Mitigating risks Featured

7:00pm EDT November 25, 2008

Any business owner will tell you that the current economy is forcing some hard choices. Still, difficult times can create opportunities, such as acquiring businesses or property on favorable terms. But, this is a delicate endeavor. You’ve got to consider all the risks involved, particularly the environmental ones.

“Don’t underestimating potential environmental risks while trying to reduce costs or turn a profit,” says Chris Jones, an attorney with Calfee, Halter & Griswold LLP. “You’ll likely end up losing more than you save.”

Smart Business spoke with Jones about environmental risks, how to spot them and how to pull off successful acquisitions.

What environmental exposures can owners face when considering an acquisition?

Simply considering an acquisition will not create any environmental liabilities, nor will completing the necessary due diligence on environmental matters prior to an acquisition. But, once the deal is done, there are several potential environmental liabilities that may be inherited by the purchaser. Whether it is an existing underground storage tank that has leaked or old drums of hazardous wastes that have been stored in a building or the seller’s failure to obtain all of the permits that are required to run the operations, once you become the owner, you own the liabilities. Some problems are easily remedied (though perhaps at a significant cost), but others can result in complicated, expensive, time-consuming environmental cleanups.

For example, the lack of permits can be remedied, but you face the threat of shutdown while the permits are obtained. Hazardous wastes can be disposed of properly, but they may have created a hazardous waste ‘unit’ that must be properly ‘closed’ under state regulations and monitored for several years thereafter at great expense to the purchaser. A leaking underground storage tank could cost hundreds of thousands of dollars to clean up as you chase the plume of contamination resulting from the leak.

If a company faces environmental exposures, what should it do?

The essential first step prior to an acquisition is to complete a Phase I environmental assessment of the facilities you plan to acquire. Even for small operations, this is money well spent. Under the U.S. EPA’s ‘All Appropriate Inquiries Rule,’ in order to claim protection from liability under CERCLA (the Comprehensive Environmental Response, Compensation and Liability Act, or the ‘Superfund’ statute) as an ‘innocent landowner,’ a ‘bona fide prospective purchaser’ or a ‘continuous property owner,’ the purchaser may only avoid liability by completing a Phase I assessment within six months prior to the acquisition and address all of the ‘recognized environmental conditions’ identified during the assessment. The cost of such an assessment will vary according to the size and complexity of the property/facility being purchased, but if it identifies an environmental problem that could costs hundreds of thousands of dollars to address, it will be money well spent. In addition to CERCLA liability protection, it is a tool that can be used to evaluate the potential environmental risks associated with the acquisition with an eye toward structuring a deal to account for those potential risks.

For example, if you know that the property you intend to purchase was once a gas station, the Phase I assessment can tell you whether there is any record of a release from the underground storage tanks that are/were on the site and what was done in response to the release. With that information, a purchaser can evaluate the potential risks and account for those risks as a part of the transaction. In any transaction, depending on the nature of the potential risks and the amount of information available, the deal can be structured to account for these exposures in a manner that makes the most economic sense. The structure could be in the form of a reduced purchase price or setting aside a part of the purchase price to account for potential remedial costs.

If a company doesn’t properly address environmental exposures, what consequences could it face?

The most onerous environmental statute is CERCLA, which says an owner or operator of a facility with a release of a hazardous substance is strictly, jointly and severally liable for the cost of cleaning up the contamination. What that means is, if you are the owner of a contaminated property and you have not done your due diligence under the ‘All Appropriate Inquiries Rule’ prior to your acquisition, you can be held liable for the complete cost of the cleanup. There may be opportunities for you to recover your costs from other parties (like the seller), but the government is going to look first to the current owner of a contaminated property to get the cleanup completed. In short, if you don’t address these issues prior to the acquisition, it will be a cost that you will bear.

What does a company need to do during a business or property acquisition with environmental concerns?

The company must complete its environmental due diligence and account for any environmental problem identified. The company may not need to complete a cleanup if the purchase agreement requires the seller to deal with it. But, each recognized environmental condition identified during due diligence must be accounted for in order to provide the best protection for the purchaser.

CHRIS JONES is an attorney with Calfee, Halter & Griswold LLP. Reach him at CJones@Calfee.com or (614) 621-7004.