5 Essential Tips: Make sense of environmental liability in corporate transactions
5 min. read
Secret confession time. I love working on environmental due diligence in corporate transactions. It’s fast-paced. I’m fascinated by learning the nuances of the particular business sector involved (and the workings of all those industry specific environmentally-relevant activities). I love the forensic lens required in order to understand the risk from current and former business operations and translating the outcome of due diligence into practical advice for my clients.
It can be understandably tricky to get visibility on environmental liability.
So, here are my 5 top tips for conceptualising where environmental liability comes from.
The biggest exposure to environmental liability typically comes from the environmental condition of the land at the site(s) from which a corporation operates.
An assumption I see commonly made, is that a business in a sector with minimal environmental footprint will not have environmental liability. This is absolutely not the case. The impact of the environment on a site (and the continued use of the site by the business in management or control) can often have the most material liability risk and cost implications. Contamination is one major example of this, but other risks such as flood risk, or bushfire risk, are also potential environmental and siting risks that can materially impact the feasibility, risk and cost of the proposed transaction. Even a business in an innocuous industry may own or lease a site that is impacted by contamination (be it historic contamination or migrated contamination) and if contamination exists, may find itself liable to investigate, manage or remediate (i.e. clean up) that contamination under the statutory powers of environmental regulators, even though it may not have caused or contributed to that contamination.
The environmental liability of the target from its activities (and their impact on the environment) is also a material risk.
Australia has environmental laws at the State/Territory, Federal and local level, which are different in each jurisdiction. Liability for breaches of environmental laws and approvals (such as licences) associated with a company’s operations may give rise to potential for exposure to criminal or civil enforcement from the environmental regulators, such as fines/penalties or costly remedial action. Due diligence is necessary to ensure that material legal compliance issues (such as holding a licence where one is required) that may impact upon continued BAU operations, or present a material risk of regulatory enforcement, reputational damage or ability to win contracts are identified. Significant capital expenditure may be necessary to address non-compliance.
It can get personal.
Environmental law is largely criminal and commonly, much like health and safety law, contains offence provisions. The key environmental laws contain derivative liability provisions meaning that directors and officers (some senior managers) are liable for the environmental offences of their corporation. For any new directors or managers joining a target, they will be potentially liable from date of their appointment in the event of any continuing post-completion non-compliance. The best way to protect people is to undertake thorough due diligence and build a rectification plan into the acquisition contracts.
Former sites and activities can still be a problem.
Environmental liabilities relating to activities at former operations, including liability for legacy contamination at formerly owned and leased sites can be a major issue. Mere divestment of sites or cessation of a lease, doesn’t preclude that there won’t be an environmental liability exposing the current business to liability for its former actions or occupation of a contaminated site.
Environmental liability issues are not a light-touch matter.
Cost and complexity of contamination management are increasing, as are the maximum penalties available to environmental regulators for breaches of environmental law (current maximum is $5,000,000 in NSW). For example, solely relying on a basic contamination search isn’t going to give you the confidence you need about contamination risk. Contamination risk cannot be determined only from a check of environmental regulators’ public registers as not all sites that are known to be contaminated are reported to the regulator and in many jurisdictions only sites that are significantly contaminated are included in a register. A modern approach to due diligence requires more rigorous environmental site assessment.
If you have any questions about this topic, or to discuss support for an upcoming transaction, please get in touch.
The legal stuff
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It is not intended to be comprehensive nor does it constitute legal advice or establish a lawyer - client relationship. Whilst attempts have been made to ensure that the content is current, Gabrielle Guthrie and Guthrie Legal do not guarantee its currency. You should always seek independent legal or other professional advice on specific cases and before acting or relying on any of the content.
