Contractual clauses concerning environmental aspects of M&A transactions
Properly constructed contractual provisions should adequately secure the interests of the parties in the event of environmental violations. They are relevant to nearly every deal.
One of the key elements for the success of any transaction is the investor’s skilful assessment of the risk associated with the planned venture.
Environmental law is one of the notable areas where risks may arise (and often do arise, regardless of whether the transaction involves shares in a company, the company’s enterprise or an organised part of its enterprise, or specific assets). This is particularly true considering the increasingly numerous regulations in this area, at both the national and EU levels, and the resulting sanctions.
In nearly every type of venture, there is a need to address related issues of environmental law.
Appropriate drafting of the transaction documents is designed primarily to secure the interests of the parties against potential negative consequences they may be exposed to across the broad range of environmental regulations.
This issue takes on particular significance in transactions involving entities generating negative environmental impacts. But even here, issues arising under environmental regulations do not have the same significance across all types of transactions. These issues are closely connected with the specific nature of the subject matter of the particular transaction, the business conducted by the target, the manner in which specific types of assets are used, and so on.
Moreover, these consequences may be of a different nature for the different parties involved, and thus should be framed differently in the transaction documents. For this reason, provisions that would be beneficial for one party are often incompatible with provisions that would be beneficial for the other party.
On one hand, the buyer’s intention is to avoid assuming the risk of any environmental liability. At the opposite pole is the seller, who seeks to dispose of the property “as is”—in the state in which it is found, passing on all inherent risks and liabilities.
From the viewpoint of issues of environmental law, and more specifically the related risks, there are certain categories of contractual institutions which may be regarded as typical for transactions involving businesses that exert an impact on the environment.
- Representations and warranties concerning such issues as environmental permits, soil and water contamination, waste management, and the ability to carry out the intended development of the real estate
- Provisions governing liability (particularly on the part of the seller) for the occurrence or discovery of circumstances causing harm to the environment, or more broadly liability under environmental law
- Mechanisms which, depending on the existence or discovery of such circumstances, enable an adjustment of the purchase price, modification of the continuing validity of the agreement, and so on.
Of course this is far from an exhaustive list of the categories of contractual provisions that may be encountered in this area, for one reason because the civil law itself does not employ any such fixed categories. In every case, depending on the factual circumstances, it is necessary to draft the transaction documents so that environmental legal issues are adequately addressed from the point of view of each of the parties.
Maciej Szewczyk, Mergers & Acquisitions Practice, Wardyński & Partners
See also Maciej Szewczyk & Jarosław Grykiel, “Contractual Clauses Concerning Environmental Protection Issues,” in Environmental Law in M&A and Real Estate Transactions, edited by Dominik Wałkowski & Izabela Zielińska-Barłożek (Lexis-Nexis, Warsaw 2014), pp. 292 and following (in Polish).