Top Environmental Due Diligence Mistakes

It’s time for my annual rant about the lack of respect given to environmental due diligence during the M&A process. It is still the overlooked stepchild of a deal, and buyers, lenders, and investors can get seriously burned by neglecting this critical component.

Identify Surprises Before Your Deal Closes

Dealmakers should be familiar with the term “Phase I,” which is the preliminary environmental report that could protect a buyer from pre-closing contamination and that must follow the guidelines set out in ASTM E1527-13.

But due diligence can be more than just commissioning a Phase I. Here are the top mistakes I already have seen in 2018:

  • Using the Lowest Bidder on a Phase I Report – You definitely get what you pay for. In addition to typos and poor grammar, I have seen obvious things overlooked (e.g. nearby leaking underground tanks) and non-problems made into problems. Many “cookie cutter” Phase I shops grind out the Phase I reports with the hope of getting the Phase II sampling work that they recommend (and, not surprisingly, charge significantly more for). To prevent this, ask around for consultant referrals. In addition, have the consultant generate a DRAFT report for your attorney to review before issuing the final report to prevent surprises.
  • Ignoring Potential Issues That Are Outside the Scope of the Phase I – Remember, a Phase I only looks at contamination and not compliance with environmental laws. Does the seller have all necessary permits AND is it complying with those permits? Representations and warranties in the sales contract are only as good as the seller’s continued financial viability.
  • Only Reading the Executive Summary of the Phase I – Have your environmental attorney read the entire report, including the appendices, to make sure nothing was missed. She should be able to complete this task in one or two hours.
  • Using an Old Phase I report – A Phase I that is more than 180 days old is considered out-of-date and needs to be updated.  (ASTM E1527-13 Section 4.6).
  • Using the Seller’s Phase I – This is a problem for at least two reasons: First, the buyer has no privity of contract (i.e. no contractual relationship) with the consultant who did the seller’s report, so the buyer could not sue if the Phase I turns out to be wrong. This issue can be resolved by getting a reliance letter from the consultant. Second, the consultant may be biased toward the seller, so frankly, I would not trust their report.

Keep these points in mind when planning your next deal to prevent unwanted surprises.

Another Good Use for Your Environmental Counsel: Bad Cop

When should you call your environmental lawyer?  Some reasons are obvious: when you get sued or to review the environmental provisions of a contract, for example.

But here’s another good reason, based on a recent project I worked on:  Environmental attorneys can provide oversight of your environmental consultant and be the “bad cop” with the government agency.

I have many friends who are environmental consultants. They do great work but are sometimes reluctant to take an adversarial stance with the government agency or offer cleanup alternatives that are contrary to the agency’s recommendation.  Consultants work almost daily with the government agency project managers and want to stay on good terms with them.

But, sometimes, a bit of toughness is required. And that’s where your lawyer can come in handy. Nobody expects us to be nice. 

Okay. Maybe I’m not this aggressive.

Recently, I worked on a project where the Texas Commission on Environmental Quality (TCEQ) wanted my client to install additional monitoring wells and conduct more sampling to prove that the contamination was sufficiently low to close the file.

I didn’t support their reasoning. There were other businesses nearby with similar contamination, so how would we ensure that we weren’t detecting their contamination? Moreover, TCEQ had granted closure on those similar properties in the neighborhood with higher contamination levels than my client’s.

Our consultant wanted to propose some limited sampling to satisfy TCEQ, but I wanted to push back and say the data were sufficient to support closure. I found TCEQ guidance to back me up and, after a few emails and letters, TCEQ finally agreed with me and closed the file.

Nobody likes to spend money on lawyers, but spending a few hours of my time cost significantly less than installing the additional wells requested.

Attorneys are ethically obligated to act in their client’s best interest, and sometimes that means playing Bad Cop. I’m not saying that consultants are not similarly ethically obligated, but sometimes they are hesitant to push back to a project manager they deal with on a regular basis.

Bringing in a lawyer to play hardball lets the consultants maintain the camaraderie they need to do their jobs without sacrificing the client’s goals or needs.

Be Prepared When the Inspector Shows Up

Most businesses get inspected. Whether it’s EPA, OSHA, IRS, TCEQ, the city health inspector or the fire marshal, the general principles are the same: to be as prepared as possible. I’ve represented a lot of companies during and after inspections, and I’ve seen it all – the good, the bad, and the ugly.  In this post, I’ll provide tips on being prepared for and properly responding to inspections.

(Note- this doesn’t necessarily apply to criminal inspections or search warrants) Continue reading Be Prepared When the Inspector Shows Up

Mediation Can Be an Effective Solution to Costly Disputes

Environmental disputes can turn costly quickly:  samples, more samples, experts, attorneys, more experts.  In my experience, few environmental disputes are worth the expense of going to trial.

I recently completed a 40-hour mediation training class and was reminded how cost-effective mediation can be.  I wanted to share these thoughts while they were still fresh in my mind.

