Presenting a live 90-minute webinar with interactive Q&A Allocating Environmental Risks and Liabilities Structuring Contract Provisions to Limit Risk in Commercial Transactions THURSDAY, SEPTEMBER 13, 2012 1pm Eastern 12pm Central 11am Mountain 10am Pacific Today s faculty features: 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 The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10.
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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)
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 Bingham McCutchen LLP All Rights Reserved: Edward L. Strohbehn Jr., Michael S. McDonough and William J. Squires, III (2012) 6
Introduction 7
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 8
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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 10
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 11
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 12
Environmental Due Diligence 13
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) 14
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 15
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) 16
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 17
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) 18
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 19
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 20
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 21
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 22
Contract Risk Allocation Techniques 23
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 24
Representations and Warranties: Other Factors Materiality Qualifiers Knowledge Qualifiers Duration/Survival Period Disclosure Schedules Exclusivity 25
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, postclosing compliance plan, agreement on cleanup standards Remedies for Breach of Covenants Example - For seller material breach, purchaser right to terminate with no liability 26
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 27
Release and Covenant Not to Sue Scope Broad Limited or Specific Reciprocal or Not 28
Other Contract Risk Allocation Techniques Purchase Price Adjustment Cost Sharing Escrows to fund cleanup Financial assurance mechanisms Restructure deal 29
Non-Contract Risk Allocation Techniques 30
Deed Restrictions Prohibit use of property for specific uses Limit use of property to specific uses Prohibit use of groundwater beneath property 31
Environmental Insurance Pollution Legal Liability (PLL) Policies Cleanup Cost Cap Policies Blended PLL/Cost Cap Policies Pricing, Availability and Timing Issues 32
Conclusion 33
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 34
Contact Information Edward L. Strohbehn Jr. Bingham McCutchen LLP Three Embarcadero Center San Francisco, CA 94111 (415) 393-2059 edward.strohbehn@bingham.com Michael S. McDonough Bingham McCutchen LLP 355 South Grand Avenue, Suite 4400 Los Angeles, CA 90071 (213) 680-6600 michael.mcdonough@bingham.com William J. Squires III Bingham McCutchen LLP One Federal Street Boston, MA 02110 (617) 951-8273 william.squires@bingham.com 35
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