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Environmental Issues and
Trends In Transactions
Stacy Kray
Skadden, Arps, Slate, Meagher & Flom LLP
San Francisco
Thomas McHenry
Gibson Dunn & Crutcher LLP
Los Angeles
Outline
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Objectives
Overview of Environmental Law Framework
Recent Trends—Regulation, Enforcement and Other
Developments
Environmental Considerations in Transactions
Environmental Diligence and Negotiations
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Introduction to the Environmental Framework—
Cleanup and Liability Laws
Laws directed at cleaning up soil and
groundwater contamination (CERCLA, RCRA,
State Law)
 Laws allowing recovery for damages to natural
resources (CERCLA)
 Laws allocating responsibility among parties
(Contracts, Indemnities, State Law)
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Pollution Control and Prevention
Laws
Clean Water Act
 Clean Air Act
 Resource Conservation and Recovery Act
 Emergency Planning and Community Right To
Know Act
 NEPA
 ESA
 TSCA
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Introduction to the Environmental Framework—
Potentially Responsible Parties
Current and prior owners and operators
 Owners/operators at time of disposal
 Generators
 Transporters
 Contractual liability
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Lender Liability Under CERCLA
Secured creditor exemption
 Recent NY AG case against bank that failed to
act to prevent releases of hazardous substances
(5/30/07 Press Release from Office of the New
York State Attorney General Andrew Cuomo)
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Protecting Against CERCLA Liability
CERCLA’s safe harbor provisions
 Establishing the “innocent purchaser” defense
 New “All Appropriate Inquiry” standards
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Additional Liability Concerns
Strict liability
 Retroactive liability
 Joint and several liability
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Importance of Environmental Law
in Business Transactions
Civil penalties of $25,000 or more per day per
violation
 Potential criminal liability
 Citizen enforcement under certain statutes
(RCRA, Proposition 65)
 Compliance costs
 Legal opinions on compliance
 Permit transfers
 Property transfer statutes
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Recent Developments
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Greenhouse gas regulation disclosure and
accounting
Internationalization of transactions
Influence of European Environmental Law
SEC enforcement actions
Proposed new standards for environmental
accruals in acquisition context
AAI standard for Phase I assessments
EPA “New Owner” Policy under development
Department of Homeland Security Chemicals of
Interest
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Greenhouse Gas Regulation &
Litigation
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CA mobile source limits beginning with 2009
models
Global Warming Solutions Act of 2006 (AB 32)
Proposed federal legislation—political aspects
Other state legislation
Ongoing litigation
Securities disclosure issues—no SEC guidance
Lifecycle analysis
NEPA/CEQA disclosure for new projects
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International Considerations
Regulations can apply to the
manufacturing, importation and disposal
of goods
 More stringent regulation in European
Union
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REACH directives
WEEE & RoHS Directives
Less stringent regulations also can be a
concern
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Reasons For
Environmental Diligence
Potential environmental liabilities related to
current and former operations and properties
 Legal requirements, e.g., property transfer laws,
securities regulations
 Preservation of innocent landowner defenses
 Compliance assessment and obligations
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Environmental Disclosures
Under Securities Laws
Item 101 – Description of Business
 Item 303 – MD&A
 Item 103 – Legal Proceedings
 Financial Statements (GAAP)
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Recent Enforcement Actions
Ashland materially misstated its
environmental reserves and net income
(SEC Order, Rel. No. 34-54830, 11/29/06)
 Con-Agra off-set unrelated losses by
decreasing environmental reserves (SEC
Lit. Rel. No. 20176, 6/29/07)
 Safety-Kleen decreased environmental
reserves after missing income targets
following hostile takeover (11/08/07 Press
Release, United States Attorney for
Southern District of New York)
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Policies On Reserves
Create clear audit trail of reserve amounts
and reasons for adjustments
 Retain records to support reserve amounts
 Consult environmental engineers before
revising estimates
 Report to board
 Hire independent auditor to assess env’l
reserve setting and investigation of
internal complaints
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Sarbanes-Oxley Developments
Obstruction of justice and document retention
issues
 Certification of company reports
 Compliance programs
 Sensitivity to disclosure
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Business Issues Affecting
Environmental Diligence
Type of transaction
 Type of company
 Client needs
 Constraints on transaction
 Purchase versus auction
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Environmental Due Diligence
Initial Steps
Background on transaction
 Background on the subject company’s business
and operations
 Due diligence request
 Other sources of environmental information
 Protocol for contacts with agencies
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Env’l Diligence Investigation
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List of current/former properties
List of current/former corporate affiliates
Call with company— company environmental personnel
Database review
Document review
Site visits
Agency contacts
Insurance
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Environmental Consultants
Case specific
 Lead time
 Cost
 Consultant agreements
 Evolving standards
 Privileges/confidentiality
 Access agreements
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Structuring the Deal
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Various ways of managing environmental risk
Environmental investigations, e.g., Phase I’s, compliance
audits
Contractual provisions, e.g., representations &
warranties, covenants, closing conditions, indemnities
Asset vs. stock purchase
Changes to pricing
Insurance
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