Allocating Environmental Risks and...

Allocating Environmental Risks and Liabilities Structuring Contract Provisions to Limit Risk in Commercial Transactions

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THURSDAY, SEPTEMBER 13, 2012

Presenting a live 90-minute webinar with interactive Q&A

Edward L. Strohbehn, Jr., Of Counsel, Bingham McCutchen, San Francisco

William J. Squires, III, Counsel, Bingham McCutchen, Boston

Michael S. McDonough, Partner, Bingham McCutchen LLP, Los Angeles

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Drafting Environmental Provisions in Business and Real Estate Transactions

Practicing Law Institute

March 29, 2012

Edward L. Strohbehn Jr. William J. Squires, III

Bingham McCutchen LLP

© All rights reserved: Edward L. Strohbehn Jr.

and William J. Squires, III (2012)

6

© All Rights Reserved: Edward L. Strohbehn Jr., Michael S.

McDonough and William J. Squires, III (2012)

Allocating Environmental

Risks and Liabilities

Structuring Contract Provisions

to Limit Risk

in Commercial Transactions

Strafford Publications Webinar

September 13, 2012

Edward L. Strohbehn Jr.

Michael S. McDonough

William J. Squires III


Introduction

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8

Strategic Issues

• Consider purpose, nature, & structure of each transaction

• Deal Types and Strategic Issues

¤ Equity Deals

∆ Successor liability concerns regarding

◊ Off-site disposal of hazardous waste

◊ Pre-closing violations of environmental laws

◊ Formerly owned, leased or operated real property

∆ Merger Agreements

◊ Environmental provisions typically reciprocal

◊ Who are the indemnitors?

¤ Asset & Real Estate Deals

∆ Consider likelihood of successor liability exposure

∆ Permit transfers and potential need for new permits

• Risk Preferences of Each Party

• Environmental Conditions of Facility/Property (Due Diligence)

• Applicable Legal Requirements

10

Sources of Legal Requirements: Liability for Environmental Contamination

• Comprehensive Environmental Response, Compensation,

& Liability Act (CERCLA)

¤ Federal authority to respond to releases/threatened releases of

hazardous substances that threaten public health/environment

∆ Mechanisms for recovering costs from PRPs

¤ Standard of Liability - strict, retroactive, joint & several liability for

∆ Current owners/operators

∆ Former owners/operators “at time of disposal”

∆ Generators

∆ Arrangers

∆ Transporters

• Resource Conservation & Recovery Act (RCRA)

• State laws (mini-CERCLA/state RCRA implementation)

¤ Impose similar requirements

11

Sources of Legal Requirements: Regulatory Compliance

• Federal Laws

¤ Clean Air Act/Clean Water Act

¤ RCRA

¤ Others (e.g., TSCA, EPCRA, FIFRA)

• State Laws

¤ Often more expansive than federal law

• Municipal, County and Regional Laws

12

Techniques for Allocating Environmental Risks

• Environmental Due Diligence

• Contract Terms

¤ Representations and Warranties

¤ Covenants and Conditions Precedent

¤ Indemnities

¤ Releases

¤ Purchase Price Adjustment

¤ Cost Sharing

¤ Escrows

¤ Financial Assurance Mechanisms

• Deed Restrictions

• Environmental Insurance

Environmental Due Diligence

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Key Purposes of Environmental Due Diligence

• Qualify for CERCLA landowner liability

protections/conduct “All Appropriate Inquiries”

• Identify, quantify & allocate environmental risks

• Obtain information to negotiate/structure deal properly

• Identify environmental requirements that must be met

before/concurrent with closing (e.g., permit transfers,

disclosures/notices related to transfer)

15

Tools for Conducting Due Diligence

• Expert and experienced:

¤ Environmental legal counsel

¤ Environmental consulting team

• Knowledgeable EH&S staff (both sides)

¤ Help define review scope and materiality thresholds

• Phase I Environmental Site Assessment

¤ Required for “all appropriate inquiries”

