Top Ten Asset Acquisition and Environmental Due Diligence Tips
Nov 01, 2011 Top Ten Download PDF
By John M. Lain, James A. Thornhill, McGuireWoods
No lawyer ever wants a client to have an unexpected surprise relating to the environmental status of a property or facility following an asset acquisition and knows the importance of performing proper environmental due diligence before closing on an asset purchase, or letting any due diligence or study periods expire. The “surprises” to avoid could be contamination that must be remediated, permits that are either non-existent or non-compliant, or litigious neighbors alleging that a release has occurred on the acquired asset that adversely affects neighboring property. By following the ten tips and suggestions listed below, an in-house counsel can either properly manage the due diligence by themselves or know what to expect from outside counsel, and be certain that their deal has no “surprise” moments after it is too late to resolve the issues pre-closing. (A set of definitions is set forth at the end of the list for terms not defined herein).
1. Get a New Phase I Environmental Site Assessment/Read the Old Ones
The first and simplest line of defense against environmental surprises is to order a Phase I Environmental Site Assessment (“ESA”) that meets the ASTM Standard Practice for Environmental Site Assessment E 1527-05 meets EPA’s AAI Rule It not only serves as a due diligence tool, but it is required under to qualify for the bona fide prospective purchaser and other defenses under CERCLA and some state laws. Although a new Phase I ESA must be prepared within six months of closing to quality under the AAI rule, old environmental reports are a good source of information, serve as background material for the ESA and should also be reviewed. Note that ASTM has announced that it plans to issue an updated Phase I standard by the end of 2012 and that EPA will have to complete a rule making to adopt such new standard. ASTM does not expect significant changes.
2. Determine if a Transfer Statute Applies
Several states have environmental transfer statutes that require some sort of notice and potential remediation when certain types of facilities are transferred. These statutes can either apply to specific categories of properties, i.e., only to certain NAICS codes, or to any property that has stored hazardous substances or had releases of hazardous substances. Examples include:
New Jersey Industrial Site Recovery Act (“ISRA”)
Indiana Responsible Party Transfer Law
3. Access, Access, Access
During the contract drafting stage, it is important for the acquiring party to make certain it has the proper access rights to perform its due diligence to both the property and for interviews with employees to satisfy AAI. This often raises issues of confidentiality in initial phases (employees wonder why people are suddenly coming in and asking questions if a sale is not public or known by the employees) and scope, i.e. can invasive testing be performed to take soil, groundwater or building material samples.
4. Don’t Forget Asbestos, Wetlands, Lead Paint, Endangered Species, Etc.
Phase I’s do not cover these topics, although they may be added to the scope of a Phase I without jeopardizing compliance with the AAI rule. The extra information that might be necessary depends upon the properties in question and potential uses. Large undeveloped tracts of land that are to be built upon should have some level of review for wetlands, endangered species and historic resources. Buildings built before 1980 should always have an asbestos survey performed.
5. Do You Need a Phase II?
If your Phase I ESA identifies “Recognized Environmental Conditions,”, then a Phase II ESA might be required. The threshold question is do you need one – for instance in a heavily industrialized area, the presence of known releases from adjacent properties with known (and solvent) responsible parties and with a strong indemnify from the seller, you might decide no Phase II ESA is needed. But, in the same situation, when your use involves hazardous substances, then a Phase II ESA could be required to establish a baseline for the site that could be useful in determining whether contamination is new or pre-existing. You also need to work closely with the environmental consultant to determine if there are potential concerns for exposure such as from vapor intrusion to improvements from contamination in the subsurface.
6. Environmental, Health & Safety Compliance Audits
If the asset to be acquired is an industrial facility, then obtaining an overall environmental, health and safety compliance audit is strongly recommended. These audits are designed to answer the questions of whether the facility: (i) has the right permits and approvals for its activities; (ii) is in compliance, or at least material compliance, with its permits and approvals; (iii) is otherwise in compliance with environmental laws such as developing proper compliance plans, and (iv) has it established and does it follow required state and federal worker health and safety standards.
7. Transferring Permits
When acquiring facilities that do have environmental permits it is extremely important to understand the transfer requirements, particularly to make sure the permits are in fact transferable as some types of permits can’t be transferred and must be reissued. Also, the language of many permit transfer regulations require that notice must be given within a certain number of days of closing. However, as we all know, closing dates can be slippery and extremely mobile and it is the lucky attorney that knows for sure a deal will close in exactly thirty days from sending in a permit transfer notice. Thus, it is common to have a conversation with the regulators (who are now generally used to the uncertainty of closing dates) to arrange to submit transfer notices, but to not have a transfer occur until notification has been given that closing has occurred. This prevents having an automatic transfer occur thirty days after a notice has gone to an agency, but then the deal takes two more weeks to close.
8. Involve Your Lenders Early
If the acquisition is going to be financed, then involving the lenders early is important. This way, if environmental issues do arise, they (and their own attorneys) can participate early and are less likely to come in on the eve of closing with unworkable demands that delay closing or torpedo a deal. As a related matter, you should always make sure that your contract with environmental consultants provide for the issuance of lender reliance letters.
9. What If the Results Are Bad?
To borrow an important rule recommended by the Hitchhikers Guide to the Galaxy – don’t panic! There are several tools available to resolve environmental issues and to resolve an otherwise distressed deal. Environmental insurance may be available that can provide cost cap cleanup protection or can protect against third party liabilities but can be expensive. Holdbacks and escrow agreements (particularly when backed by a cost-cap protection policy if available) can be used to fund remediation costs. Many states now have voluntary cleanup programs that provide regulatory liability protection if an approved plan is developed and implemented for qualifying types of properties. The issue is always who pays for such solutions and will they unreasonably delay closing while insurance underwriting occurs or while assessments are completed to determine if voluntary cleanup programs can be used.
If any of the tools mentioned above are needed, then it is likely that the seller and buyer will have post-closing responsibilities and obligations to one another. For instance, a seller who will be responsible for post-closure remediation will need access to the property to meet its obligations. The buyer will need to be certain that such access will not interfere with its activities. Most voluntary cleanup programs result in the need for environmental covenants to be placed upon the property. The new owner will need to be sure that the restrictive covenant conditions are compatible with its proposed uses and it must comply with them. Finally, if environmental issues are present, then site work and building alteration needs to be performed in a way that does not exacerbate any environmental conditions.
Reprinted with permission from the Association of Corporate Counsel (ACC)
Additional ACC Resources
ACC Resource Library - Primer
ACC Resource Library - Program Material
ACC Resource Library - Article - Sponsored by Bloomberg Law
ACC Resource Library - Top Ten - Sponsored by Khaitan & Co
This resource is sponsored by: