Environmental concerns are always an important part of transactions — from mergers to real estate deals — and lawyers tasked with environmental due diligence have seen big changes in their practice area over the past few years.
They must track a variety of factors that drive how they provide deal-oriented environmental analyses and risk management services to clients, from market forces to regulation to how much public relations factor into the mix, and recent developments have altered the legal landscape and provided lawyers with tools they haven't had in the past.
“In a lot of deals, there are many more options for managing environmental risk,” Kirkland & Ellis LLP partner Paul Tanaka said.
Here are four trends attorneys that do environmental reviews for transactions ought to have on their radar.
Indemnification vs. Insurance Policies
In the past, parties to a deal would almost always rely on an indemnification from the seller for environmental liabilities that were identified in the due diligence for a transaction, according to Tanaka.
“In recent years, the market in general is much more of a seller’s market, and the ability to get a seller to indemnify a purchaser in a transaction has decreased somewhat,” he said.
To deal with that market reality, attorneys are now relying on representation and warranty insurance to give buyers peace of mind. Whereas in the past, sellers routinely offered indemnification policies to buyers in the event some representation that was made in the agreement turned out not to be true — such as a property not being contaminated or being in compliance with all environmental laws — now attorneys are suggesting insurance policies to protect buyers' interest.
Abbi Cohen, a partner at Dechert LLP, said an added element to this new equation is that carriers have to feel confident in the policies they issue, which depends on environmental attorneys making sure the parties to the deal have the appropriate risk assessment. In a twist, involving an insurance carrier can actually end up prolonging the time it takes to complete the deal in some instances.
“In another transaction without an R&W carrier, a client, like a private equity firm, might be comfortable with a much more preliminary assessment, without having professionals spend the time and the money to develop the fulsome environmental due diligence,” Cohen said.
Responsibility for Initial Environmental Assessments
The very nature of due diligence itself has changed over time, Annemargaret Connolly, a partner at Weil Gotshal & Manges LLP and chair of the firm’s environmental practice, said. One example of that is that some sellers are doing more to prepare, from an environmental perspective, to bring themselves to market.
It used to be common for buyers to be responsible for gathering and analyzing environmental data, but now, Connolly said, some sellers are undertaking initial environmental reviews and then offering up that information to bidders in the form of “data rooms,” which used to be physical locations where company secrets were kept but now are secure internet pages.
“It makes the process work faster and easier because you don’t have various parties asking you to access your property to do site visits, which is very disruptive,” Connolly said, referring to seller-initiated reviews.
Buyers still have to investigate to make sure the seller’s information is complete and correct, she said, and if they’re uncomfortable they can see about doing some more research and analysis of their own, she said.
“If you get picked as the final bidder, you may ask to go to one or two or a handful of sites, not do a full-blown review, but just to confirm that what you’re being told in materials provided to you is consistent with what your consultants find,” Connolly said. “That’s a change from the way it used to be.”
Product-Related Compliance Concerns
Tanaka said another recent shift on the buyers’ end is worrying more about product-related environmental regulatory compliance than about unknown contamination at a site, reflecting that the more ingredients there are in products, the more potential regulation there will be by environmental authorities across the globe.
“It’s maybe less from a liability risk in terms of a contaminated site or an enforcement action, but it could have significant risk if your products have ingredients that do not belong in them or are violating laws in certain jurisdictions,” he said of the compliance concern. “That can significantly impact your ability to sell those products in those jurisdictions without reformulating them or coming up with other methods to comply with the environmental laws.”
Developing a product-related analysis can dramatically increase the complexity of an attorney’s work on a particular deal if those types of products are involved, because of the various regulatory and legal regimes that have to be studied in an analysis, he said.
Cohen noted that when the transaction is international, there are even more concerns. She said the European Union has been quite proactive in using its Registration, Evaluation, Authorisation and Restriction of Chemicals regulation, which controls the use of chemicals differently from the U.S.
“It’s not enough to get some sense as to what the scientific community is thinking about. You have to think about it in context, and what jurisdiction is relevant for the business your client is thinking about,” she said. “It’s worthwhile thinking about what’s happening around the rest of the world because that regulation is likely to move to the U.S.”
Considering the Current Regulatory Environment
Connolly said one trend that has popped up, in light of the Trump administration’s deregulatory agenda, is how likely a business is to be targeted by a nongovernmental organization for possible environmental issues.
“You used to be able to evaluate a facility’s risk by looking at what the federal government might have been doing or the state. … The federal government isn’t doing a lot now with enforcement,” she said. “We’re starting to look at newspaper articles to see if there are any NGOs or any activist groups that could start to create real headaches, from a PR perspective.”
She said that not only can environmental and citizen groups create public outcry about a facility or some other aspect of a business that may be involved in a potential deal, they can inflict real damage by weighing in during permit application or renewal processes and by filing lawsuits.
“We need to start paying attention because the result can be just as costly,” she said.
Along those lines, Tanaka said he tells his clients not to correlate their risk management to whatever the current approach is of the federal executive branch.
“Even if the overall regulatory environment is less stringent, I think that there are others that will still be focused on environmental compliance and risks, including lenders or insurers or future buyers,” he said. “You don’t want to be in a situation where you don’t take those risks into account and two years later the approach changes and your clients are now looking to sell a company.”
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