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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
Objectives
Overview of Environmental Law Framework
Recent Trends—Regulation, Enforcement and Other
Developments
Environmental Considerations in Transactions
Environmental Diligence and Negotiations
1
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)
2
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
3
Introduction to the Environmental Framework—
Potentially Responsible Parties
Current and prior owners and operators
Owners/operators at time of disposal
Generators
Transporters
Contractual liability
4
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)
5
Protecting Against CERCLA Liability
CERCLA’s safe harbor provisions
Establishing the “innocent purchaser” defense
New “All Appropriate Inquiry” standards
6
Additional Liability Concerns
Strict liability
Retroactive liability
Joint and several liability
7
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
8
Recent Developments
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
9
Greenhouse Gas Regulation &
Litigation
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
10
International Considerations
Regulations can apply to the
manufacturing, importation and disposal
of goods
More stringent regulation in European
Union
REACH directives
WEEE & RoHS Directives
Less stringent regulations also can be a
concern
11
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
12
Environmental Disclosures
Under Securities Laws
Item 101 – Description of Business
Item 303 – MD&A
Item 103 – Legal Proceedings
Financial Statements (GAAP)
13
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)
14
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
15
Sarbanes-Oxley Developments
Obstruction of justice and document retention
issues
Certification of company reports
Compliance programs
Sensitivity to disclosure
16
Business Issues Affecting
Environmental Diligence
Type of transaction
Type of company
Client needs
Constraints on transaction
Purchase versus auction
17
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
18
Env’l Diligence Investigation
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
19
Environmental Consultants
Case specific
Lead time
Cost
Consultant agreements
Evolving standards
Privileges/confidentiality
Access agreements
20
Structuring the Deal
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
21