¤ Governed by regulatory and engineering standards:

∆ All Appropriate Inquiries (40 CFR Part 312)

∆ Phase I (ASTM E1527-05)

• Customized due diligence checklist

¤ Regulatory standards only a baseline

• Timetable allowing for early & complete review

16

Phase I Environmental Site Assessment

• Review of public records/site

¤ ASTM E1527-05: Identify presence/likely presence of any

hazardous substances or petroleum products

¤ “All appropriate inquiries” (“AAI-scope”) review on the target

property (40 CFR 312)

• Four elements of Phase I (ASTM E1527-05)

¤ Records Review

∆ Historical & current records, public environmental databases,

documents provided by seller

¤ Site Reconnaissance

¤ Present/Past Owner & Occupant Interviews

¤ Phase I Report

∆ Identifies recognized environmental conditions (RECs)

∆ Identifies data gaps

∆ Provides opinion regarding additional investigation (e.g., Phase II)

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Landowner Liability Protections/“All Appropriate Inquiries”

• “All Appropriate Inquiries” (i.e. Phase I) – Evaluation of

potential contamination at/near a property prior to

acquisition

¤ Establishes baseline for documented conditions at time

property is acquired

¤ Protects certain buyers from liability for existing contamination

• Must meet 40 CFR Part 312 or ASTM E1527-05

¤ May need to update existing Phase I if not done within 1 year

of acquisition (site visit, interviews, records = 180 days)

• Notable areas of review

¤ Hazardous material use/inventory & migration from adjoining

properties

¤ Vapor migration/intrusion

¤ Land use restrictions

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Phase I – Matters to be Reviewed Within AAI-Scope

• Records Review (potential

releases/contamination)

¤ Owner/Operator Records

¤ Government Records

¤ Other Records

• Site reconnaissance

• Owner and occupant interviews

(present/past)

19

Beyond the Phase I – Gathering Additional Information About Environmental Issues

• Types of liability (federal/state/local)

¤ CERCLA/remediation liabilities

¤ Environmental tort liabilities

¤ Environmental liabilities created by contract

¤ Other environmental compliance obligations (to government or

third parties)

∆ Air quality/greenhouse gases

∆ Hazardous waste management & disposal

∆ Asbestos, PCBs, mold, lead-based paint

∆ Wetlands & endangered species

• Allocation of liabilities between buyer & seller

• Actual vs. threatened liabilities

• Known vs. unknown/potential liabilities

• What liabilities are “material”?

• Possible need for Phase II subsurface investigation

20

Beyond the Phase I – Gathering Additional Information About Environmental Issues (cont.)

• General permitting/regulatory compliance review

¤ Permits, authorizations, orders/consent decrees

¤ Notices of violation, related agency correspondence, “no further

action” letters

¤ EH&S operating procedures

• Issues other than hazardous substance releases to soil/water

¤ E.g., air quality, greenhouse gases, lead in drinking water,

wetlands, historic preservation, archaeological resources

• Environmental insurance

• Seismic evaluation

21

Obtaining Information to Negotiate/Structure Deal

• Allocation of environmental risks between buyer & seller

• Choice of acquisition type (e.g., asset purchase vs. merger)

• Assessment of potential current/future remediation &

compliance costs in pricing deal or obtaining concessions

¤ Including discovered or planned capital expenditures/buildouts

• Properly value property to be transferred

• Structure deal to ensure application of landowner and/or

lender liability protections

• Anticipate potential issues with timing of closing

• Evaluate need to acquire/supplement environmental

insurance

• Determine whether to proceed with transaction

22

Identify Environmental Requirements Required to Execute Transfer of Property

• Permit transfer requirements

¤ Must permits be transferred? (stock sale vs. asset sale)

