environmental toolkit for the corporate generalist/small law department: red flags and major issues

Environmental Toolkit for the Corporate Generalist/Small Law Department: Red Flags

and Major Issues

AGENDA1. Panelist Introductions.

2. Introduction to the Scenario

3. Transactions (M&A)

4. Litigation

5. Regulatory

6. Wrap-up and audience questions

PANELISTS1. Rich Sedory

2. Melissa Allain

3. Marc Goldstein

4. Bob Barrett

PROBLEM SCENARIO You are the GC for a fictitious mid-sized specialty engine and engine components company, Boston Industries (BI).

BI has $250 million in annual sales with headquarters and an R&D lab in Cambridge, an additional U.S.

manufacturing and distribution hub in Memphis, TN, and a contract manufacturing partnership in Brazil. BI is

actively looking to expand its domestic and international manufacturing and marketing capabilities through

acquisitions in the next 12-19 months.

PROBLEM SCENARIO BI has identified its closest competitor,

Massachusetts Metals as its target for acquisition. MassMetals has existed in the region since colonial times and has a manufacturing facility located along a brook in suburban Boston and its holdings include several mines and foundries outside Massachusetts.

At its Boston manufacturing facility, among other things, it was a manufacturer of die-cast zinc and

aluminum parts.

Environmental Due Diligence in Deal Making

“Do I need to worry about the environmental laws?"

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“Of course not, you don't need to worry about the environmental laws…unless"

• You are a publicly traded entity.• You buy or sell property.• You buy or sell other companies or businesses.• You generate waste.• You want to expand your operations.• You hold an environmental permit.

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Boston Industries – First Steps

• Who Initiates Discussions?• Non-Disclosure/Confidentiality Agreement• Top/High Level Diligence

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Next

• Type of Transaction Contemplated– Stock• All Assets & Liabilities

– Assets• Limited Assets & Liabilities• Real Estate

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Next

• Letter of Intent/Proposal– Style?– Details?– Enthusiasm (enthusiasm leverage)– Anxiety (anxiety leverage)

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Diligence

• Before Launching – Key Questions• What Am I Looking For?• Why am I Looking For It?

– Interrelated Perspectives• Business• Legal

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Environmental Diligence

• Primary Purpose– Identify Liabilities/Risks• Frame Issues/Practices that Impact Value

– Provide Tools to Manage Environmental Risk• Appropriate Level (in context of deal)• Workable Action Plans• Fulfill Fiduciary Duties/Disclosure Requirements• Satisfy Financing Conditions

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Environmental Diligence• Where to Start (Primary Concerns/Risks)– Regulatory Compliance

• Permitting & Compliance– Potential Costs

• On-Site Remediation– Potential Liabilities

• Current & Historical Generation • Offsite Disposal• Bankruptcy?

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Environmental Diligence• Form Team– In-House Legal/Technical Personnel– Outside Environmental Consultant– Outside Counsel

• Frame Engagements– Written Scope– Confidentiality– Ownership of Work Product

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• Documentation– Questionnaire to Target– Assess Target’s preparedness• Anticipate Buyer’s Questions?• Organize Relevant Documents?• Privileged or Extraneous Materials?• Access to Personnel?

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• Factors Affecting Scope– # of Facilities– Time Allotted (is it realistic)– Funds Available– Definition of Materiality– Risk Tolerance

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• Environmental Site Assessment– Evaluation of Land, Air and Water• On, Above or Below

– Possible Positive Evidence of Due Care• “Innocent Purchaser”

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• Environmental Site Assessment– Access Agreement• Insurance• Indemnity• Site Restoration• Avoiding Interference with Site Operations

– Possibility of “tipping hand” in Confidential or Hostile Takeover

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• Environmental Site Assessment– Phase I• Recognized Environmental Conditions• Meet ASTM Standard to Provide “All Appropriate

Inquiry” Phase II• Depends on Evidence of Possible Contamination

Uncovered in Phase I

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• Documentation– Pay Close Attention to Provisions of Confidentiality

Agreement– What Happens if Reportable Events are

Discovered?– Address What Happens to Documents Exchanged

if Deal Does Not Proceed

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• Documentation– Virtual Data Room• Permits • Don’t Limit Review to “Environmental Documents”

– Real Estate Documents– Financial Documents, including bankruptcy

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• Documentation– Electronic Data Bases• ECHO• SEC/EDGAR

– Public information sources• Press/Blog Sources

– Aerial/Satellite Photos

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• Document Results– Objective Observations & Results– Review Drafts (Before Final)• Interim Reports provide Early Warnings• Privileged?

