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Seller's Guide for Environmental Due Diligence

June 13, 2012

As a follow-up to the article that appeared in our February 2012 Global Automotive Newsletter, "Purchaser’s Guide for Conducting Environmental Due Diligence," this Seller’s Guide will discuss several due diligence tips that will help a seller conduct environmental due diligence and negotiate environmental matters.   

Compile and review key environmental documents.

Ideally, the seller should gather and review key environmental documents, such as:

before commencing the transaction and should review all environmental documents before providing them to a purchaser. Compiling and reviewing key environmental documents before beginning a transaction will allow the seller to:

Consider conducting environmental due diligence before commencing the transaction.

In a corporate transaction where real property is involved, environmental due diligence may include a Phase I ESA.  A Phase I ESA is an initial assessment of the property to identify environmental conditions that denote existing contamination or potential contamination.  A Phase I ESA does not include soil or groundwater testing.  If the Phase I ESA identifies environmental conditions at the property, then a Phase II ESA, including soil and groundwater testing may be appropriate.  An environmental compliance audit is a review of the conditions and practices at the facility in light of applicable environmental laws and requirements.  There are several reasons for the seller to perform a Phase I and if necessary, a Phase II ESA and an environmental compliance audit prior to commencing the transaction.  

Note that, if the seller completes ESAs and environmental compliance audits prior to commencing the transaction, the environmental consultant should be retained by an attorney in their rendering of legal advice so that the opinions and conclusions in the consultant’s reports may be protected by the attorney-client and work product privileges.   

Negotiate a confidentiality agreement.

A confidentiality agreement is an effective way for a seller to establish the scope, process, and limitations of the due diligence review before documents are exchanged and site visits are scheduled.  A confidentiality agreement should:

Designate an environmental information manager and identify key employees with environmental knowledge.

Select one employee who will be responsible for managing the environmental documents and information during the transaction.  This person can be an executive, the corporate environmental health and safety manager, or another individual with sufficient knowledge of the company’s environmental documents and requirements.  The designated employee should have the following responsibilities during the transaction:

Prepare to transfer environmental permits.

The seller should identify all environmental permits, determine if the permits are transferrable, and identify the requirements to transfer the permits to the purchaser.

Negotiate a site access agreement.

Once the purchaser has completed its initial document review and if the seller has not already performed ESAs and environmental compliance audits, then the purchaser may request that it be allowed to perform these reviews and a site visit will likely be necessary.  In this case, the parties should negotiate a site access agreement.

Consider how the environmental due diligence can influence the transaction.

Consider how the regulatory and compliance information should be factored into the transaction.

As we noted in our previous article, no two transactions are the same and the seller needs to understand its environmental liabilities and how those liabilities fit in with the seller’s objectives and goals for the transaction.  Using these tips will help the seller prepare for the environmental due diligence process in the transaction and conduct environmental due diligence that is appropriate to effectively negotiate environmental matters.     

Kelly M. Martorano