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EME Solutions Environment, Management & Engineering Optimizing the Environmental Due Diligence Process Angela Libby Jankousky (303) 279-7647, alj.emes@home.comalj.emes@home.com For Executive Enterprises October 20, 2000
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2 Presentation Goals Why do environmental due diligence? Historical evolution Standard (ASTM) process Enterprise-wide due diligence Framework for optimizing
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3 Why Do Due Diligence? To accurately value the business by: Uncovering anything that affects the Decision to acquire the business Price Structure and terms of the deal $$$
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4 Why do EHS* Due Diligence Innocent land owner defense Environmental baseline Civil and criminal liability Tap remediation funds Impact of upcoming regulations Understand product liability $$$ *Environmental, Health and Safety
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5 An Iterative Process Structure of the deal drives the process Start: assume all liabilities are your client’s And they’re wretched ... Then back off As data indicate liabilities are not so bad
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6 CERCLA Liability Who: “Potentially Responsible Parties” Current & former owners and operators Companies that arranged for disposal Transporters Generators Retroactive and Strict Liability Joint and Several Liability
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7 Only 3 Defenses Act of war Act of God Innocent Land Owner Defense (‘86) Purchaser did not know and had no reason to know about the contamination Catch 22
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8 The Big Bang Include current sites, former sites, disposal sites.
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9 A Cautionary Tale
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10 Why do EHS Due Diligence? Innocent land owner defense Environmental baseline Civil and criminal liability Tap remediation funds Impact of upcoming regulations Understand product liability
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11 For Continuing Operations Guilty: Knowing Violation Guilty: Should Have Known
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12 Compliance Audit Strategy Noncompliance(s) discovered: Plan to correct immediately, or Disclose to EPA under Audit Policy Reduced gravity-based penalties Penalty for economic benefit No recommendation for criminal prosecution See www.epa.gov/oeca/ore/apolguid.html Effective 5/11/00www.epa.gov/oeca/ore/apolguid.html
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13 Compliance Audit Strategy Noncompliance(s) not discovered: But suspected Incorporate into corporate audit system May have more than 21 days to report
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14 States w/ Audit Privilege and Immunity Laws (6/1/00) Colorado South Dakota Kentucky South Carolina Minnesota New Hampshire Wyoming Ohio Utah Montana Texas Alaska Kansas Nevada Virginia Nebraska Michigan Iowa Arizona Idaho Source: Katheryn Jarvis Coggon, Holme Roberts & Owen, LLP
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15 Environment, Health & Safety Innocent land owner defense Environmental baseline Civil and criminal liability Tap remediation funds Impact of upcoming regulations Understand product liability
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16 Impact of Upcoming Regulations Material costs should be disclosed Examples of potentially high cost issues Air Toxics regulations Montreal Protocol requirements (CFCs) Ergonomics Issues
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17 Johns Manville’s Lesson “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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18 Product Liability Issues Recent bankruptcies Dow Corning (silicone breast implants) Owens Corning (asbestos) Future Issues ??
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19 Presentation Goals Why do environmental due diligence? Historical evolution Standard (ASTM) process Enterprise-wide due diligence Framework for optimizing
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20 Evolving Due Diligence Process 500 BC Caveat emptor 1651 AD The buyer needs a hundred eyes, the seller not one. G. Herbert 1986 CERCLA Section 101(35)(B) (From ABA’s Journal of Natural Resources & Environment, Fall 2000, Bruce Ray, ed.)
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21 What happens if we buy the contaminated property? “It would be baaaaad!!”
