Alessandro Baudino

Trump anti-DEI executive orders and their potential adverse impacts for EU undertakings

After the long crisis caused by the COVID 19 pandemic and the economic shocks resulting from Russia's invasion of Ukraine (which caused skyrocketing costs, inflation and exchange rate volatility), the new course (political, economic, social and environmental) of the TRUMP era is outlining new and unpredictable scenarios that dramatically bring to attention the problem of managing the risks to which companies are subject, and which must be addressed from the perspective of a prudent and forward looking approach to risk management.

In addition to the tariffs applied to products of European origin, EU undertakings will have to cope with the three Executive Orders issued by President TRUMP on January 21, 2025, regarding federal DEI policies, including: i) terminating DEI-related programs in the federal government (“Ending Radical and Wasteful Government DEI Programs and Preferencing”); ii) prohibiting the influence of race, gender, and other factors in federal employment decisions (“Reforming the Federal Hiring Process and Restoring Merit to Government Service”); and iii) directing every federal agency to develop strategies to deter unlawful DEI practices in the private sector (“Ending Illegal Discrimination and Restoring Merit-Based Opportunity”).

These executive orders are having their first effects on the commercial relations  of European companies that operate with US government agencies or state-owned companies, in the context of contracts for the supply of goods or services or public procurements of the most varied kinds.

European companies that are about to sign a new contract with a U.S. government agency or compete for tenders, will need to formally certify that they do not implement any programs “promoting DEI that violate any applicable Federal anti-discrimination laws”.

European companies that already have long-term contracts in place with US Government agencies or state owned companies, received the request to sign an addendum for the modification/integration of existing contracts, the purpose of which is: “to incorporate into the contract the contractor´s CERTIFICATION REGARDING COMPLIANCE WITH APPLICABLE FEDERAL ANTI-DISCRIMINATION LAW”.

By this addendum, the contractor is required to represent and warrant that it has not adopted and will not adopt any program that promotes Diversity, Equity, and Inclusion (“DEI”) inconsistent with the new Trump directives, and to agree “that such certification is material for purposes of the government’s payment decision and therefore subject to the False Claims Act. See 31 U.S.C. 3729(b)(4)”.

Failing to sign and send the declaration, results in the contractor’s  exposure to the risk of termination of the existing contract. The release of an inaccurate or false declaration results in a violation of the False Claims Act that (beyond any criminal relevance) exposes the contractor to the risk of having to return the sums already paid by the administration, plus a penalty equal to three times the value of the contract (“triple damage”).

The executive orders are provoking  different and non-uniform reactions in the United States.

The giant COSTCO, for example, expressed its willingness to maintain its inclusion programs, arguing that they are not in conflict with the new directives and have in fact favored, in their opinion, creativity and innovation in merchandise and services and led to greater customer satisfaction. But the big players in Corporate America (Meta and Walmart, McDonald's and Disney, General Motors and Goldman Sachs, and even the pioneer BlackRock, the first to focus on ESG investment objectives), are aligning with the new course and will require their commercial partners to take upon themselves the same obligations (Source: Il sole 24 Ore, March 02, 2025).

From the point of view of international private and procedural law, it seems reasonable to believe that claims for damage compensation and penalties can hardly be enforced in European jurisdictions: in fact, even if the contract were subject to (national and federal) US laws, claims for compensation would clash with principles (national and community) of public law.

But the termination of the contract, based on a false declaration or a refusal to adapt the contract to the new requests, could have devastating consequences from an economic and financial perspective.

A clash between fundamental values, and not just a simple “Battle of forms”

The new executive orders issued by TRUMP will create very serious problems for European companies, but they cannot lead to a deviation from the founding values of our national and community constituent charters, which are inspired by the duties of equality and solidarity established by Articles 2 and 3 of the Italian Constitution and Article 2 of the EU Treaty.

The so-called “DEI” policies (reflected in particular in the “S” (Social) and G (Governance) objectives of the acronym ESG, are also incorporated into numerous EU directives and have already been made mandatory and operational in most European Countries. This is the case, to name a few, of the rules on the hiring of people belonging to protected categories or with disabilities; the rules that establish the nullity of discriminatory dismissals; the prohibition on dismissal of women on maternity leave; paid leave that can be used by relatives and in-laws of disabled people; the provisions on gender balance in boards of directors and boards of auditors, etc.

The conflict between these two visions of the world also arises in reverse terms: in the sense that even European companies that operate (directly or through their subsidiaries in the USA) with American companies (either public or private) will have to verify (in compliance with their duty of control on their "value chain"), whether the American counterparts that aligned with the new "Anti DEI" course, still operate in coherence and in compliance with the social, governance and environmental values that are the basis of the ESG objectives set forth at community and national level.

The Corporate Sustainability Due Diligence Directive, EU 2024/1760 (hereinafter: "CSDDD"), approved on 24 April 2024, requires European companies, falling within its scope of applicability, to identify and address the negative impacts of their actions on human rights and the environment, within and outside Europe.

More specifically, the CSDDD rules require European companies to verify throughout their supply/value chain that their business partners comply with ESG objectives. To this end, companies are required to include this specific obligation in all commercial contracts, requiring contractual guarantees from their business partners regarding compliance with their corporate codes of conduct. And in the event of failure to undertake this obligation by business partners or in the absence of a reasonable expectation that these obligations will be respected, the company must refrain from entering into new relationships or extending the existing ones and, as a last resort, must terminate the business relationship if the policies of its partner may cause a serious negative impact on the environment or human rights.

But regardless of the application of the CSDDD, in some European countries there is already an obligation for the Principle or main contractor to verify along the entire supply chain that the controlled/supplier/affiliated companies comply with the provisions on environmental protection, consumer protection, and illicit exploitation of workers, in order to sanction any conduct that is likely to facilitate - even through culpable omission of adequate checks on contractors or subcontractors - the commission of crimes or the violation of rules established to protect fundamental values of civil life such as safety on the work place, health, human freedom, the environment, etc.).

It is therefore easy to imagine how these new obligations are destined to have a further, devastating impact on M&A operations, joint ventures, as well as on long-term supply agreements and more generally on commercial relations with American companies, which today are free from compliance with regulations - regarding respect for workers' rights and the environment - which are instead mandatory for us (and indeed even criminally sanctioned).

The clash is in fact taking shape in much broader and more serious terms than the usual "battle of forms", which arises when the parties to a commercial contract, leveraging their respective positions of strength and their consolidated practices, each claim to impose their own contractual scheme, rather than negotiating a fair and shared agreement. The conflict here arises between two opposing visions of the objectives and obligations to which business activity must adhere, reflected in different and conflicting regulatory contexts.

Appropriate planning and adequate risk management obligations

In this new, unpredictable scenario, the activations that, from the point of view of a prudent and forward-looking approach to risks, the entrepreneur will have to adopt, must be framed in the new system of organizational and planning obligations outlined by the new laws, at both national and EU level.

Management must therefore focus on verifying the impact that the new risk profiles are destined to have on the company business plans, in order to evaluate their reliability and coherence and, where it is necessary to review the plan's "assumptions", and promptly adopt the necessary corrective measures.

It should also be considered that companies that, by law or on a voluntary basis, are required to report on sustainability (EU Corporate Sustainability Reporting Directive, in short CSRD), are subject to specific disclosure obligations: for example, they must declare in the notes to the financial statements whether they have adopted specific anti-discrimination policies and policies aimed at promoting equal opportunities, gender balance and equal pay. And these disclosure obligations are not limited to EU companies, but include group policies and extend to foreign and US subsidiaries.

It is therefore possible that this information, disclosed through financial statements but also through company websites (where the codes of ethics and adopted ESG policies are published), may be relevant for the purposes of the assessment - by US counterparties - of the compatibility of existing contracts with the anti-DEI executive orders.

Appropriate tools to get out of the impasse

Given the complexity of the regulatory context, in order to fulfill the obligation of professional diligence to which directors are bound, it will be essential to involve, in all the jurisdictions involved, professionals capable of communicating with each other and equipped with the multidisciplinary skills necessary to assess the extent of the new executive orders, their actual scope of application, their degree of implementation (which is not uniform in the various confederate states), the areas of potential conflict with the obligations assumed at national and European level, the consequences of possible violations, and the room for maneuver to identify alternative agreed solutions aimed at safeguarding the conservation and continuity of contracts.

It should also be considered that, beyond the regulatory constraints imposed by the various legal systems, there is a common value – also accepted in common law systems – which consists in the preservation of the patrimonial and social value of the businesses, which is achieved through the defense and protection of existing business contracts and economic relationships.

Furthermore, even in common law systems, the so-called obligations of correctness and good faith are recognized: the implicit covenant of good faith and fair dealing (“implied covenant of good faith and fair dealing”) implies that – even in the absence of an express provision of the so-called “hardship” clauses (which provide for the obligation to renegotiate the conditions of the contract in the event of supervening situations that make its execution difficult or excessively onerous) – the parties to a contract are required to deal with each other honestly, fairly and in good faith, so as not to prejudice the right of the other party or parties to receive the benefits of the contract.

Collaborative negotiation, inspired by the principles of solidarity, good faith and transparency, will be the winning tool to bring together all the parties and their professionals at a negotiating table aimed at identifying, in a constructive manner, a shared solution that allows to overcome the difficulties that have arisen and avoid the termination of the contract.