Environmental Issues and Trends In Transactions

Stacy KraySkadden, Arps, Slate, Meagher & Flom

LLP San Francisco

Thomas McHenry Gibson Dunn & Crutcher LLP

Los Angeles

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Outline Objectives Overview of Environmental Law Framework Recent Trends—Regulation, Enforcement and

Other Developments Environmental Considerations in Transactions Environmental Diligence and Negotiations

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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)

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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

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Introduction to the Environmental Framework—Potentially Responsible Parties

Current and prior owners and operators

Owners/operators at time of disposal Generators Transporters Contractual liability

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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)

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Protecting Against CERCLA Liability

CERCLA’s safe harbor provisions Establishing the “innocent purchaser”

defense New “All Appropriate Inquiry” standards

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Additional Liability Concerns

Strict liability Retroactive liability Joint and several liability

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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

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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

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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

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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

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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

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Environmental Disclosures Under Securities Laws

Item 101 – Description of Business Item 303 – MD&A Item 103 – Legal Proceedings Financial Statements (GAAP)

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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)

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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

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Sarbanes-Oxley Developments Obstruction of justice and document

retention issues Certification of company reports Compliance programs Sensitivity to disclosure

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Business Issues Affecting Environmental Diligence

Type of transaction Type of company Client needs Constraints on transaction Purchase versus auction

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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

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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

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

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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