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9 Eur. Envtl. L. Rev. 120 (2000)
Environmental Due Diligence

handle is hein.kluwer/eelr0009 and id is 122 raw text is: 120 European Environmental Law Review April 2000 Environmental Due Diligence Environmental Due Diligence Dr. Carsten Corino, Gleiss Lutz Hootz Hirsch Rechtsanwdlte, Stuttgart' Summary: The rise of the due diligence process and the growing importance of environmental due diligence; the elements of environmental due diligence: pollution of buildings, soil and ground water - the law on protection against harmful emissions - the law relating to water and waste disposal - management systems and their significance - product-related requirements - insurance. Drafting a contract for the sale and purchase of a business; points to be taken into account from the seller's and the buyer's points of view and the scope for compromises. 1. Introduction The term due diligence originates, as does the practice thereof, from the United States of America, and basically means due, or merited, care. Initially the term merely stood for the level of diligence or care to be exercised, when buying or selling a business, by the management of the prospective acquirer on the one hand, and by the external advisors, lawyers and auditors on the other. 2 However, it has of late also come to stand for the general examination of business enterprises or parts of such enterprises. The kind of events which particularly merit a due diligence report are company acquisitions, mergers, or a listing on the stock exchange. Similar examinations may also take place prior to the supply of credit3 or on concluding insurance policies.4 The object of such an examination, apart from the legal and tax elements, is the entire managerial and operational state of the company (financial, market ai:d environmental matters). Due diligence has gained considerably in significance over the years. There is barely a sizeable corporate sale which takes place without a due diligence report. In some cases, prospective purchasers have been known to abandon an acquisition because the information which the examina- tion has uncovered has fallen short of their expectations. In other cases, the acquisition has, instead, been limited to parts of the company only. At any rate, the disclosure of such facts and circumstances may put considerable pressure on the purchase price, which may result in a reduction of as much as 50 per cent. Concurrently, depending on the national law which applies, the seller can often avoid any liability or guarantee by pleading that the buyer was either aware of defects at the time of purchase or neglected to inform himself of them. The form which the assessment takes has become largely standardised. The pre-acquisition due diligence is an integral part of the contractual negotiations. Generally these are based on an agreement to maintain confidentiality, and sometimes a letter of intent or a preliminary contract. At the beginning of the due diligence, the buyer provides the seller with a list which is tailored as closely as possible to the object of purchase and which contains questions which are of interest to the buyer (a checklist). In the case of small transactions, the questions are often simply answered on request by the management of the target company. Generally, however, a data room is provided, along with the documents concerning the subjects of the questions. The use of the room is often subject to a number of restrictions in terms or time or with respect to duplicating facilities etc. In respect of warranty of title, documentation of the disclosed facts and circumstances is required. Remaining queries are sometimes examined in detail in a separate, second phase. At the end, a report materialises which forms the basis for further contractual negotiations and, finally, contractual conclusion. 2. Environmental Due Diligence Environmental due diligence plays a significant part in corporate transactions. Inherited pollution which is part and parcel of the acquisition may well require sums which reach into the millions and so swallow up the value of the enterprise. Similarly, infringements of permits or statutory requirements could easily result in the business coming to a standstill. The following account is focused on the legal side of environmental due diligence, which is so often in the foreground. If the seller declines to disclose data concerning environ- mental protection, the buyer may, pursuant to the EC Directive 90/313,5 apply to the competent authorities and exercise its right to inspect the company files there. However, business and company secrets may not be made available. 2.1 Pollution of Buildings, Soil and Ground Water In Europc, as in the USA,6 pollution of the ground, soil and the buildings on them have great practical significance. In this respect, European law has restricted itself to very specific regulations.7 Inherited pollution of this nature exists in one form or another at almost every traditional industrial The author wishes to thank Julia Weimer, Stuttgart, for her translation. Comments on this article are welcome to carsten-cor- ino@gleiss-law.com. 2 Wegen, due diligence checklist for the acquisition of a German corporation, commercial law advice Due-Diligence Checkliste fair den Erwerb einer deutschen Gesellschaft, Wirtschafsrechtliche Beratung (WiB) 1994, 291. See Keidel, ecological risks in banking, Wiesbaden 1997. 4 For further details on environmental insurance, see 2.8 below. Official Journal (OJ) 1990 L 158'56. f See the private norm ASTM, designation E-1527-94; Cahill, Environmental Audits, 7th edition 1996, p. 402 if.; Rothenberg/ Alyea/Smith, Environmental Issues in Business Transactions under U.S. Law, Wisconsin Environmental Law Journal, 1998 (5) p. 121; Healy/Hacker, The Importance of Identifying and Allocating Environmental Liabilities in the Sale or Purchase of Assets, Villanova Environmental Law Journal 1999 (10), 91. 7 See Directive 86/276, OJ 1986 L 181/6. Copyright' 2007 by Kluwer Law International. All rights reserved. No claim asserted to original government works.

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