JurisdictionUnited States
Due Diligence in Oil & Gas and Mining Transactions
(Sept 2018)


Benjamin Machlis 1
Dorsey & Whitney, LLP
Salt Lake City, UT

[Page 17 - 1]

MARK BENJAMIN MACHLIS is a Partner at Dorsey & Whitney. He helps clients navigate the complexity of state and federal environmental requirements to achieve their business objectives. He represents clients throughout the life cycle of their projects, from acquisition and permitting to operational compliance, enforcement defense, remediation, closure, and divestiture. He has extensive experience in matters involving state and federal regulations regarding solid and hazardous waste (RCRA), hazardous materials transportation (HMR), toxic chemicals (TSCA), water quality (CWA), community right-to-know laws (EPCRA), and remediation of contaminated property (CERCLA). Ben has been recognized by Mountain States Super Lawyers® as a "Rising Star" in Environmental practice in 2014 through 2017 and by Utah Business Magazine as a Utah Legal Elite, Up and Coming lawyer in 2017. He has served as Young Professionals Committee Chairman (2016-2017) of the Rocky Mountain Mineral Law Foundation, as a member of the Board of Directors of Utah Open Lands, and as an adjunct faculty member at the S.J. Quinney College of Law.

I. Introduction

Everyone has, or has at least heard, the horror stories of a company forced to spend hundreds of millions of dollars to address legacy environmental issues that it acquired in a recent, or not so recent, transaction. In some circumstances the issues giving rise to the liability were truly unknowable at the time of the transaction, but in the vast majority of these situations the environmental issues giving rise to the liability were discoverable, had appropriate due diligence been conducted. These horror stories are particularly prescient in the mining industry, where environmental issues associated with historic mining operations is common. Identify and understanding the potential environmental liabilities at issue in a transaction is the key to avoid being unpleasantly surprised by environmental liabilities down the road.

Environmental due diligence in mining transaction should be effectively designed to identify, understand and evaluate the risk presented by the answers to three major questions:

• Does the target of the transaction have the necessary permits, or is it likely to obtain the necessary permits to conduct the operations that are being conducted or are desired to be conducted?
• Does the target of the transaction have issues with non-compliance with environmental laws, regulations, and the terms of its environmental permits that could result in material liability?
• Does the target of the transaction have exposure to liability for environmental contamination?

In her complimentary paper, Dawn Meidinger covers environmental due diligence in mining transactions as it relates to resource management and protection laws, including state and federal mine permitting and reclamation laws, wildlife protection laws, historic preservation laws, and the regulation of discharges of dredged or fill material, so those topics are not specifically covered in detail here.2 This paper focuses on environmental due diligence as it relates to environmental laws addressing pollution, wastes, and toxic and hazardous substances.

This paper provides a practical overview of the environmental due diligence process regarding potential liabilities for compliance with these environmental laws and liabilities for environmental contamination in the context of mining transactions. It discusses the purpose, structure and limitation of environmental due diligence, provides an overview of the major environmental statutory schemes that govern the environmental compliance issues and liabilities most common in the mining industry, and explains the practical role that the results of environmental due diligence play in informing the transaction and the parties post-closing

[Page 17 - 2]

conduct. This paper is not an exhaustive treatise on environmental due diligence--it does not detail and catalog every potential environmental compliance issue or liability that could arise and impact a transaction. The multitude of potential legal and factual scenarios that could arise are too numerous to make such a treatise practical here.

Environmental due diligence, like all aspects of due diligence, is designed to provide information necessary to inform the clients' decision regarding the proposed transaction. The tricky part of environmental due diligence is that the liabilities for environmental contamination or non-compliance with environmental laws are not always superficially apparent and the associated liabilities can be large. For example, contaminated soils and ground water may exist where the surface appears pristine and can lead to millions of dollars in clean-up liability. Accordingly, appropriate environmental due diligence should be designed to identify potential liabilities and instances of non-compliance so that the parties to the contract can make informed decisions regarding the transaction. Specifically, environmental due diligence will: inform the value proposition of the transaction--material environmental liabilities or potential liabilities should be accounted for in the price a buyer is willing to pay; inform the deal structure and documentation to ensure that liabilities are appropriately allocated among the parties, bearing in mind that contractual allocations or indemnities do not absolve a party from statutory liability;3 and inform the buyers post-closing plans for the property.

II. Scoping Environmental Due Diligence

If asked, most environmental practitioners would prefer that a "leave no stone unturned" approach to environmental due diligence be undertaken on each and every transaction. This sentiment is justified by the nature of potential environmental liabilities, where latent issues, not readily apparent, can lead to significant liability and reinforced by practitioners' desire to have all of the facts before advising a client on whether and how to proceed in a transaction. However, the reality is that a "leave no stone unturned" approach to environmental due diligence is rarely feasible or desired by the client. Accordingly, establishing and documenting a defined scope for the environmental due diligence is an important first step that ensures a common understanding of the task at hand.

Scoping environmental due diligence is inherently a balancing exercise, with the need to inform the decision making process with information regarding the environmental issues and risks on one side of the scale, and the practical constraints upon unlimited environmental due diligence on the other. An early and thorough evaluation and understanding of the nature of the transaction and the assets involved is key to appropriately scoping the environmental due diligence, because both of these factors will influence potential liabilities and risks present in the proposed transaction. Once the potential risks are identified, a detailed discussion can be had with the client to scope due diligence around these risks and the clients cost, timing, and other considerations.

A. Nature of the Transaction

[Page 17 - 3]

The structure of the proposed transaction has a significant impact on the appropriate scope of due diligence. The environmental risk factors of an asset transaction, where only specified assets such as a single operational mine, exploration project or other defined set of assets is being transferred from buyer to seller, are substantially different than the environmental risk factors of an entity transaction where the buyer acquires an entire company that owns the target assets. With an asset transaction potential liability is generally limited to liability regarding the assets being acquired.4 The scope of environmental due diligence can, accordingly, be limited to the environmental risks presented by the assets specifically involved in the transaction.

Entity transactions provide an entirely different scenario. In entity transactions the buyer is acquiring an entity, be it a corporation, limited liability company or other type of business entity, owning certain target assets. That entity may own other non-target assets, have owned or operated other facilities in the past, and entered into contracts or other arrangements, all of which have the potential to create environmental liabilities unrelated to the target assets that are driving the deal. These issues can be significant--in acquiring a business entity the buyer acquires all of the entity's assets and liabilities, regardless of their relationship to the assets driving the deal.5 The scope of environmental due diligence for such a deal must investigate the full panoply of potential environmental liabilities arising from all of the entity's present and historic operations and dealings.

The structure of the transaction also materially impacts the need to transfer permits, provide permitting agencies notice, or obtain consent from the permitting authority. Generally, asset transactions present a more straightforward analysis--where an asset is transferred, the permits necessary to operate that asset must be transferred, or reapplied for if a permit is non-transferrable.6 Entity transactions sometimes present a more nuanced analysis of whether the changes in control of entity holding permits triggers any notification of consent requirements.

It is important to keep these considerations in mind as the deal evolves. As deal structure often changes over the course of negotiations from an asset transaction to an entity transaction, or vice-versa, it is important to revisit the scope of the environmental due diligence being conducted.

B. Nature of the Asset(s)

The assets involved in a proposed transaction also significantly...

To continue reading

Request your trial

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT