CSDDD and Groups of Companies

In a recent paper, I examined how the recently adopted Corporate Sustainability Due Diligence Directive (CSDDD) will be applied in group of companies and how the duties imposed may affect the operations and even the structure of the group. The CSDDD has not yet come into force and a new proposal may make some changes to the Directive, if adopted, see COM (2025) 81 final. However, the proposed changes will have only minor impact on the rules analysed in the article.

The Directive’s application to groups

The CSDDD applies to very large companies (in-scope companies), but its scope is expanded to include certain parent companies heading larger groups. The CSDDD here adopts the solution that only the ultimate parent company is the in-scope company, and as a consequence the due diligence obligation will be imposed on the whole group world-wide, not only on an EU subgroup. Not only is the group decisive when determining whether the Directive applies, but the due diligence required by the CSDDD has to be conducted throughout the group. 

Group support

Apart from these obvious links to the group the CSDDD also contains a number of rules affecting groups. These include the possibility that companies in the group can (or even must) support each other in conducting the due diligence. First, Article 2(3) CSDDD allow an in-scope holding company to hand over the due diligence obligation to an operating subsidiary. Article 6 CSDDD allows an in-scope subsidiary to hand over the fulfilment of the due diligence obligation to an in-scope parent. The conditions for making use of these two types of transfers differ and their consequences differ too, as in one situation there is a transfer of obligations and in the other only a transfer of the fulfilment of the obligations. The fact that these two types of group support are regulated (in some detail) raises the question whether other types of support or delegation within groups are not allowed. This cannot be assumed, and actually the CSDDD provides that all group companies should support each other in complying with the Directive. Thus, according to Article 5(2) CSDDD Member States should ensure that for the purpose of due diligence, companies are entitled to share resources and information within their respective groups of companies and with other legal entities. The implication of this is discussed in the article.

Structuring groups

The CSDDD can give groups an incentive to structure the group in such a way as to limit the impact of the Directive. When a holding company decides to transfer its obligations according to Article 2(3) CSDDD it may choose the subsidiary which is situated in the Member State with the most attractive implementation of the CSDDD. Also, an in-scope parent company may consider changing its registered office from one Member State to another to change the applicable law. For the most parts the CSDDD constitutes minimum harmonisation (however, see Article 4(2) CSDDD), and therefore implementation may differ, and so may enforcement, the rules governing civil liability etc. These differences may be worth exploring for groups. 

Another possible reason to reconsider the group structure is the fact that the CSDDD requires that the in-scope company should conduct due diligence on its own business partner, but it is less clear whether an in-scope parent company should conduct due diligence on the business partners of its subsidiaries. If the answer is no (which the wording indicates), then the parent company may reduce the due diligence obligation by either transferring its business activities to its subsidiaries or by forming a holding company, which would then be the ultimate parent company and consequently take over the role as the in-scope company. If the in-scope company is reduced to a holding company, it has no activities and consequently no business partners of its own and would ‘only’ have to conduct due diligence on the subsidiaries themselves. As a consequence, there would be no need for conducting due diligence on any business partners. 

It is debatable whether such restructuring is desirable, and in my article I discusses how particularly the principle of abuse of EU law may impose restrictions to certain restructurings. Also, a solution could be to clarify that the due diligence obligation extends to the business partners of the subsidiaries.

Operation of groups

The CSDDD is also likely to affect the operation of the group. Not only will EU-based group companies be allowed to share resources and information, see Article 5(2) CSDDD, but the CSDDD also assumes that the parent company exercises control over its subsidiaries. Thus, the parent company has to make sure that the code of conduct it has adopted also applies in the subsidiaries, see Article 7(2), point c. But if there are potential adverse impacts in the subsidiaries the parent company must use its control rights actively to avoid or mitigate these. If the parent company does not do so it may risk fines and even civil liability if stakeholders in the subsidiaries suffer harm. So, the parent company has a clear incentive to keep a close eye on its subsidiaries and interfere with them, if necessary. 

Conclusion

The CSDDD is not a company law directive but nevertheless aims to regulate (large) groups of companies, not only by requiring the parent company to conduct due diligence throughout the group, but also by regulating that group companies can support each other in handling these obligations. It can be argued that it may affect the structure of groups, but it will certainly affect the operation of these groups.

The author's paper can be found here. 

Karsten Engsig Sørensen is a Professor at the Department of Law, Aarhus University.