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• Document Results– Final Report• Executive Summary• Scope & Limitations

– Focus on Risks & Potential Impact

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Environmental Diligence• Conclusion– Allow Sufficient Time– Don’t Rely on Data Rooms (confirm information)– Use Experienced Personnel/Resources– Watch for Caution Flags ( Skeptical Instincts are Important)

• Seller’s documents disorganized/incomplete• Seller insists questions narrowly channeled through

certain/limited individuals (direct access withheld)

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• Conclusion– Understand the Importance of Historical Information– Don’t Rely on Prior Assessments/Audits (Without an

Update)– Don’t Rely on Reps & Warranties– On Closing – YOU will be the Current

Owner/Operator

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Transaction

• Purchase Agreement– Key Representations and Warranties• Full Disclosure of Knowledge

– What’s in the Documents– What’s not in the Documents

• Violations (applicable law/potential claims)• Permits (Operations and Compliance)• Litigation/Threatened Claims

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Transaction• Purchase Agreement

– Escrow– Indemnity

• Buckets, triggers, caps• Cleanup Costs• 3rd Party Claims

– Release• Scope

– Post-Closing Obligations• Performing Remediation

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Integration

• Insurance– New Risks– Policy Disclosure– Program Gaps

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How to Effectively Respond to Environmental Claims

Marc J. GoldsteinBeveridge & Diamond, P.C.Wellesley, Massachusetts

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Clear Brook… …might have PCBs

Oh No…

33DO NOT PANIC

Preliminary Steps

• Evaluate immediate deadlines• Litigation hold/document preservation• Initiate search for insurance policies

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Evaluate what you have

• Litigation v. government enforcement– Cost recovery– Participation in clean-up– First in or late to the party

• What body of law?– CERCLA, state clean-up statute, RCRA, TSCA,

trespass, negligence, strict liability• What court/governmental entity?

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Assemble the Right Team

• What expertise is required to properly respond?– Legal• Electronic discovery

– Technical– Local relationships• Bar and/or regulators

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Assemble the Right Team

• How to evaluate the size of the potential matter?– Amount in dispute• Bet the company

– Amount of discovery– Citizen’s suit/impact litigation (pro bono)– Precedential considerations

• How does that impact selection of lawyers

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Assemble the Right Team• Compare needed expertise to your internal

resources• Litigation• Environmental• Particular medium (air, water, contaminated sites)• Technical• Jurisdiction• Document management

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Finding the Team• Getting names– Entry point is lawyers or consultants and one leads

to the other– Right experience in the right areas– Adequate resources to handle bigger case if

required– Technical competence for material and eDiscovery

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Defining Roles• Getting names– Entry point is lawyers or consultants and one leads

to the other– Right experience in the right areas– Adequate resources to handle bigger case if

required– Technical competence for material and eDiscovery

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Is this BI’s liability?• Insurance– Coverage, pollution exclusions, duty to defend– Timely notice critical; timely response?

• Indemnification and corporate successor– What do the transactional documents say?

• Bankruptcy discharge– When Require specialized expertise?

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Is this BI’s liability?• Indemnification and corporate successor– What do the transactional documents say?– Avoiding litigation within litigation

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Is this BI’s liability?• Bankruptcy discharge– When did the claim arise for purposes of

discharge?– Jurisdictional differences matter– Assert as affirmative defense and consider moving

in bankruptcy court– Often requires specialized legal expertise

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Is everyone invited to the party?• Third-party practice– Former owners and operators– Transporters and arrangers– Upstream or upgradient contributors– Evaluating viability of potential defendants• Empty seat at trial?

• Who should do this investigation?