¤ Transfer vs. cancellation & obtain new permit

¤ Timing requirements for prior notice to permitting agency

¤ Transfer of consent decrees, orders, settlement agreements

¤ May need to assure compliance prior to transfer

• Property transfer disclosure requirements

¤ Many states require some form of pre-transaction disclosure for

sites with hazardous substances

¤ NJ and CT also require commitment to remediate

¤ E.g., NJ Industrial Site Recovery Act – State notice and

approval required prior to sale of “Industrial Establishment”;

commitment to clean up site

Contract Risk Allocation Techniques

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Representations and Warranties: Common Examples

• Comply with all environmental laws

• Have, maintain, & comply with environmental permits

• Handling, storage, transportation, disposal & treatment of

hazardous materials/wastes all in compliance

• No receipt of notices alleging:

¤ Violations of any environmental requirements;

¤ Third-party liability related to environmental requirements or

conditions

• No on- or off-site releases of any hazardous substances

(note: some include “in violation of environmental laws”)

• All environmental reports/data/docs disclosed

• Whether vapor intrusion or migration testing has been done

within or beneath any facilities or properties

25

Representations and Warranties: Other Factors

• Materiality Qualifiers

• Knowledge Qualifiers

• Duration/Survival Period

• Disclosure Schedules

• Exclusivity

26

Covenants and Conditions Precedent

• Pre-Closing Covenants

¤ Examples

∆ Seller shall operate and maintain all facilities in compliance

with all applicable environmental laws

∆ Seller shall immediately notify purchaser of any notices

received by seller alleging violations of environmental laws

∆ Seller shall ensure compliance with all permit transfer

requirements (or warrant no such requirements)

• Post-Closing Covenants

¤ Example - Covenant to complete existing cleanup, post-

closing compliance plan, agreement on cleanup standards

• Remedies for Breach of Covenants

¤ Example - For seller material breach, purchaser right to

terminate with no liability

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Indemnities

• Allocate remediation and other liabilities

¤ Fines, penalties, capital expenditures for violations of law

¤ Tort claims

¤ Natural resource damage claims

• Potential Scope of Indemnity - Indemnification for:

¤ Breaches of representations and warranties

¤ Excluded environmental liabilities

¤ Excluded assets/liabilities (e.g., seller-retained assets)

¤ Known/unknown environmental conditions

• Limitations on Indemnity:

¤ Deductibles

¤ Caps/Thresholds

¤ Survival periods

28

Release and Covenant Not to Sue

• Scope

¤ Broad

¤ Limited or Specific

• Reciprocal or Not

29

Other Contract Risk Allocation Techniques

• Purchase Price Adjustment

• Cost Sharing

• Escrows to fund cleanup

• Financial assurance mechanisms

• Restructure deal

Non-Contract Risk Allocation Techniques

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Deed Restrictions

• Prohibit use of property for specific uses

• Limit use of property to specific uses

• Prohibit use of groundwater beneath property

32

Environmental Insurance

• Pollution Legal Liability (PLL) Policies

• Cleanup Cost Cap Policies

• Blended PLL/Cost Cap Policies

• Pricing, Availability and Timing Issues

Conclusion

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Conclusion

• Environmental Risks Can Be Substantial

• Substantial Number of Federal, State, and Local Legal

Requirements

• Risks Are Always Present

• Many Contract and Non-Contract Techniques Available to

Allocate Risks

• Key Strategic Factors

¤ Know the Facts: Perform Thorough Due Diligence

¤ Plan Ahead: Learn Deal Structure & Risk Preferences

¤ Ensure Sound Schedule: Don’t Do Last-Minute Due Diligence

¤ Allocate the Environmental Risks: Do Creative Contract

Drafting

Contact Information

Edward L. Strohbehn Jr.


Three Embarcadero Center

San Francisco, CA 94111

(415) 393-2059

[email protected]

Michael S. McDonough


355 South Grand Avenue, Suite 4400

Los Angeles, CA 90071

(213) 680-6600

[email protected]

William J. Squires III


One Federal Street

Boston, MA 02110

(617) 951-8273

[email protected]

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