CHAPTER 9 ENVIRONMENTAL LIABILITIES IN MERGERS AND ACQUISITIONS OF NATURAL RESOURCE COMPANIES

• Jurisdiction: United States

Mergers and Acquisitions of Natural Resources Companies
(Nov 1994)
CHAPTER 9
ENVIRONMENTAL LIABILITIES IN MERGERS AND ACQUISITIONS OF NATURAL RESOURCE COMPANIES
Nancy L. Hayes
Morrison & Foerster
San Francisco, California

TABLE OF CONTENTS

SYNOPSIS Page

I. INTRODUCTION

II. OVERVIEW OF ENVIRONMENTAL LIABILITIES

A. Liabilities for Environmental Contamination

1. CERCLA Remediation Liability

2. Other Remediation Statutes

3. Environmental Lien/Transfer Requirements

a. Liens

b. Property Transfer

4. Common Law Liability

5. Reclamation Requirements

B. Compliance Liabilities

1. Penalties

2. Compliance Costs

3. Permit Transfers

4. Disclosure Requirements

C. Summary

III. OVERVIEW OF SUCCESSOR LIABILITY IN MERGERS AND ACQUISITION AND LIABILITIES OF PARENTS, SHAREHOLDERS, OFFICERS, DIRECTORS AND DISSOLVED CORPORATIONS

A. Forms of Mergers and Acquisitions and Transfer of Liabilities to Successors

1. Statutory Merger or Consolidation

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2. Asset Acquisition

3. Stock Acquisition

B. Parent, Shareholder, Officer and Director Liability

1. Parent and Shareholder Liability

2. Officer and Director Liability

C. Liability of Dissolved Corporations Under CERCLA

D. Fraudulent Conveyances

E. Summary

IV. MANAGING ENVIRONMENTAL LIABILITIES IN MERGERS AND ACQUISITIONS

A. Structural Strategies

1. Statutory Merger or Consolidation

2. Asset Acquisition

3. Stock Purchase

4. Insulation of Clean Properties from Contaminated Properties

B. Disclosures and Due Diligence

C. Contractual Allocation of Risks

1. Representations and Warranties

2. Covenants and Conditions to Closing

3. Indemnities and Releases

V. CONCLUSION

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I. INTRODUCTION

Natural resource companies often face significant potential environmental liabilities because of the kinds of activities such companies conduct and the broad scope and effect of environmental laws. An important consideration for those involved in mergers and acquisitions of natural resource companies will be determination of the best means to identify and manage environmental liabilities to minimize exposure to them. Where exposure cannot be minimized, parties to these transactions will want to reduce the possibility of being surprised by such liabilities as much as possible.

A variety of means can be employed for this purpose. These include: (i) attention to structural strategies to shield the parties and their assets from the liabilities; (ii) use of disclosures and due diligence to identify potential liabilities; and (iii) negotiation of transaction documents to allocate liabilities appropriately. To understand how these means can be used most effectively, it is helpful first to consider the basic kinds of environmental liabilities, examples of how such liabilities typically transfer in mergers and acquisitions and the exposure of those involved in the transactions to these liabilities.

The next two sections of this paper provide an overview of environmental liabilities and their transfer in mergers and acquisitions. The remaining sections discuss means to deal with these liabilities effectively in such transactions.

II. OVERVIEW OF ENVIRONMENTAL LIABILITIES

Environmental liabilities can be considered in two categories. The first category consists of liabilities for environmental contamination. The second category encompasses liabilities for compliance with regulatory and permit requirements and prohibitions.

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A. Liabilities for Environmental Contamination

In mergers and acquisitions, the liabilities for environmental contamination of most concern are usually those created by various statutes designed to provide for remediation of environmental contamination. Lien and transfer requirements imposed by such statutes may also become important in the transactional context. Other sources of liability for environmental contamination include common law causes of action and, of particular import to natural resource companies, land and mineral management statutes.

