Transcript Optimizing the Environmental Due Diligence Process

M
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Environment, Management & Engineering
Optimizing the
Environmental Due
Diligence Process
Angela Libby Jankousky
(303) 279-7647, [email protected]
For Executive Enterprises
October 20, 2000
Presentation Goals
 Why do environmental due diligence?
 Historical evolution
 Standard (ASTM) process
 Enterprise-wide due diligence
 Framework for optimizing
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Why Do Due Diligence?
 To accurately value the business by:
 Uncovering anything that affects the
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Decision to acquire the business
Price
Structure and terms of the deal
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Why do EHS* Due Diligence
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 Innocent land owner defense
 Environmental baseline
 Civil and criminal liability
 Tap remediation funds
 Impact of upcoming regulations
 Understand product liability
*Environmental, Health and Safety
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An Iterative Process
 Structure of the deal drives the process
 Start: assume all liabilities are your client’s
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And they’re wretched
 . . . Then back off
As data indicate liabilities are not so bad
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CERCLA Liability
 Who: “Potentially Responsible Parties”
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Current & former owners and operators
Companies that arranged for disposal
Transporters
Generators
 Retroactive and Strict Liability
 Joint and Several Liability
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Only 3 Defenses
 Act of war
 Act of God
 Innocent Land Owner Defense (‘86)
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Purchaser did not know and had no reason
to know about the contamination
Catch 22
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The Big Bang
Include
current sites,
former sites,
disposal sites.
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A Cautionary Tale
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Why do EHS Due Diligence?
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 Innocent land owner defense
 Environmental baseline
 Civil and criminal liability
 Tap remediation funds
 Impact of upcoming regulations
 Understand product liability
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For Continuing Operations
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Guilty:
Knowing Violation
Guilty: Should
Have Known
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Compliance Audit Strategy
 Noncompliance(s) discovered:
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Plan to correct immediately, or
 Disclose to EPA under Audit Policy
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Reduced gravity-based penalties
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Penalty for economic benefit
No recommendation for criminal prosecution
See www.epa.gov/oeca/ore/apolguid.html Effective 5/11/00
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Compliance Audit Strategy
 Noncompliance(s) not discovered:
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But suspected
 Incorporate into corporate audit system
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May have more than 21 days to report
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States w/ Audit Privilege and
Immunity Laws (6/1/00)
Ohio
Utah
Montana
Texas
Alaska
Kansas
Nevada
Virginia
Nebraska
Michigan
Iowa
Arizona
Idaho
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Colorado
South Dakota
Kentucky
South Carolina
Minnesota
New Hampshire
Wyoming
Source: Katheryn Jarvis Coggon, Holme Roberts & Owen, LLP
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Environment, Health & Safety
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 Innocent land owner defense
 Environmental baseline
 Civil and criminal liability
 Tap remediation funds
 Impact of upcoming regulations
 Understand product liability
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Impact of Upcoming
Regulations
 Material costs should be disclosed
 Examples of potentially high cost issues
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Air Toxics regulations
Montreal Protocol requirements (CFCs)
Ergonomics Issues
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Johns Manville’s Lesson
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“I cannot possibly say how many companies are
putting themselves and their employees and
customers at this kind of risk today. I think I do
know that voluntary product stewardship adds
up to competitive advantage over the short term
and a greatly improved chance of survival and
profit into the future.”
-- Bill Sells, HBR March-April 1994
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Product Liability Issues
 Recent bankruptcies
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Dow Corning (silicone breast implants)
Owens Corning (asbestos)
 Future Issues
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Presentation Goals
 Why do environmental due diligence?
 Historical evolution
 Standard (ASTM) process
 Enterprise-wide due diligence
 Framework for optimizing
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Evolving Due Diligence Process
500 BC
Caveat emptor
1651 AD The buyer needs a hundred eyes,
the seller not one. G. Herbert
1986
(From ABA’s Journal of Natural Resources &
Environment, Fall 2000, Bruce Ray, ed.)
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CERCLA Section 101(35)(B)
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What happens if we buy the
contaminated property?
“It would be
baaaaad!!”
