Environmental Due Diligence Considerations in Acquiring Companies, Assets, and Real Property Interests

environmental due diligence

Due diligence is a broad term that refers to the investigation companies should carry out prior to acquiring other companies, assets, or real estate.  There are numerous federal and state laws that comprehensively regulate air, water, and land pollution that make environmental due diligence essential.  The purpose of this article is to outline some of the more common environmental due diligence considerations.

Conduct Assessments in Compliance with ASTM

The first step in most due diligence assessments should be preparing a basic environmental assessment of the conditions of the plant, facility, storage units, other assets, and the land.  Financial responsibility for hazardous conditions can trail companies and property owners for years even after the contaminated property is sold. The current owner of contaminated property can also be liable for hazardous conditions even if the current owner did not cause or contribute to the hazardous conditions.

The American Society for Testing and Materials (“ASTM”) has established protocols for carrying out environmental due diligence.  The ASTM assessment should also exam for asbestos or lead in older buildings.  These preliminary inquiries can aid buyers establish liability defenses under federal law, even if they uncover contamination during the process.  These assessments are also necessary to obtain environmental insurance, which is often available to cover unknown liabilities.

Identifying the Environmental Compliance Officer at Each Facility

During the due diligence process the acquiring company should request permission to speak with the environmental compliance officer at each facility.  If no one at the facility can inform you what environmental permits are in place, where spill reports are kept and whether authorizations are about to expire, this is a warning sign about the historical operation of the target company and potential environmental issues.

Identify Applicable Environmental Permits and Transfer Requirements

Facilities typically have a number of environmental permits that will need to be transferred should the acquisition of the company go forward.  In identifying the permits, it is important to note the expiration dates and transfer requirements for each permit. The transfer requirements may be found in the state administrative procedures.  This is an essential pre-acquisition task because state regulators require prior notice to transfer air, water, and waste permits.

A company may have been the subject of an environmental enforcement action that resulted in a consent decree or order.  The provisions of these orders typically include very specific procedures and conditions for the transfer of an asset. In dealing with a federal consent order, it is important to understand when and if to inform the US Department of Justice or other federal agency.  For expired or missing permits, a sale can be a good time to come clean with regulators.

Look at Local Zoning Rules

The buyer should understand the local zoning requirements for all assets that are being acquired.  Traditional zoning in the US is premised on the strict separation of uses (industrial, commercial, and residential).  If the local zoning prohibits the uses that have been ongoing, the use may be “grandfathered” because they predate the imposition of zoning controls.  However, most municipalities, while allowing grandfathered use to continue, prohibit any expansion or alteration of the grandfathered use.

Work with a Law Firm that has Access to Local Counsel or Local Environmental Consultants

Land-use and environmental permitting requirements vary widely from state to state and city to city.  Certain states require approval prior to the sale of any industrial facility. Some counties require companies to obtain permits to store hazardous substances onsite.  Local professionals will be in the best position to provide advice on the process.

 

 

Identify Sale Agreements and Other Contracts that Might Include Indemnities that Benefit Past or Future Owners

When acquiring a corporate entity or real property, it is important to review the indemnification provisions of past contracts, which often have expiration dates.  Certain states require environmental indemnities to specifically mention environmental concerns or hazardous substances in order to successfully allocate liability.

If the seller has a valid indemnity from a prior owner, this may be a great reason to acquire the seller’s entity rather than the assets.  By acquiring the entity the buyer may obtain the benefit of the indemnity, which the seller probably cannot assign to the buyer in an asset sale.

Conclusion

The acquisition of a company is an important process for the acquirer.  Typically the acquirer is paying a significant amount for the target company, its assets, or real estate.  It is important that the acquiring company receives the value they are paying for. Environmental liabilities can significantly decrease the value obtained by the acquiring company and therefore proper environmental due diligence is needed during the acquisition process in order to identify any potential issues.

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