Post on 31-Mar-2015
E E M M
EME SolutionsEnvironment, Management & Engineering
Optimizing the Environmental Due Diligence Process
Angela Libby Jankousky(303) 279-7647,
alj.emes@home.com
For Executive Enterprises October 20, 2000
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Presentation Goals
Why do environmental due diligence?
Historical evolution Standard (ASTM) process Enterprise-wide due diligence Framework for optimizing
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Why Do Due Diligence?
To accurately value the business by:
Uncovering anything that affects the Decision to acquire the business Price Structure and terms of the deal
$$$
$$$
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Why do EHS* Due Diligence
Innocent land owner defense Environmental baseline Civil and criminal liability Tap remediation funds Impact of upcoming regulations Understand product liability
$$$
$$$
*Environmental, Health and Safety
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An Iterative Process
Structure of the deal drives the process Start: assume all liabilities are your
client’s And they’re wretched
. . . Then back off As data indicate liabilities are not so bad
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CERCLA Liability
Who: “Potentially Responsible Parties” Current & former owners and operators Companies that arranged for disposal Transporters Generators
Retroactive and Strict Liability Joint and Several Liability
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Only 3 Defenses
Act of warAct of God Innocent Land Owner Defense
(‘86) Purchaser did not know and had no
reason to know about the contamination Catch 22
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The Big Bang
Include current sites, former sites, disposal sites.
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A Cautionary Tale
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Why do EHS Due Diligence?
Innocent land owner defense Environmental baseline Civil and criminal liability Tap remediation funds Impact of upcoming regulations Understand product liability
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For Continuing Operations
Guilty: Knowing Violation
Guilty: Should Have Known
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Compliance Audit Strategy
Noncompliance(s) discovered: Plan to correct immediately, or
Disclose to EPA under Audit Policy Reduced gravity-based penalties
Penalty for economic benefit No recommendation for criminal
prosecutionSee www.epa.gov/oeca/ore/apolguid.html Effective 5/11/00
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Compliance Audit Strategy
Noncompliance(s) not discovered: But suspected
Incorporate into corporate audit system May have more than 21 days to report
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States w/ Audit Privilege and Immunity Laws (6/1/00)
ColoradoSouth DakotaKentuckySouth CarolinaMinnesotaNew
HampshireWyoming
OhioUtahMontanaTexasAlaskaKansasNevada
VirginiaNebrask
aMichiganIowaArizonaIdaho
Source: Katheryn Jarvis Coggon, Holme Roberts & Owen, LLP
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Environment, Health & Safety
Innocent land owner defense Environmental baseline Civil and criminal liability Tap remediation funds Impact of upcoming regulations Understand product liability
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Impact of Upcoming Regulations
Material costs should be disclosed
Examples of potentially high cost issues Air Toxics regulations Montreal Protocol requirements (CFCs) Ergonomics Issues
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Johns Manville’s Lesson
“I cannot possibly say how many companies are putting themselves and their employees and customers at this kind of risk today. I think I do know that voluntary product stewardship adds up to competitive advantage over the short term and a greatly improved chance of survival and profit into the future.”
-- Bill Sells, HBR March-April 1994
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Product Liability Issues
Recent bankruptcies Dow Corning (silicone breast implants) Owens Corning (asbestos)
Future Issues ??
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Presentation Goals
Why do environmental due diligence?
Historical evolution Standard (ASTM) process Enterprise-wide due diligence Framework for optimizing
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Evolving Due Diligence Process
500 BC Caveat emptor
1651 AD The buyer needs a hundred eyes,
the seller not one. G. Herbert
1986 CERCLA Section 101(35)(B)
(From ABA’s Journal of Natural Resources & Environment, Fall 2000, Bruce Ray, ed.)
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What happens if we buy the contaminated property?
“It would be baaaaad!!”
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Post-CERCLA Evolution
Chaos The beginnings of
standardization ASTM standards (1993) Today
Check off the environmental box Tailor process to the transaction
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Due Diligence Costs, Timing
Phase II
Phase I
Identify Acqu isition Target
$1.5K - $7K/site
$10K- $$$!/site
One month
At least onemore month
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Due Diligence Cost Factors
Phase I Complex site history Site Location (travel costs) Complexity of neighbors Availability of local records Consultant expertise
Phase II Scope of sampling Cost of expediting samples
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Presentation Goals
Why do environmental due diligence?
Historical evolution Standard (ASTM) process Enterprise-wide due diligence Framework for optimizing
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Std Practice for Environmental Site Assessments: Phase I
“To define good commercial and customary practice for conducting an environmental site assessment”
ASTM E 1527 -- 00
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ASTM E 1527 -- 00
Intent: innocent landowner defense
Not designed to assess business environmental risk
www.astm.org
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Phase I Environmental Site Assessment
Records ReviewSite ReconnaissanceInterviewsReport
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Records Review
Standard Environmental Record Sources
Additional Environmental Record Sources
Physical Setting Sources Historical Use Information
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Standard Environmental Records
Federal NPL site list Federal CERCLIS list
CERCLIS NFRAP list RCRA facilities list
RCRA generators list RCRA TSD facilities list
Federal ERNS list State NPL list
State CERCLIS State registered USTs
State Leaking UST lists
State landfill & solid waste disposal lists
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Local Environmental Records
Data listsBrownfield sites
Data sourcesDept. of Health/Environ.
Lists of landfill sitesLists of haz waste sitesRecords of wellsUST listsLocal land recordsRecords of Emergency release reports
Fire Dept.Planning DeptLocal/Regional AgenciesLocal Electric CompaniesBuilding Inspection /Permit Dept
(not exhaustive)
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Physical Setting Sources
Required USGS 7.5 Minute Quad Map
Discretionary Groundwater maps Bedrock geology maps Soil maps Others
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Historical Use Information
Develop a history of the property All obvious uses of the property from
present1940 orFirst use
Whichever is earlier
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Standard Historical Sources
Aerial photographs Fire insurance maps Property tax files Recorded land title records USGS Quad Maps Local Street Directories Zoning/Land Use Records Other: including maps, newspaper
archives, personal recollections, etc.
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Phase I Environmental Site Assessment
Records ReviewSite ReconnaissanceInterviewsReport
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Site Reconnaissance
Observation: Exterior and Interior Identify Uses
Current and past uses Current and past uses of adjacent property
Conditions Geologic, Hydrogeologic, Hydrologic Topographic Structures Roads Potable Water Supply Sewage Disposal System
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Site Uses -- Observations
Geologic, hydrologic and topographic conditions
Condition of structures
Potable water supply Sewage disposal Waste disposal Ponds, pools of liquid
Use, storage of petroleum prods.
Storage tanks Odors Drums PCBs
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Building -- Observations
Heating/Cooling & fuel source
Drains and sumps
Pits Stained soil or
pavement
Stressed vegetation Solid Waste Storage Tanks Wells Septic Systems Stains or Corrosion
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Phase I Environmental Site Assessment
Records ReviewSite ReconnaissanceInterviewsReport
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Those who may be interviewed
Key site manager Site Occupants Environmental or safety
professionals Site Corporate
Those with info re: previous practices
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Interviewee Balancing Act
Desire to be:TruthfulHelpfulLoyal to pro-spective emp.
Desire to be:Loyal to employerProtective of past mistakes
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Interview Questions
Location/ existence of other documents Audit reports Site assessments Permits Questions that follow from record review
Current and previous disposal practices Any pending or threatened
proceedings?(Not an exhaustive list)
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Interviews w/ Gov’t Officials
To obtain information indicating recognized environmental conditions
Local Agencies to be Interviewed Fire Department Hazardous Waste Disposal Health Agency
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Phase I Environmental Site Assessment
Records ReviewSite ReconnaissanceInterviewsReport
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Report Should Contain
The scope of services Findings of known or suspect en.
conditions Opinion with rationale Conclusions Summary of deviations (if any) References Signature
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ASTM Phase I “Non-scope” Considerations
Asbestos Health and Safety
Radon Ecological resources
Lead-Based Paint Endangered Species
Lead in Drinking Water
Indoor air quality
WetlandsRegulatory Compliance
Cultural resourcesHistoric resources
Industrial Hygiene High voltage power
lines
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Post ASTM Phase I
Get a rough estimate of liabilities Consultant’s understandable
reluctance Huge error bars around these
estimates
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Lesser Liability Range
0 1 2 3 4 5
Spill
UST Leak
Asbestos
Lead Paint
Radon
Potable H2O
EMF
Indoor Air
Permit Transfers
$ Millions
PotentialTypical
Source: Wayne Tusa, Environmental Risk and Loss Control, Inc.
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More Costly Potential Liabilities
0 20 40 60 80 100
Oth. Soil Cont.
Groundwater
Off-Site Disp
CFCs
Noncompliance
Fines
Occ Exp
Haz Prods
Millions
Potential Typical
Source: Wayne Tusa, Environmental Risk and Loss Control, Inc.
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Overlapping Interests
Envir. Consult.Comfortable w/ASTMReluctant to estimate costsWould like to do a Phase IIWants repeat business
Buyer’s MgtWants answer
Tolerates uncertainty,
depending on the structure of the deal
Generate CostsWith error bars
& probabilities
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Is Phase II Necessary?
No sig. liabilities
Can be managed
contractually?
Phase I
Maybe.Need more data
No. Deal killers
Phase II
Yes.
Potentiallysignificant liabilities
Develop aStrategy foreach issue
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Presentation Goals
Why do environmental due diligence?
Historical evolution Standard (ASTM) process Enterprise-wide due diligence Framework for optimizing
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Confidential Due Diligence
Confidentiality for Public Transactions See Minimizing Risks in Public Company
Mergers and Acquisitions, Judith A. Walkoff and Eric B. Rothenberg, Natural Resources and the Environment, Fall 2000
SEC disclosures www.sec.gov/edgarhp.htm Materiality Threshold Different Interpretations
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Relying on Representations and Warranties
Interview Corporate Environmental Staff Understand their FAS 5 process Environmental Management Systems Corporate Audit Program Review web page, enforcement records Safety as a barometer of performance
www.osha.gov/cgi-bin/est/est1
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Seller’s Environmental Staff
Torn between Auditioning for a job Internal tensions regarding disclosure Knowledge of past mistakes Absence of knowledge
Design enterprise due diligence scope After conversations with seller’s staff
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Representing the Seller
Well organized data room Desk-top Phase I Relevant permits, audits, other
records Access to those with the answers
Trained to understand their role
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Presentation Goals
Why do environmental due diligence?
Historical evolution Standard (ASTM) process Enterprise-wide due diligence Framework for optimizing
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Value-Added Due Diligence
Objective:Max: $ Increased Value of the Deal –
$ Cost of environmental due diligence
Constraints Find any deal killers Find all leverage opportunities Provide information on time Preserve confidentiality Allocate scarce due diligence resources Preserve Innocent Landowner Defense
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Scoping Environmental Due Diligence
Involve Environ. Professionals early Specify the objective
Collaborate to design a scope Get cost estimates
Conduct next phases When data are necessary for the deal
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Trade Offs
Increased RiskSketchy Information
Inflated Purchase PriceRequest Indemnities
Higher CostBetter InformationAccurate Purchase Price
Minimal Due Diligence
Extensive Due Diligence
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The Optimal Due Diligence
Fits the transactionEvolves with the
transaction And may change the transaction
Post acquisition integration