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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.

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Presentation on theme: "Environmental Issues and Trends In Transactions Stacy Kray Skadden, Arps, Slate, Meagher & Flom LLP San Francisco Thomas McHenry Gibson Dunn & Crutcher."— Presentation transcript:

1 Environmental Issues and Trends In Transactions Stacy Kray Skadden, Arps, Slate, Meagher & Flom LLP San Francisco Thomas McHenry Gibson Dunn & Crutcher LLP Los Angeles

2 1 Outline  Objectives  Overview of Environmental Law Framework  Recent Trends—Regulation, Enforcement and Other Developments  Environmental Considerations in Transactions  Environmental Diligence and Negotiations

3 2 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)

4 3 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

5 4 Introduction to the Environmental Framework— Potentially Responsible Parties  Current and prior owners and operators  Owners/operators at time of disposal  Generators  Transporters  Contractual liability

6 5 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)

7 6 Protecting Against CERCLA Liability  CERCLA’s safe harbor provisions  Establishing the “innocent purchaser” defense  New “All Appropriate Inquiry” standards

8 7 Additional Liability Concerns  Strict liability  Retroactive liability  Joint and several liability

9 8 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

10 9 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

11 10 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

12 11 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

13 12 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

14 13 Environmental Disclosures Under Securities Laws  Item 101 – Description of Business  Item 303 – MD&A  Item 103 – Legal Proceedings  Financial Statements (GAAP)

15 14 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)

16 15 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

17 16 Sarbanes-Oxley Developments  Obstruction of justice and document retention issues  Certification of company reports  Compliance programs  Sensitivity to disclosure

18 17 Business Issues Affecting Environmental Diligence  Type of transaction  Type of company  Client needs  Constraints on transaction  Purchase versus auction

19 18 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

20 19 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

21 20 Environmental Consultants  Case specific  Lead time  Cost  Consultant agreements  Evolving standards  Privileges/confidentiality  Access agreements

22 21 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

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