1. CERCLA Remediation Liability

Various federal, state and sometimes local statutes provide for remediation of environmental contamination. These statutes vary in their specific application and effect. However, the types of provisions often found in these statutes that tend to make them of greatest concern can be seen in the Federal Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA").¹

Passed in 1980 and amended in 1986, CERCLA authorizes the U.S. Environmental Protection Agency ("EPA") to order (administratively or judicially) the removal or remedy of hazardous substance releases or to undertake the removal or remedy and then recover the costs from liable parties.² Similarly, any other person at a contaminated site can begin the remediation and seek to recover all or some of the costs from liable parties pursuant to CERCLA.³ CERCLA also allows the government to recover for natural resource damages on government-owned or controlled properties, as long as the damages occurred after the enactment of CERCLA.⁴

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CERCLA identifies four categories of liable parties (referred to as "potentially responsible parties" or "PRPs"): (1) present owners and operators of the facility; (2) owners and operators at the time of disposal; (3) persons who arrange for disposal, treatment or transportation of hazardous substances at a facility not owned or operated by those persons; and (4) persons who transport hazardous substances to a treatment or disposal facility selected by them.⁵ "Person" is defined to include, among others, corporations and individuals.⁶

For a PRP in any of these categories, a majority of the courts have held that there are only very narrow, statutory affirmative defenses to CERCLA liability.⁷ The statutory defenses are that the release was caused solely by an act of God, war, or an unrelated third party.⁸ Liability is strict,⁹ which means that it may attach without fault to a party who did not in anyway cause the contamination or for a release in compliance with all

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applicable laws at the time it occurred. Liability is also normally joint and several,¹⁰ which means each PRP is liable for the entire cost of the cleanup, although costs are usually allocated based on equitable factors. Finally, liability is retroactive and continuing.¹¹ Thus, a PRP may still be held liable, even if the hazardous substance releases occurred many years ago.

Natural resource companies can easily become PRPs subject to CERCLA liability. CERCLA hazardous substances are often present as naturally occurring components of the resources that such companies seek to recover and process. Such substances may remain or be created in products and wastes produced by the companies. CERCLA hazardous substances may also be present in the products used in operations to recover, transport or process the ores and mineral resources. Furthermore, the volumes of ores and minerals and resulting residuals and wastes may be high and cover large areas of natural resources. Thus, the potential for environmental contamination and natural resource damages subject to CERCLA in connection with the operations of natural resource companies is high, and where such contamination and damages occur, they can be extensive, and their remediation can be costly.¹² Furthermore, over time, to carry out their operations, natural resource companies may acquire and later divest themselves of various interests

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in land. In many cases, others may already have conducted exploration, mining or other activities on the land.¹³

As a consequence, natural resource companies can easily become PRPs, either as a result of their own activities or those of others. In general, PRP status for natural resource companies will arise from one of four circumstances. First, the company may own or operate property contaminated by the company's own activities or those of others. Second, the company may have previously owned or operated property that was contaminated by the activities of the company or others prior to the company's divestiture of the land interest. Third, the company may have arranged for disposal or treatment or for transportation for those purposes at another location not owned or operated by the company — for example, at a landfill or a recycling facility. Fourth, as discussed more thoroughly in Sections III.A and B, the company may become liable as a successor, parent or other stockholder of another company having such liabilities. Courts have interpreted "owner or operator" broadly to include, for example, parent corporations, subsidiaries, successors, officers, and directors.¹⁴

CERCLA provides exemptions that may shield various segments of the natural resource industry from CERCLA liability for certain kinds of activities or contamination. For example, the definition of CERCLA hazardous substance does not include "petroleum, including crude oil or any fraction thereof not otherwise specifically listed or

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designated as a hazardous substance" under CERCLA.¹⁵ Thus, releases of crude oil and crude oil products during oil field or downstream activities may not be subject to CERCLA as hazardous substance releases. However, if other hazardous substances are present in the petroleum through use or mixture with other materials, CERCLA may nonetheless apply.¹⁶

In identifying hazardous wastes under the Resource Conservation and Recovery Act ("RCRA")¹⁷ as CERCLA hazardous substances, the statute also excludes certain wastes suspended from RCRA regulation by Congress, including certain oil, gas and geothermal energy exploration, development and production wastes and certain ore and mineral extraction, beneficial and processing wastes.¹⁸ The effect of this exclusion is limited, however, as evidenced by cases interpreting CERCLA as applying to mining wastes if they are hazardous or contain hazardous or toxic substances.¹⁹ Other exclusions...