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Ten Tips and Takeways for Buying or Selling an Environmentally "Dirty" Business

The 2011 Business Law Institute

May 5, 2011

Joseph J. Humke and Katherine A. Roek

Ten Tips and Takeaways for Buying or Selling an Environmentally "Dirty" BusinessThe 2011 Business Law Institute

Ten Tips and Takeaways for Buying or Selling an Environmentally "Dirty" BusinessThe 2011 Business Law Institute

Outline

I. An Environmental Law Primer

II. An M&A Primer

III. Ten Tips and Takeaways

Ten Tips and Takeaways for Buying or Selling an Environmentally "Dirty" BusinessThe 2011 Business Law Institute

Federal Laws

State Laws

Local Laws

Ten Tips and Takeaways for Buying or Selling an Environmentally "Dirty" BusinessThe 2011 Business Law Institute

CERCLA

Ten Tips and Takeaways for Buying or Selling an Environmentally "Dirty" BusinessThe 2011 Business Law Institute

Joint and Several Liability Among Current and Former Owners of Property

Ten Tips and Takeaways for Buying or Selling an Environmentally "Dirty" BusinessThe 2011 Business Law Institute

What Can Buyers Do?

1. Conduct "All Appropriate Inquiry" ("AAI")

2. Satisfy remaining Bona Fide Prospective Purchaser ("BFPP") Requirements

3. Keep Good Records

Ten Tips and Takeaways for Buying or Selling an Environmentally "Dirty" BusinessThe 2011 Business Law Institute

Basic M&A Transaction Structures

1. Asset Purchase

2. Stock (Equity) Purchase

3. Merger

Ten Tips and Takeaways for Buying or Selling an Environmentally "Dirty" BusinessThe 2011 Business Law Institute

Primary Indemnification Questions*

1. WHO

2. WHAT

3. HOW LONG

4. HOW MUCH

5. SECURITY* Indemnification usually not available in acquisitions of public companies

Ten Tips and Takeaways for Buying or Selling an Environmentally "Dirty" BusinessThe 2011 Business Law Institute

Successor Liability . . . Next In Line

Ten Tips and Takeaways for Buying or Selling an Environmentally "Dirty" BusinessThe 2011 Business Law Institute

Tip # 1: Secure Local Knowledge

Hire an environmental consultant with local knowledge

Preferably, first-hand experience in the given industry, and with state/local agency

Benefit of legal counsel engaging consultant?

Ten Tips and Takeaways for Buying or Selling an Environmentally "Dirty" BusinessThe 2011 Business Law Institute

Tip # 2: Conduct a Phase I

At a Minimum, Take the First StepTowards Qualifying for the BFPP Defense

Ten Tips and Takeaways for Buying or Selling an Environmentally "Dirty" BusinessThe 2011 Business Law Institute

Tip # 3: To Phase II or Not Phase II

Some Considerations . . .

"Recognized Environmental Conditions" in Phase I

Reliance on pre-existing Phase II test results (if available)

Time

Cost

What parties intend to do with results

Reporting obligations

Ten Tips and Takeaways for Buying or Selling an Environmentally "Dirty" BusinessThe 2011 Business Law Institute

Tip # 4: Establish a Communication Plan

• Buyer wants to understand lay of the land

• Seller may not want to incur reporting obligations

• BUT! If a "release" is found during Phase II activities, the owner is obligated to report (and potentially the consultant)

• Establish the ground rules for communication of results (from Buyer Seller, and Seller agency) BEFORE testing begins

Ten Tips and Takeaways for Buying or Selling an Environmentally "Dirty" BusinessThe 2011 Business Law Institute

Tip # 5: Buyers . . . Consider Financing Sources

Financing sources may have internal environmental testing requirements . . .

Remember, he/she who holds the money, usually has the last word on what is or is not to be done

BE SURE EVERYONE IS ON THE SAME PAGE FROM THE OUTSET

Ten Tips and Takeaways for Buying or Selling an Environmentally "Dirty" BusinessThe 2011 Business Law Institute

Tip # 6: Understand Indemnification Dynamic

Buyers may conduct Phase II testing to better define risk while, at the same time, wanting to seek indemnification for all pre-closing environmental liabilities

Sellers may attempt to limit indemnification obligation to known environmental conditions identified through Phase II

Ten Tips and Takeaways for Buying or Selling an Environmentally "Dirty" BusinessThe 2011 Business Law Institute

Tip # 7: Diligence Third-Party Recovery Sources

1. Other Responsible Parties

2. Insurance

Pre-dating pollution exclusion

Environmental liabilityinsurance

Ten Tips and Takeaways for Buying or Selling an Environmentally "Dirty" BusinessThe 2011 Business Law Institute

Tip # 8: Don't Forget About Permits

• Are there permits?

• Are they current?

• Is the Seller in compliance with all conditions of current permits?

• Are there any past violations of permits?

• Are the permits transferable to a new owner?

• Are any additional permits required?

Ten Tips and Takeaways for Buying or Selling an Environmentally "Dirty" BusinessThe 2011 Business Law Institute

Tip # 9: Uncertainty is a Certainty

• Latent issues may surface AFTER closing

• Phase II investigations may not reveal all site conditions

• WHO is going to bear the risk of liability associated with these uncertainties?

• WHAT protections to Buyers have in light of uncertainty?

• Will indemnifications survive?

Ten Tips and Takeaways for Buying or Selling an Environmentally "Dirty" BusinessThe 2011 Business Law Institute

Tip # 10: Don't Let the Tail Wag the Dog

Keep Environmental Issues in Perspective . . . Environmentally "Dirty" Businesses Get Bought and

Sold All the Time

Ten Tips and Takeaways for Buying or Selling an Environmentally "Dirty" BusinessThe 2011 Business Law Institute

Q&A