventions, as well as national constitutions and laws recognising or implementing human rights.
• Environmental risks, understood as impacts that may impair the right to a healthy environment, such as climate change, air and water pollution, deforestation, loss of biodiversity and greenhouse emissions.
• Governance risks, defined as impacts that may impair good governance of a country, region or territory, including corruption and bribery, as well as illegal campaign contributions or failure to comply with the applicable tax legislation.

The due diligence obligation should encompass an undertaking’s entire value chain, not only its own operations. The notion of “value chain” seems to have a larger scope than “supply chain”, encompassing all entities with which the undertaking has a direct or indirect business relationship (upstream and downstream, inside or outside the EU), and which either (a) supply products or services that contribute to the undertaking’s own products or services, or (b) receive products or services from the undertaking.

What action is required?
Undertakings would need to set up a structured compliance system and carry out an ongoing risk assessment of their operations and business relationships to see if they cause or contribute to any of the relevant risks. If no risks are identified, the undertaking should publish a statement in that regard, along with its risk assessment, which must be reviewed if new risks emerge.

If risks are identified, then a due diligence strategy must be established in which identified risks should be specified together with a prioritisation policy where all risks cannot be addressed at the same time. Value chain due diligence should be “proportionate and commensurate” to the undertaking’s specific circumstances, including its size, capacity, resources and leverage. The undertakings would inter alia need to indicate the policies and measures they intend to adopt to address identified risks, and to ensure by means of contractual clauses and the adoption of codes of conduct that their business relationships put in place and carry out appropriate policies in line with their due diligence strategy. Certain information about the undertaking’s value chain would also need to be publicly disclosed.

Stakeholder involvement
The undertakings would need to engage in consultations with stakeholders (particularly trade unions) when establishing and implementing their due diligence strategy in a manner that is appropriate to their size and the nature and context of their operations.

Additionally, undertakings would need to establish a safe and accessible grievance mechanism to operate as both an early warning risk-awareness and as a remediation system to allow stakeholders to voice concerns regarding the existence of relevant risks.

Penalties and supervision
Member States should provide for proportionate and dissuasive penalties in case of legislation infringements. Repeated infringements, when committed intentionally or with serious negligence, should constitute a criminal offence. Member States should also designate a competent governmental authority to supervise the enforcement of the framework.

In terms of civil law implications, complying with the legislation would not constitute a defence to any civil liability which an undertaking may incur under national law. Furthermore, there is a concurrent proposal for light modification of Brussels I and Rome II regulations to facilitate the enforcement of business-related human rights claims involving an extraterritorial component by introducing additional choice of law and jurisdiction clauses.

Next steps

The report requires the Commission to propose legislation on mandatory supply chain due diligence “without undue delay”. The Commission itself has just recently launched a public consultation on the wider topic of sustainable corporate governance, seeking – amongst other things – stakeholders’ views on the need to introduce mandatory due diligence. The consultation ends in February 2021, whereupon the Commission is expected to submit its formal legislative proposal. We will continue to monitor further developments.

By Maks David Osojnik, Associate, and Marko Frantar, Attorney at Law in cooperation with Schoenherr