Environmental Due Diligence for M&A Transactions

Part 1-Introduction

A common purchase in the United States is a car, something necessary for many of us to get to work, travel to the grocery store, pick-up kids at school — among the thousands of destinations where Americans use their car. When we buy a car, we often do an investigation, so to speak. We do online research on the vehicles that peak our interest, we inspect the vehicle at the dealership, we ask questions of the dealer, and we test-drive the car. We do what we can to protect our imminent investment; to make sure we aren’t purchasing something that might break down or cause more headaches than we bargained for. These investigations are common to anyone that has purchased a car. Similarly, for a smaller contingent of the population — owners, developers, insurance companies, lenders, and investors, for example — these investigations also occur (or should occur) on land that’s purchased through a merger or acquisition.

Due diligence assessments are used for multiple reasons and by different parties to a transaction. A buyer will use an assessment to determine whether a piece of property (or property connected to an entity being acquired) has potential environmental contamination concerns and whether any issues may necessitate remedial action in the future. Thus, such an investigation might alter the purchase price or it might dissuade a buyer from going through with a closing. A seller might conduct due diligence on their property to better determine value. Lenders will use due diligence investigations — conducted by the buyer or purchaser or itself—to determine environmental liabilities that might follow a borrower and their ability to pay back a loan, affecting the lender’s ability to securitize a loan. It also allows the lender to identify contamination that might take precedent over its lien against the property and assist it to better decide on whether foreclosing on a property is desirable. Lastly, due diligence findings can also determine how the parties allocate environmental liabilities, which can influence the contract drafting process (some provisions may be needed less, influencing bargaining positions).

This will be the first of many posts on the environmental due diligence that must be conducted in connection with asset or entity purchases. Like buying a car, there are often common mistakes made leading up to a purchase that concerns land. Mistakes include not allowing sufficient time to complete comprehensive due diligence; ignoring the All Appropriate inquiry rule; discussions with professionals and consultants on the buyer’s planned use for the property; and when necessary, ensuring that the due diligence is not simply limited to Phase One. Depending on the type and size of the transaction, and the laws and regulations that are relevant to the transaction, environmental due diligence can include an examination of the target company’s records and its compliance with environmental requirements; liability potential at sites formerly and/or currently used by the company; and sites where the company arranged to dump hazardous materials. Although there are significant complexities involving each of these, this series of blog posts will focus on how to avoid common mistakes and educate the reader on environmental best practices when an acquisition concerns real property.