Mediation isn’t always the answer. But, not only can it provide an important reality check, it can also encourage more creative resolutions than anything available in a courtroom. Continue reading Mediation Can Be an Effective Solution to Costly Disputes

Understanding Black Mold Assessment and Remediation – Don’t Get Duped

In the aftermath of the 2017 hurricanes, black mold has become one of the most critical issues encountered during building repair and reconstruction. You need to know:

1) what regulations are applicable for your location,

2) what is required and what is not, and,

3) what you can control. Continue reading Understanding Black Mold Assessment and Remediation – Don’t Get Duped

The Best of the Offshore Technology Conference

I attend the Offshore Technology Conference (OTC) last week in Houston.  After walking more than 11 miles and visiting almost every booth (thank goodness for the best conference app I have used),  here are the coolest things I saw and the best swag I received:

Coolest Products

  • AbTech makes Smart Sponge that adsorbs oil rather than absorbing it.  The result is that oil doesn’t drip from the sponge when squeezed.  They sell it for socks and in square blocks to put in subfloor drains. I found it ironic that AbTech is located in arid Scottsdale, AZ
  • Mont demonstrated a neat Bristle Blaster that removed corrosion from pipes without using grit.  Pretty cool.
  • Noke makes bluetooth-enabled locks that you can open with an app on your phone.
  • Gaston Mille sells anti-slip and steel-toed slip on shoe covers.  This would be  more convenient for visitor shoes, and easier to carry yourself if visiting a plant. They are new to the US.

Coolest Swag

Most booths had the usual pens, coozies, mints, and beer (well,  isn’t beer is always a a cool swag?).  Among the thousands of booths, I found a couple of cool swag items:

  • Draeger do rag.  Who doesn’t want to look like a cool “gansta” with a do rag emblazoned with the Draeger logo?
  • Moscow Mule copper cup.  Although I’m not a fan of the drink (too sweet), the cup is still cool. From Copper State Rubber.
  • A keychain with a flashlight AND three small tools to fix your eyeglasses.  Provided by TTS Group ASA

Best Slogan

As a bonus for those who have read down this far, the best slogan was from a company that makes hydraulic and pneumatic wrenches:  “tools for studs with big nuts”

 

Did I get any business or prospects from OTC?  Probably  not, but it was quite an experience and worth attending once.

Don’t Underestimate Environmental Due Diligence

I’ve been to a lot of “deal maker” networking events lately.  These are the ones with lenders, private equity folks, M&A attorneys and other people who help put deals together.  When I introduce myself, many are perplexed about why I am there.  “Do you do Phase I’s?” they ask.  “No.  I review Phase I’s to make sure they are done properly and resolve issues identified in those reports.”  I reply, adding “I also make sure the business has the proper environmental permits, authorizations and registrations and that they are in compliance with those requirements.”  Then, they get a look that says they didn’t consider those issues in their last deal.  Oops.

Environmental Due Diligence is so much more than doing a Phase I on real property.  I had a client come to me after he purchased a business.  TCEQ inspected the business not long after the deal closed and found that they were operating in excess of their permitted limits.  TCEQ shut down the business until they could get the proper registration.  Had the client reviewed the permit conditions before closing, he would have seen the noncompliance and could have made the seller remedy it.

Don’t underestimate the environmental requirements of a deal.  For example, do your deals involve food distribution businesses?  Keep in mind that commercial refrigeration units are regulated by the Clean Air Act.  In early 2016 Trader Joe’s agreed to pay EPA a $500,000 penalty for failing to inspect and repair leaks in its refrigeration units.

Environmental due diligence should be more than checking a box.  The consequences can be devastating.

 

 

 

You Can’t Make This Stuff Up

How long has lead in soil and groundwater been regulated?  Since environmental regulations first came out.  So, imagine my surprise when I learned that in December (yes – last month), the FDA issued GUIDANCE for the lead concentration in lipstick.lipstick

FDA has suggested that lipstick contain no more than 10 ppm lead, stating “[w]e determined that exposure to 10 ppm lead from incidental ingestion of cosmetic lip products is very small and cannot be measured in routine blood testing.”

Compare that to environmental regulations for lead.  TCEQ has set the residential lead concentration in soil to protect leaching into groundwater at 3 ppm.

So, explain to me why it’s okay to have 10 ppm in lipstick that will be ingested, but it is not okay to have 3 ppm lead soil that could leach and then get diluted in groundwater?  Is 10 ppm too high or is 3 ppm too low?

Rant over.

Get Your Checkbooks Ready!

Effective August 1, 2016, EPA implemented significant civil penalty increases. These changes will apply to all pending and future cases relating to violations occurring after November 2, 2015.  In addition, EPA said it intends to do additional inflation adjustments annually, beginning on or shortly before January 15, 2018.

For example, the maximum RCRA (solid and hazardous waste) penalty  increased from $37,500 to $40,779 per violation.  EPCRA Section 313 (Form R) maximum penalties increased roughly 63% from 2001 levels.

My takeaway from this is that it is more important than ever to have a solid environmental management program in place and conduct periodic audits to ensure the program is effective.  EPA’s e-disclosure policy provides various levels of penalty relief for self-discovered, self-reported, and self-corrected violations.  Contrary to recent rumors, the program is alive and well and not being discontinued.

Here’s a link to the EPA memo detailing all of the increases.  The specific adjustments are in Table A.  Note that OSHA is implementing a similar penalty increase.  Link

New Changes to TSCA – Blessing or Curse?

Congress passes bill to modernize nation’s primary chemical management law

The last time the U.S. Congress passed a major environmental law relating to chemicals, Gerald Ford was president, the Dow was around 1000 and Apple Computer was just a few months old.

Now, 40 years later, that law – the Toxic Substances Control Act (TSCA) — is finally getting a much-needed update. On June 7, the Senate passed changes to the TSCA, which the House of Representatives had already approved. President Obama is expected to sign the bill into law soon, making it the first major new environmental law since 1990. Bill Summary and Text Continue reading New Changes to TSCA – Blessing or Curse?