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Post-CERCLA Evolution
 Chaos
 The beginnings of standardization
 ASTM standards (1993)
 Today
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Check off the environmental box
Tailor process to the transaction
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Due Diligence Costs, Timing
Identify Acquisition Target
$1.5K - $7K/site
$10K- $$$!/site
Phase II At least one
more month
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Phase I One month
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Due Diligence Cost Factors
 Phase I
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Complex site history
Site Location (travel costs)
Complexity of neighbors
Availability of local records
Consultant expertise
 Phase II
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Scope of sampling
Cost of expediting samples
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Presentation Goals
 Why do environmental due diligence?
 Historical evolution
 Standard (ASTM) process
 Enterprise-wide due diligence
 Framework for optimizing
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Std Practice for Environmental
Site Assessments: Phase I
“To define good commercial and
customary practice for conducting
an environmental site assessment”
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ASTM E 1527 -- 00
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ASTM E 1527 -- 00
 Intent: innocent landowner defense
 Not designed to assess business
environmental risk
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www.astm.org
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Phase I Environmental Site
Assessment
Records Review
Site Reconnaissance
Interviews
Report
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Records Review
 Standard Environmental Record Sources
 Additional Environmental Record Sources
 Physical Setting Sources
 Historical Use Information
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Standard Environmental
Records
Federal NPL site list
CERCLIS NFRAP list
RCRA generators list
Federal ERNS list
State CERCLIS
State Leaking UST lists
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Federal CERCLIS list
RCRA facilities list
RCRA TSD facilities list
State NPL list
State registered USTs
State landfill & solid
waste disposal lists
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Local Environmental Records
(not exhaustive)
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Data lists
Brownfield sites
Lists of landfill sites
Lists of haz waste sites
Records of wells
UST lists
Local land records
Records of Emergency
release reports
Data sources
Dept. of Health/Environ.
Fire Dept.
Planning Dept
Local/Regional Agencies
Local Electric Companies
Building Inspection
/Permit Dept
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Physical Setting Sources
 Required
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USGS 7.5 Minute Quad Map
 Discretionary
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Groundwater maps
Bedrock geology maps
Soil maps
Others
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Historical Use Information
 Develop a history of the property
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All obvious uses of the property from present
1940 or
 First use
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Whichever is earlier
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Standard Historical Sources
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Aerial photographs
Fire insurance maps
Property tax files
Recorded land title records
USGS Quad Maps
Local Street Directories
Zoning/Land Use Records
Other: including maps, newspaper archives,
personal recollections, etc.
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Phase I Environmental Site
Assessment
Records Review
Site Reconnaissance
Interviews
Report
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Site Reconnaissance
 Observation: Exterior and Interior
 Identify Uses
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Current and past uses
Current and past uses of adjacent property
 Conditions
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Geologic, Hydrogeologic, Hydrologic Topographic
Structures
Roads
Potable Water Supply
Sewage Disposal System
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Site Uses -- Observations
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Geologic, hydrologic and
topographic conditions
Condition of structures
Potable water supply
Sewage disposal
Waste disposal
Ponds, pools of liquid
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Use, storage of
petroleum prods.
Storage tanks
Odors
Drums
PCBs
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Building -- Observations
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Stressed vegetation
Solid Waste
Storage Tanks
Wells
Septic Systems
Stains or Corrosion
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Heating/Cooling
& fuel source
Drains and sumps
Pits
Stained soil or
pavement
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Phase I Environmental Site
Assessment
Records Review
Site Reconnaissance
Interviews
Report
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Those who may be interviewed
 Key site manager
 Site Occupants
 Environmental or safety professionals
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 Those with info re: previous practices
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Site
Corporate
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Interviewee Balancing Act
Desire to be:
Loyal to employer
Protective of past
mistakes
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Desire to be:
Truthful
Helpful
Loyal to prospective emp.
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Interview Questions
 Location/ existence of other documents
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Audit reports
Site assessments
Permits
Questions that follow from record review
 Current and previous disposal practices
 Any pending or threatened proceedings?