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22 Post-CERCLA Evolution Chaos The beginnings of standardization ASTM standards (1993) Today Check off the environmental box Tailor process to the transaction
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23 Due Diligence Costs, Timing $1.5K - $7K/site $10K- $$$!/site One month At least one more month
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24 Due Diligence Cost Factors Phase I Complex site history Site Location (travel costs) Complexity of neighbors Availability of local records Consultant expertise Phase II Scope of sampling Cost of expediting samples
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25 Presentation Goals Why do environmental due diligence? Historical evolution Standard (ASTM) process Enterprise-wide due diligence Framework for optimizing
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26 Std Practice for Environmental Site Assessments: Phase I “To define good commercial and customary practice for conducting an environmental site assessment” ASTM E 1527 -- 00
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27 ASTM E 1527 -- 00 Intent: innocent landowner defense Not designed to assess business environmental risk www.astm.org
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28 Phase I Environmental Site Assessment Records Review Site Reconnaissance Interviews Report
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29 Records Review Standard Environmental Record Sources Additional Environmental Record Sources Physical Setting Sources Historical Use Information
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30 Standard Environmental Records Federal NPL site listFederal CERCLIS list CERCLIS NFRAP listRCRA facilities list RCRA generators listRCRA TSD facilities list Federal ERNS listState NPL list State CERCLISState registered USTs State Leaking UST listsState landfill & solid waste disposal lists
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31 Local Environmental Records Data lists Brownfield sites Data sources Dept. of Health/Environ. Lists of landfill sites Lists of haz waste sites Records of wells UST lists Local land records Records of Emergency release reports Fire Dept. Planning Dept Local/Regional Agencies Local Electric Companies Building Inspection /Permit Dept (not exhaustive)
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32 Physical Setting Sources Required USGS 7.5 Minute Quad Map Discretionary Groundwater maps Bedrock geology maps Soil maps Others
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33 Historical Use Information Develop a history of the property All obvious uses of the property from present 1940 or First use Whichever is earlier
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34 Standard Historical Sources 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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35 Phase I Environmental Site Assessment Records Review Site Reconnaissance Interviews Report
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36 Site Reconnaissance Observation: Exterior and Interior Identify Uses Current and past uses Current and past uses of adjacent property Conditions Geologic, Hydrogeologic, Hydrologic Topographic Structures Roads Potable Water Supply Sewage Disposal System
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37 Site Uses -- Observations Geologic, hydrologic and topographic conditions Condition of structures Potable water supply Sewage disposal Waste disposal Ponds, pools of liquid Use, storage of petroleum prods. Storage tanks Odors Drums PCBs
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38 Building -- Observations Heating/Cooling & fuel source Drains and sumps Pits Stained soil or pavement Stressed vegetation Solid Waste Storage Tanks Wells Septic Systems Stains or Corrosion
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39 Phase I Environmental Site Assessment Records Review Site Reconnaissance Interviews Report
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40 Those who may be interviewed Key site manager Site Occupants Environmental or safety professionals Site Corporate Those with info re: previous practices
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41 Interviewee Balancing Act Desire to be: Truthful Helpful Loyal to pro- spective emp. Desire to be: Loyal to employer Protective of past mistakes
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42 Interview Questions Location/ existence of other documents 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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43 Interviews w/ Gov’t Officials To obtain information indicating recognized environmental conditions Local Agencies to be Interviewed Fire Department Hazardous Waste Disposal Health Agency
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44 Phase I Environmental Site Assessment Records Review Site Reconnaissance Interviews Report
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45 Report Should Contain 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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46 ASTM Phase I “Non-scope” Considerations AsbestosHealth and Safety RadonEcological resources Lead-Based PaintEndangered Species Lead in Drinking WaterIndoor air quality Wetlands Regulatory Compliance Cultural resources Historic resources Industrial HygieneHigh voltage power lines
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47 Post ASTM Phase I Get a rough estimate of liabilities Consultant’s understandable reluctance Huge error bars around these estimates
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48 Lesser Liability Range Potential Typical Source: Wayne Tusa, Environmental Risk and Loss Control, Inc.
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49 More Costly Potential Liabilities Potential Typical Source: Wayne Tusa, Environmental Risk and Loss Control, Inc.
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50 Overlapping Interests Envir. Consult. Comfortable w/ASTM Reluctant to estimate costs Would like to do a Phase II Wants repeat business Buyer’s Mgt Wants answer Tolerates uncertainty, depending on the structure of the deal Generate Costs With error bars & probabilities
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51 Is Phase II Necessary? No sig. liabilities Can be managed contractually? Phase I Maybe. Need more data No. Deal killers Phase II Yes. Potentially significant liabilities Develop a Strategy for each issue
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52 Presentation Goals Why do environmental due diligence? Historical evolution Standard (ASTM) process Enterprise-wide due diligence Framework for optimizing
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53 Confidential Due Diligence Confidentiality for Public Transactions 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 www.sec.gov/edgarhp.htm Materiality Threshold Different Interpretations
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54 Relying on Representations and Warranties Interview Corporate Environmental Staff Understand their FAS 5 process Environmental Management Systems Corporate Audit Program Review web page, enforcement records Safety as a barometer of performance www.osha.gov/cgi-bin/est/est1
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55 Seller’s Environmental Staff Torn between Auditioning for a job Internal tensions regarding disclosure Knowledge of past mistakes Absence of knowledge Design enterprise due diligence scope After conversations with seller’s staff
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56 Representing the Seller Well organized data room Desk-top Phase I Relevant permits, audits, other records Access to those with the answers Trained to understand their role
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57 Presentation Goals Why do environmental due diligence? Historical evolution Standard (ASTM) process Enterprise-wide due diligence Framework for optimizing
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58 Value-Added Due Diligence Objective: Max: $ Increased Value of the Deal – $ Cost of environmental due diligence 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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59 Scoping Environmental Due Diligence Involve Environ. Professionals early Specify the objective Collaborate to design a scope Get cost estimates Conduct next phases When data are necessary for the deal
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60 Trade Offs Increased Risk Sketchy Information Inflated Purchase Price Request Indemnities Higher Cost Better Information Accurate Purchase Price Minimal Due Diligence Extensive Due Diligence
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61 The Optimal Due Diligence Fits the transaction Evolves with the transaction And may change the transaction Post acquisition integration
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