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Joint Defense Group• Practical considerations– Share work, databases, and work product– Share consultants and experts– Can keep costs

• Preserving privilege through written agreement

• Settlement considerations

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Settlement• Elusive in multiparty, cost-recovery litigation• Contribution protection• Premiums and reopeners

• EHS in Brazil• Conflict Minerals• Human Trafficking

Supply Chain Management

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Some Like It Hot

Transparency International

Good News – Bad News

Challenges …• Business opportunities in riskier markets • Local expertise is often essential• 3Ps include consultants, suppliers, resellers, freight forwarders, expeditors, and agents• 3P due diligence is expensive and time-consumingGood News …• All global companies face the same challenge• Increase efficient use of limited resources by taking a risk-based

approach to 3P due diligence• Industry-wide solutions are emerging

Third Party Risk Management is Essential

• Companies are liable for actions of intermediaries acting on their behalf—sometimes strictly liable

• Increased exposure to anti-corruption regulations due to use of 3Ps in riskier markets

• Most FCPA cases involve 3Ps in improper payments

• DOJ expects companies to have adequate controls to manage the supply chain, including thorough due diligence

Industry Solutions• Anti-Bribery Anti-Corruption Platform– Automated process– More robust documentation

• Electronic Industry Citizenship Coalition (EICC)

• Conflict Free Sourcing Initiative

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Clean Companies Act – Beyond Green• Act extends to foreign entities with a registered office, branch

or other representation in Brazil • Authorizes civil and administrative sanctions—based on strict

liability—for bribing a Brazilian or foreign public official.– Fines up to 20% of annual revenues in year before start of

investigation– Effective January 29, 2014 (Law No. 12,846)

• Implementation: Decree No. 8,420– Establishes administrative process, guidelines for calculating fines and

assessing compliance program, and leniency rules.– Signed March 18, 2015, effective March 19, 2015

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Anti-Bribery Laws: Environmental Context

• US enforcement actions include improper payments/bribes to government officials to waive air emissions and discharge water permits or obtain more lenient terms and conditions in permits and remediation orders.

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Brazil – Environmental Framework

• Federal, state, municipal (civil law jurisdiction)• Public prosecutors – independent of

government agencies; broad authority• Eli Lilly regulatory proceedings and litigation in

Brazil Labor Court and US– Risk of exposure to all employees presumed by

mere presence of groundwater contamination– Collective injury to work environment

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Conflict Minerals• Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-

Frank”)

– Requires determination and disclosure of use of conflict minerals (tin, tantalum, tungsten or gold, or “3T&G”)

– from the Democratic Republic of Congo (DRC) and neighboring countries (“Covered Countries”).

• Final SEC rule promulgated August 22, 2012, effective 2013 for companies that file with the SEC.

– Full implementation in 2015– The rule requires an Independent Private Sector Audit if filers determine that their products contain

conflict minerals from a Covered Country.

Provisions for conflict minerals can be enforced up the supply chain.

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Conflict Minerals – Covered Countries

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Conflict Minerals – Impact on Supply Chain Management

• Data management• Contractual enforcement up and down the

supply chain• Internal controls• Transparency, financial reporting• Regulatory scrutiny

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Labor Issues • Human trafficking is increasing• Responsibility even in absence of contract

privity– New York University blamed for labor exploitation

in construction of its campus in Abu Dhabi. NYU was held responsible at least in public view even though the Abu Dhabi governmental authority was building the campus.

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Additional Materials and Resources Sample supply chain questionnaire

Trends in Brazilian Contaminated Site Liability, Russell Fraker, Beveridge & Diamond, March 2015

Product Stewardship Trends in Latin America, Russell Fraker, Beveridge & Diamond, March 2015

SEC Conflict Minerals Rule: Refresher, Lauren Hopkins, Beveridge & Diamond, April 2015, ACC Quick Hit, available at

Conflict Minerals & Customer Requests: 5 Requests You Shouldn’t Fulfill, Douglas J. Hileman, available at www.DFCMAudit.com.

http://www.dfcmaudit.com/

QUESTIONS

Rich Sedory – [email protected]

Melissa Allain – [email protected]

Marc Goldstein – [email protected]

Bob Barrett – [email protected]

mailto:[email protected]


