Because environmental laws and regulations can impose substantial operating costs and liabilities, it is very important to flag and address environmental issues in M&A transactions. Such issues include operating costs and liabilities associated with current and past operations, as well as cleanup costs and liabilities arising from site contamination. In addition, a forward-looking analysis may be necessary if the industry involved in the transaction is targeted for increased regulation. Some of the pitfalls you can encounter, and how to avoid them, are summarized below.

1. Understand the Deal and the Client’s Goals

First and foremost, it is necessary to understand the basic parameters of the deal and the client’s goals and expectations. In addition to determining whether the transaction involves a stock or asset purchase, you need to know whether the real property involved in the deal is leased or owned, if the relevant environmental permits and approvals are available for review, what environmental litigation and enforcement actions have occurred or are ongoing, and whether there are engineering reports to provide such baseline information, as well as data about historic uses of the real properties involved in the transaction. Where the information is less than complete, you need to make sure that the client understands the risks that could exist, whether as the buyer or seller, if the “unknowns” turn out to be material.

2. Remember the Limits of Your Expertise

Unless the situation is very unique, it is important to remember that you are acting as a lawyer in the transaction, and not as a technical consultant. Understand the limits of your role and act accordingly. Where you need technical expertise, find the appropriate consultant(s) in a timely fashion so that you are not driven by expediency as opposed to merits in identifying and retaining such assistance and in making decisions with the benefit of that technical input.

3. Information is Everything

Environmental due diligence is very important in order to represent the best interests of your client, regardless of whether you represent the buyer or the seller. In fact, due diligence that meets the requirements of relevant state and federal laws and regulations may provide a buyer with protection from most cleanup responsibilities for historic contamination. In order to obtain such protection, a so-called “Phase I report” that includes property visits and records review will generally be necessary.

Where your client is the buyer, you need to ensure that the client understands the compliance status and associated liabilities of the business and properties being acquired, and whether there is historic contamination of concern. If the data provided by the seller is complete and comprehensive, the investigation may end after review of such information, especially if it includes Phase I reports and any additional investigation required as a result of those reports. However, it may also be advisable to review management presentations describing company operations and future plans. In addition, you may need to conduct some online research about the business and relevant litigation and enforcement actions, or to supplement the information provided about past uses of particular properties. This supplemental investigation may encompass nearby properties that could contaminate the properties involved in the transaction, or perhaps extend to regulation of the industry involved in the transaction where statutory or regulatory changes are on the horizon.

If you are serving as the seller’s counsel, you should ensure that the data provided by the seller adequately identifies the environmental issues associated with the business and its operations, and of the properties encompassed by the transaction. That would include the operating permits and the conditions that they impose, as well as information about historic uses and knowledge of historic contamination, whether originating onsite or offsite. If the seller is aware of offsite contamination that could be migrating onto the property, then such knowledge needs to be conveyed in the appropriate manner, particularly if failure to do so would saddle the seller with responsibility to address that contamination or lead to arguments that could undo the deal.

4. Keep State Requirements and Jurisdiction in Mind

It is easy to focus on federal regulatory requirements and ignore state programs. But those state programs can be even more stringent than their federal counterparts and thus very important in any assessment of regulatory requirements affecting company operations and liabilities. In addition, it is important to remember that contract terms such as environmental representations and indemnities may well be decided under state law. For example, even where the contract language may preclude the seller’s liability under a federal statute such as the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), a buyer may still have common law claims under state law provisions and principles, and the statute of limitations for such claims will also depend upon the relevant state law.

5. Beware of Vague Clauses

Failure to clearly state which party to a deal has liability for particular issues, including unanticipated cleanup liabilities in the future, can lead to results that the drafters may have never envisioned. “As Is” language in contracts has been subject to particular scrutiny, and such clauses must be especially clear to withstand judicial scrutiny. In a number of lawsuits, the courts have used dictionary definitions to determine the meaning of particular contract terms where the judge concluded that the intent of the drafters was not sufficiently clear.

While this can happen where both parties thought they had specifically stated their intention, it can be even more of an issue where those parties cannot reach agreement and opt for language that is more vague. In such a situation both parties to the transaction may find that the court’s interpretation is quite different from either of theirs. In addition, a court may consider what earlier drafts of the agreement covered. For example, if an earlier draft included a specific clause (such as an indemnification provision or an “As Is” clause) that was later removed, the earlier draft might be used as evidence of what came off the table during the negotiation process.

The foregoing “traps” are of course not the only ones you can encounter in a particular transaction. However, timely due diligence and continued dialogue between and among members of the deal team can go a long way toward resolving the issues that may arise.