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Published 8 December 2020
In corporate transactions, the need for environment and health and safety (EHS) due diligence can be overlooked and its importance underestimated. This often stems from a lack of appreciation of the risks involved or a desire to control costs.
It is not often appreciated that clean-up costs for historic contaminated land can be one of the largest financial risks in any transaction, that many offences carry strict liability and can carry unlimited criminal fines.
This article provides an overview of the importance and benefits of an EHS due diligence process when acquiring a corporate entity or its assets and highlights how the information gathered during the process can be utilised prior to and post-completion.
The scope of due diligence will largely be determined by the sector in which the target operates, as well as the size and the nature of the proposed acquisition (such as whether it is a share sale or an asset sale). Usually organisations within higher risk sectors, such as manufacturing, construction, energy/utilities and healthcare, threaten greater EHS liabilities, but inherently all businesses involve some level of EHS risk. Therefore, while some level of EHS due diligence is always advisable, the level and extent of the due diligence scope can be tailored for each transaction, depending on the potential risks involved.
Having an EHS lawyer on board from the outset of a due diligence process ensures that many areas of the target business can be scrutinised. Typical areas of analysis include:
As you can see, EHS due diligence covers a broad spectrum of issues and will look carefully at the target’s compliance with EHS laws. Breaches of EHS laws can attract third party claims, as well as unlimited criminal fines and criminal prosecutions which cannot be indemnified or insured against. On a share sale, this is even more pertinent given that, post-completion, a buyer is essentially ‘stepping into the shoes’ of the seller and may inherit many EHS liabilities by virtue of the transaction. It is important that these risks are identified and managed at the earliest opportunity during the transaction timeline.
A thorough due diligence report will provide an in-depth and holistic view of EHS liabilities of a target, providing buyers with visibility into the business and any current or historical operational risks. This can be an invaluable tool during the negotiation process. Depending on the results of the due diligence, a buyer has many potential options at its disposal:
Inevitably, there may be some minor issues identified during the due diligence process, which are not considered serious enough to consider within the negotiation but still warrant rectification and/or active management by the buyer post-completion.
Where there are these outstanding issues, by entering into a purchase with awareness of any EHS problems that need to be rectified, a buyer will be able to hit the ground running post-completion by taking heed of the recommendations. For example, by carrying out appropriate due diligence, the buyer is more likely to be aware of the need to take actions such as notifying regulators of a change in ownership, reviewing EHS policies and procedures, transferring permits or reviewing the asbestos management plan in order to operate the business lawfully.
Early and thorough due diligence ensures that a prudent buyer can address any EHS issues and avoid potentially crippling liabilities and any associated adverse reputational risks. Although due diligence may not unearth every single risk in every single transaction, it provides an invaluable and useful platform from which to negotiate the deal and to address any outstanding issues post-completion.
For more information or advice, please contact a member of our environmental regulatory team.
The authors would like to thank Isabelle D’Arcy for her assistance with this article.
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