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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
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
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-
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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