Environmental Matters
What are Environmental Matters? In this section, the Seller provides information regarding environmental issues relating to the Business. It is part of the Representations and Warranties of the Seller section.
The Representations and Warranties of Seller portion of the Agreement is used to save the Buyer time and money. Rather than require the Buyer to go through third parties to find certain information, the Seller provides the information and must reimburse the Buyer for any Losses it suffers if the information is false or misleading.
The Middle Ground: Here, the Seller makes comprehensive representations regarding its compliance with Environmental Laws. Those representations include:
(1) The Business is and always has been in compliance with applicable environmental laws and the Seller has not received notice of an Environmental Violation or Claim, or a request for information pursuant to Environmental Law that remains unresolved;
(2) The Seller has obtained all Environmental Permits necessary to conduct the Business or use the Purchased Assets as currently conducted or used and all such Environmental Permits are in full force and effect. Nothing has occurred, to the Seller’s knowledge, that would interfere with the validity of the Environmental Permits after the Closing Date, and the Seller has undertaken all measures necessary to transfer the Environmental Permits on the Closing Date;
(3) None of the Purchased Assets or any real property used or formerly used (whether owned or leased) by the Business have been listed on, or proposed for listing on, the National Priorities List under CERCLA or any similar state list;
(4) There has been no Release of Hazardous Materials in violation of Environmental Law with respect to the Business or the Purchased Assets, including on any real property currently or formerly used by the Business. Furthermore, the Seller has not received any notice that it violated an Environmental Law or the terms of an Environmental permit, or that could reasonably be expected to result in an Environmental Claim against the Seller, the Business, or the Purchased Assets;
(5) The Disclosure Schedules contain a complete and accurate list of all active or abandoned storage tanks owned or operated by Seller in connection with the Business or the Purchased Assets;
(6) The Disclosure Schedules contain a complete and accurate list of all off-site facilities or locations for the treatment, storage, or disposal of Hazardous Materials used by the Seller, and any predecessor to the extent the Seller may retain liability, in connection with the Business or Purchased Assets. No such facilities or locations have been placed on or proposed for placement on the National Priorities List under CERCLA, or any similar state list, and the Seller has not received any Environmental Notice of potential liability with respect to any such facilities or locations;
(7) The Seller has not retained or assumed any liabilities or obligations from third parties with respect to Environmental Laws (whether by contract or operation of law);
(8) The Seller has provided Buyer with (i) all material documents in Seller’s possession or control relating to compliance with Environmental Laws, Claims, or Notices in connection with the Business or Purchased Assets, or any real property used by the Business at any time, and (ii) all material documents relating to actual or potential capital expenditures made to ensure current or future compliance with Environmental Laws; and
(9) The Seller is not aware of and does not reasonably anticipate, as of the Closing Date, any condition or event relating to Hazardous Materials that may, after the Closing Date, prevent, impede, or materially increase the costs associated with performance of the Business or use of the Purchased Assets as currently conducted or used.
Purpose: The importance of this section depends largely on the Business and the industry in which it operates, as well as the location of the properties utilized by the Business. If the Business uses Hazardous Materials as part of its normal operations, this section is essential for the Buyer. Likewise, if the Business’s real property is adjacent to another business that uses Hazardous Materials, these representations lessen the risk that the Buyer will have to pay for the environmental violations of others. However, if the Business itself does not use any materials that are subject to environmental regulation and there is no similar threat posed by neighboring landowners, the scope of representations contained here may not be necessary. In the event that the Seller only used Hazardous Materials at a specific point in time or at one specific location, the parties can agree to limit the Seller’s representations to address those situations without including the entire set of representations listed above.
Buyer Preference: Due to the potential magnitude of penalties related to environmental violations, the Buyer wants to include the most comprehensive set of environmental representations that will be acceptable to the Seller and may also want to exclude environmental matters from any limits on its indemnification rights. If there are identifiable environmental issues and the Seller wants to limit the representations to those situations, the Buyer has a number of options. It may insist on the Seller correcting those issues prior to the sale or require a portion of the Purchase Price to be placed in escrow until the problems are remedied. A more conservative Buyer might seek to exclude the property from the transaction or lower the Purchase Price based on projected remediation costs. Another option would be to purchase environmental insurance. Still, the Buyer will want representations that apply to the entire Business and all properties utilized by the Seller. The Buyer prefers specific, material exceptions to the representations listed in the Disclosure Schedules, but nothing more, since it wants the representations to be as widely applicable as possible. Lastly, if the Business operates in an industry that interacts with climate change regulation (e.g. the energy, utility, and manufacturing industries), the Buyer may want to include a representation that speaks to the validity and transferability of “Environmental Attributes” (e.g. emissions allowances or renewable energy credits).
Seller Preference: If real property is not involved in the purchase and/or the Business does not utilize Hazardous Materials, the Seller may want this section to be excluded in its entirety. If that is not the case and these representations are included, the Seller can try to limit the environmental representations to this section by including a statement to that effect. As for the representations themselves, the Seller will want them to be qualified using a materiality or Material Adverse Effect standard, and/or with knowledge qualifiers. It may also want to limit them to cover specific properties or time frames if it can identify specific situations that are more likely to result in environmental-related costs for the Buyer. If the Seller agrees to deal with the Buyer’s environmental concerns prior to the sale, it can include those terms in a separate agreement and limit the representations to exclude the subject matter of the separate agreement. Because the Seller is most likely to provide an incomplete or misleading representation when instances or exceptions are listed with specificity in the Disclosure Schedules, it will want to make broad disclosures to avoid unintentionally breaching a representation.
Differences in a Stock Sale Transaction Structure: Since the Buyer inherits all the liabilities of the Business in a stock sale, the environmental representations are likely to be more comprehensive under that structure than in an asset sale.
