0. Environmental Issues and Trends In Transactions
Stacy Kray
Skadden, Arps, Slate, Meagher & Flom LLP
San Francisco
Thomas McHenry
Gibson Dunn & Crutcher LLP
Los Angeles

1. Outline Objectives Overview of Environmental Law Framework
Recent Trends—Regulation, Enforcement and Other Developments
Environmental Considerations in Transactions
Environmental Diligence and Negotiations 1

2. Introduction to the Environmental Framework—Cleanup and Liability Laws
Laws directed at cleaning up soil and groundwater contamination (CERCLA, RCRA, State Law)
Laws allowing recovery for damages to natural resources (CERCLA)
Laws allocating responsibility among parties (Contracts, Indemnities, State Law) 2

3. Pollution Control and Prevention Laws
Clean Water Act
Clean Air Act
Resource Conservation and Recovery Act
Emergency Planning and Community Right To Know Act
NEPA
ESA
TSCA 3

4. Introduction to the Environmental Framework—Potentially Responsible Parties
Current and prior owners and operators
Owners/operators at time of disposal
Generators
Transporters
Contractual liability 4

5. Lender Liability Under CERCLA
Secured creditor exemption
Recent NY AG case against bank that failed to act to prevent releases of hazardous substances (5/30/07 Press Release from Office of the New York State Attorney General Andrew Cuomo) 5

6. Protecting Against CERCLA Liability
CERCLA’s safe harbor provisions
Establishing the “innocent purchaser” defense
New “All Appropriate Inquiry” standards 6

7. Additional Liability Concerns
Strict liability
Retroactive liability
Joint and several liability 7

8. Importance of Environmental Law in Business Transactions
Civil penalties of $25,000 or more per day per violation
Potential criminal liability
Citizen enforcement under certain statutes (RCRA, Proposition 65)
Compliance costs
Legal opinions on compliance
Permit transfers
Property transfer statutes 8

9. Recent Developments
Greenhouse gas regulation disclosure and accounting
Internationalization of transactions
Influence of European Environmental Law
SEC enforcement actions
Proposed new standards for environmental accruals in acquisition context
AAI standard for Phase I assessments
EPA “New Owner” Policy under development
Department of Homeland Security Chemicals of Interest 9

10. Greenhouse Gas Regulation & Litigation
CA mobile source limits beginning with 2009 models
Global Warming Solutions Act of 2006 (AB 32)
Proposed federal legislation—political aspects
Other state legislation
Ongoing litigation
Securities disclosure issues—no SEC guidance
Lifecycle analysis
NEPA/CEQA disclosure for new projects 10

11. International Considerations
Regulations can apply to the manufacturing, importation and disposal of goods
More stringent regulation in European Union
REACH directives
WEEE & RoHS Directives
Less stringent regulations also can be a concern 11

12. Reasons For Environmental Diligence
Potential environmental liabilities related to current and former operations and properties
Legal requirements, e.g., property transfer laws, securities regulations
Preservation of innocent landowner defenses
Compliance assessment and obligations 12

13. Environmental Disclosures Under Securities Laws
Item 101 – Description of Business
Item 303 – MD&A
Item 103 – Legal Proceedings
Financial Statements (GAAP) 13

14. Recent Enforcement Actions
Ashland materially misstated its environmental reserves and net income (SEC Order, Rel. No , 11/29/06)
Con-Agra off-set unrelated losses by decreasing environmental reserves (SEC Lit. Rel. No , 6/29/07)
Safety-Kleen decreased environmental reserves after missing income targets following hostile takeover (11/08/07 Press Release, United States Attorney for Southern District of New York) 14

15. Policies On Reserves
Create clear audit trail of reserve amounts and reasons for adjustments
Retain records to support reserve amounts
Consult environmental engineers before revising estimates
Report to board
Hire independent auditor to assess env’l reserve setting and investigation of internal complaints 15

16. Sarbanes-Oxley Developments
Obstruction of justice and document retention issues
Certification of company reports
Compliance programs
Sensitivity to disclosure 16

17. Business Issues Affecting Environmental Diligence
Type of transaction
Type of company
Client needs
Constraints on transaction
Purchase versus auction 17

18. Environmental Due Diligence Initial Steps
Background on transaction
Background on the subject company’s business and operations
Due diligence request
Other sources of environmental information
Protocol for contacts with agencies 18

19. Env’l Diligence Investigation
List of current/former properties
List of current/former corporate affiliates
Call with company— company environmental personnel
Database review
Document review
Site visits
Agency contacts
Insurance 19

20. Environmental Consultants
Case specific
Lead time
Cost
Consultant agreements
Evolving standards
Privileges/confidentiality
Access agreements 20

21. Structuring the Deal Various ways of managing environmental risk
Environmental investigations, e.g., Phase I’s, compliance audits
Contractual provisions, e.g., representations & warranties, covenants, closing conditions, indemnities
Asset vs. stock purchase
Changes to pricing
Insurance 21