* The Manufacturing Law Blog provides timely commentary on issues of importance to manufacturers and distributors. Contributors from the law firm of Robinson & Cole LLP are corporate compliance and litigation attorney, Jeff White ; environmental, health and safety attorney, Pam Elkow; and labor and employment attorney, Nicole Bernabo.
Way back when, before the world as we know it changed in 2008, I did a lot of transactional work. Our clients were buyers or sellers of businesses, sometimes lenders. They were buying real estate or businesses. I hadn’t done a lot of that work in a while, during the time we were all muddling through the Great Recession. While we clearly haven’t returned to the perhaps unsustainable heyday of mergers and acquisitions, there seems to be a genuine increase such activity. So, this seemed like a good time to review how we handle environmental and health and safety issues in the purchase or sale of a business. This post will focus on a stock sale. In a later post, I’ll write about asset sales, which can be quite different. I’ll write as if I was representing the buyer – if you’re planning selling, imagine I’m on the other side, giving the other guy this advice.
There are often business reasons for stock sales, as opposed to stock sales, but all things being equal, as the environmental lawyer, I would always prefer an asset sale for the buyer. While it’s not a definitive block to liability for the past sins of the company (many jurisdictions will view acquiring all the assets as a “continuation of the business”, and will still find liability), it’s a lot easier to make the argument that in a stock sale. That said, sometimes there are real business reasons for a stock sale.
First, quick reminder on what it means to be a stock sale – you’re buying it all –all the assets and liabilities of the company. So, due diligence is even more important, as there may be old issues that have nothing to do with the company’s operations today that will become your issues.
These are the questions I’ll be asking, and the basis for the representations and warranties that I may be looking for in that stock purchase agreement:
- Has the company been on the receiving end of any government enforcement actions? Orders, notices of violations? How were they resolved? Are there outstanding issues? This is important not just as an indicator of how the company has handled EHS issues in the past, but agencies, such as OSHA, may increase penalties for “repeat” violations. At a minimum, the company will have a history with the agency.
- Has the company received any requests for information from EPA with respect to off-site disposal of material? This is a precursor to potential liability under the Comprehensive Environmental Response, Cleanup Liability Act (CERCLA), or Superfund, and correspondence that should be taken seriously. Has EPA alleged that the company is responsible for material sent off-site? Liability under CERCLA is strict liability.
- Does the company have all the permits it needs to operate the business? Is the company in compliance with the permits? Are they expiring soon, and has the company applied for a renewal? An expired or about to expire permit could seriously impact the business operations.
- Have there been any known releases or spills of hazardous materials? Where the company is now, or wherever it may have operated in the past? How were they handled? Did the relevant agency agree that the spill was cleaned up?
- Has the company complied with environmental, health and safety laws in general? Has it made all appropriate filings? Has it done all necessary training?
- Has the company received notice from any other parties, neighbors, employees, former employees, of potential claims?
It’s a long list of questions. You may not be surprised to find that my initial advice to any party to a transaction is to not wait until the last minute to get the environmental lawyer involved. The earlier we’re engaged in the process, the easier it is to manage any issues that are uncovered.