(Not an exhaustive list)
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Interviews w/ Gov’t Officials
 To obtain information indicating
recognized environmental conditions
 Local Agencies to be Interviewed
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Fire Department
Hazardous Waste Disposal
Health Agency
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Phase I Environmental Site
Assessment
Records Review
Site Reconnaissance
Interviews
Report
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Report Should Contain
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The scope of services
Findings of known or suspect en. conditions
Opinion with rationale
Conclusions
Summary of deviations (if any)
References
Signature
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ASTM Phase I “Non-scope”
Considerations
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Asbestos
Radon
Lead-Based Paint
Lead in Drinking Water
Wetlands
Regulatory Compliance
Industrial Hygiene
Health and Safety
Ecological resources
Endangered Species
Indoor air quality
Cultural resources
Historic resources
High voltage power
lines
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Post ASTM Phase I
 Get a rough estimate of liabilities
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Consultant’s understandable reluctance
 Huge error bars around these estimates
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Lesser Liability Range
Permit Transfers
Indoor Air
EMF
Potential
Typical
Potable H2O
Radon
Lead Paint
Asbestos
UST Leak
Spill
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3
4
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$ Millions
Source: Wayne Tusa, Environmental Risk and Loss Control, Inc.
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More Costly Potential Liabilities
Haz Prods
Occ Exp
Fines
Potential
Typical
Noncompliance
CFCs
Off-Site Disp
Groundwater
Oth. Soil Cont.
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60
80
100
Millions
Source: Wayne Tusa, Environmental Risk and Loss Control, Inc.
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Overlapping Interests
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Envir. Consult.
Comfortable
w/ASTM
Reluctant to
Buyer’s Mgt
Generate Costs
estimate costs With error bars
Wants answer
Would like to
Tolerates
& probabilities
do a Phase II
uncertainty,
Wants repeat
depending on the
business
structure of the deal
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Is Phase II Necessary?
Potentially
significant
liabilities
Can be
managed
contractually?
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No.
Deal killers
Phase I
No sig.
liabilities
Maybe.
Need more data
Yes.
Phase II
Develop a
Strategy for
each issue
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Presentation Goals
 Why do environmental due diligence?
 Historical evolution
 Standard (ASTM) process
 Enterprise-wide due diligence
 Framework for optimizing
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Confidential Due Diligence
 Confidentiality for Public Transactions
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See Minimizing Risks in Public Company Mergers
and Acquisitions, Judith A. Walkoff and Eric B.
Rothenberg, Natural Resources and the
Environment, Fall 2000
 SEC disclosures
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www.sec.gov/edgarhp.htm
Materiality Threshold
Different Interpretations
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Relying on Representations
and Warranties
 Interview Corporate Environmental Staff
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www.osha.gov/cgi-bin/est/est1
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Understand their FAS 5 process
Environmental Management Systems
Corporate Audit Program
Review web page, enforcement records
Safety as a barometer of performance
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Seller’s Environmental Staff
 Torn between
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Auditioning for a job
Internal tensions regarding disclosure
Knowledge of past mistakes
Absence of knowledge
 Design enterprise due diligence scope
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After conversations with seller’s staff
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Representing the Seller
 Well organized data room
 Desk-top Phase I
 Relevant permits, audits, other records
 Access to those with the answers
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Trained to understand their role
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Presentation Goals
 Why do environmental due diligence?
 Historical evolution
 Standard (ASTM) process
 Enterprise-wide due diligence
 Framework for optimizing
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Value-Added Due Diligence
 Objective:
Max: $ Increased Value of the Deal –
$ Cost of environmental due diligence
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 Constraints
 Find any deal killers
 Find all leverage opportunities
 Provide information on time
 Preserve confidentiality
 Allocate scarce due diligence resources
 Preserve Innocent Landowner Defense
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Scoping Environmental Due
Diligence
 Involve Environ. Professionals early
 Specify the objective
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Collaborate to design a scope
Get cost estimates
 Conduct next phases
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When data are necessary for the deal
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Trade Offs
Increased Risk
Higher Cost
Better Information
Accurate Purchase Price
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Extensive
Due Diligence
Sketchy Information
Inflated Purchase Price
Request Indemnities
Minimal
Due Diligence
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The Optimal Due Diligence
 Fits the transaction
 Evolves with the transaction
 And
may change the transaction
Post acquisition integration
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