10-11-2023

Mothers guard your daughters!

The increasing role of risk management and sustainability reporting require increasingly centralized control by group management. Are you still "in control" of all the activity of your subsidiaries? And which subsidiaries should you hold accountable?

Expanding reporting
Until now, the annual reporting of Article 2:141(2) of the Dutch Civil Code -regarding the broad outlines of the strategic policy, the general financial risks and the management and control systems- mainly concerned financial indicators. However, due to (among other things) the influence of the European ESG directives (Corporate Sustainability Reporting Directive (CSRD) and Corporate Sustainability Due Diligence Directive (CSDDD)), this financial reporting is increasingly becoming sustainability reporting. The expanding reporting obligation increases the role of group management and the importance of risk management.

Scope of CSRD directive for a group more limited...
The CSRD directive applies to companies with more than 500 employees and more than EUR 150 million in turnover. In a group, the parent company can assume the reporting obligations of its subsidiaries. A prerequisite for this, however, is that both the parent and the subsidiaries fall within the scope of the directive. This does not work for the typical Dutch (top) holding companies, which usually don’t have any personnel. The CSRD will by no means always apply to the entire group, but only to (sub)holding companies and the equally qualifying subsidiaries falling under them. It is advisable to check which subsidiaries to hold accountable.

...than that of the CSDDD directive
The CSDDD Directive explicitly applies to all subsidiaries of qualifying companies, even if those subsidiaries themselves do not meet the Directive's criteria (more than 500 employees, more than EUR 150 million turnover). This may result in a group organized in regions also having corporate sustainability DD obligations to its (extramarital?) subsidiaries, i.e. subsidiaries that engage in entirely different activities, which are not subservient to the reporting-obligatory regional (sub)holding company.

More guidance from mother...
The CSRD and CSDDD guidelines, yet to be implemented by the Netherlands, contain many open standards. In order to achieve as much uniformity as possible in compliance and reporting, it is to be expected that central group management will increasingly exert more guiding influence, for example by imposing group-wide policy rules. Parent companies will more often prescribe in detail what their subsidiaries must comply with and will also monitor their subsidiaries' implementation. This will reduce the subsidiaries' policy freedom in these areas. The views of the management of a subsidiary in a third (world) country will by no means always coincide with those of the group management. Increasingly, the parent will impose its standards on its subsidiary, regardless of the subsidiary's views.

.. also leads to mother's duty of care?
The more intense the parent company's involvement with the daughters, the more likely it is that the “mother” also has a duty of care. Breach of that duty of care can lead to liability of the parent to the subsidiary's counterparties. The so-called Beklamel standard can be used to determine, in a specific case, whether the subsidiary directors' duty of care can be shifted to the parent (mother) as a result of the parent's actual interference with the subsidiary's implementation of the group policy developed at the central level. If the parent had a sufficient degree of intervention, it also has a duty of care - and thus liability - to third parties.

Conclusions
The sustainability reporting of the CSRD Directive and the far-reaching due diligence obligations of the CSDD Directive will increase the role of group management vis-à-vis its subsidiaries. To keep the increasingly extensive flow of information from subsidiaries to parent manageable, parents will increasingly impose group-wide policies. In addition to the content of the reports, it will also be necessary to identify which parts of the group are covered by the directives. The fact that the directives have yet to be implemented in national legislation is no reason to wait and see: mothers guard your daughters!