United States: The Nickel Report: Risk Management Roadmap: Navigating Environmental Due Diligence In Multi-Jurisdictional Transactions

Depending upon the assets being acquired or project being developed, a well-designed due diligence plan can be a critical component in managing transaction risk both before and after closing or commercial operation. Adeptly managing the due diligence process requires careful thought to appropriate timing and scope at both the front and back ends.

Among the most critical items in ensuring a successful outcome are consulting decision-makers who are driving the transaction and engaging professionals to provide appropriate support well in advance. Too often, key risks are overlooked or not adequately allocated or managed as a result of a rushed or improperly focused due diligence effort. Particularly for assets or projects with an inherently higher environmental, health and safety, or social (EHSS) impact potential, attempting to manage risk through the purchase and sale or development agreements alone also may not suffice. For example, avoiding a risk by carving out particular assets, employing third-party risk management strategies such as insurance policies, and post-acquisition integration or stakeholder engagement plans can be among the more effective means of managing EHSS risk—but these each require careful strategic planning by a team of professionals with the skills and experience to navigate a transaction's complexities, particularly in a cross-border context.

Every project and transaction differs; moreover, even two transactions that appear similar may require very different due diligence and risk mitigation approaches, depending upon the nature, objectives and risk appetites of the parties. Thus, it's important to design a due diligence plan to properly address the transaction, both to avoid missing critical issues and to avoid getting bogged down or derailed by issues that are irrelevant or immaterial. General considerations helpful to calibrating an EHSS due diligence plan to the transaction and the parties include:

  • Type of asset or facility: Operations with higher potential for EHSS impacts likely justify investing more effort on front-end due diligence and risk-allocation structuring and planning for back-end risk mitigation strategies.
  • Type of buyer, developer or investor: The role and sophistication of a party also dictates the appropriate level and type of due diligence effort. A passive institutional investor or lender, for example, typically will have a different risk profile in the transaction or project relative to a strategic investor planning to operate a facility.
  • Co-parties and their roles: Their number, sophistication, solvency, relationship to one another and jurisdictions can be important to evaluating risk allocation among buyer, seller, developer and any other co-parties.
  • Type of transaction: Whether an acquisition is confined to a narrow set of assets or structured as a stock purchase can have a significant effect on the breadth and depth of environmental due diligence. Development project considerations also likely will differ significantly depending on the project ownership and operating structure.
  • Jurisdiction: The project's or assets' location should be evaluated to identify applicable law of the local jurisdiction, any treaty or other international standards relevant to its operation or dispute resolution, degree of governmental and NGO focus on the industry or similar facilities and any unique litigation or dispute resolution risks.
  • Timing and availability of documentation & site access: Ensure availability early in the process—unanticipated impediments to accessing relevant documentation or to scheduling property or plant inspections can result in missed issues or deadlines.
  • Qualified consultants & local counsel: Similarly, it's important to confirm availability of competent technical consultants and local counsel early in the process. Depending upon the type and complexity of the project or transaction, preferred professionals may be occupied with other priorities, unavailable due to conflicts or may require significant time to engage and define their scopes of work.
  • Legal privilege preservation: Where the due diligence process may uncover significant legal violations or other high-risk items posing significant legal exposure, qualified legal counsel should be consulted early to help scope the due diligence effort, manage consultants and others involved in the project or transaction; to assess identified risks for legal exposure and structure liability allocation strategies; and to assist in developing post-closing risk mitigation and stakeholder engagement plans.
  • Focused scope of work: Each of these considerations should be clearly documented in a due diligence work scope to ensure the effort is comprehensive but focused and to ensure clear definition of team objectives, roles, communication protocols and timelines.

Beyond the obvious categories of applicable local jurisdiction statutory or regulatory EHSS standards and routine due diligence tools such as a Phase I or II site assessment, key areas of focus to help define the due diligence team's work scope include:

  • Ensure your focus isn't overly narrow: As the environmental profession becomes increasingly specialized, it's also increasingly important to ensure coverage of key risks beyond just the more obvious issues such as soil contamination and government permits; in both domestic and cross-border contexts, worker exposure, social responsibility and political considerations also may pose significant legal, commercial or reputational risk.
  • Don't neglect the back end: Post-acquisition integration and mitigation plans are an oft overlooked, but critical, component to an effective due diligence strategy to help address both corrective measures for identified defects as well as strategies for managing government affairs concerns and public, customer or media relations where appropriate.
  • Country risk should help guide your focus: Issues which may be mission critical in one jurisdiction may be moot in others. The underlying political, economic and social environment can have just as significant an impact on risk factors affecting the due diligence scope as legal standards, particularly in developing economies.
  • Be aware of international standards or commitments: Whereas assets located in developed economies typically are governed by a robust set of comprehensive environmental regulatory and procedural standards, in less developed jurisdictions international EHSS standards such as the World Bank Group Equator Principles, IFC Performance Standards or voluntary industry or NGO-administered standards may be implicated (e.g., the International Petroleum Industry Environmental Conservation Association or Roundtable on Sustainable Palm Oil guidelines)—whether through a voluntary commitment, contractual obligation, permit, lease or concession.
  • Identify mandatory reporting obligations before inadvertently tripping a land mine: Beware of these obligations in advance, either to develop a contingency plan for managing such risks or to carve out sensitive issues that could trigger post-acquisition self-disclosure obligations, and address them through contractual allocation, insurance or other risk-management strategies that avoid triggering enforcement or litigation.
  • Anticipated legislative or regulatory developments: It's not enough to look back at existing regulatory standards; scan the horizon for new or expanded legal developments with the potential to affect an asset's or project's legal or commercial risk profile.
  • Consider internal corporate social responsibility (CSR), EHSS management system or sustainability program commitments and reputational risk factors: It's also not enough to focus only on external standards—many sophisticated international companies have adopted CSR, EHSS or sustainability commitments above-and-beyond legal requirements of the relevant jurisdiction to help manage legal and reputational risk.
  • Status of site reclamation and closure contingencies: Whether in the US or overseas jurisdictions, particularly for industries with a high potential for EHSS impacts such as energy, natural resources and extractive industries, adequate plans and financial provisions for site reclamation and closure have become increasingly critical both to governmental regulatory authorities and NGOs policing corporate EHSS practices.
  • Adjacent parcels, infrastructure and supply/off-take parties: The status of and ability to effectively transfer government-issued permits and operating licenses is a common focus of due diligence – but site access, adjacent infrastructure and transportation rights (e.g., rail, transmission, pipelines, ports or terminals), as well as supply, off-take and waste disposal arrangements also can be important EHSS and commercial risk factors.
  • State ownership or participation: Particularly in jurisdictions with heightened political risk, whether the assets are being privatized from state ownership or control can be an important risk factor, as can availability of immunity from liabilities incurred during state ownership and recourse against the sovereign or state-owned enterprise for liabilities pre-dating privatization or deriving from ongoing participation in the project by the government or a state-affiliated party.
  • Leverage in contractual allocation structuring: Appropriate risk management through purchase and sale or development, supply and offtake agreement structuring is a well-recognized risk mitigation tool. However, it's important to understand the company's degree of leverage to effect favorable contractual provisions at the outset of the due diligence period, as a position of less leverage may warrant more attention to investigating documentation and site conditions to confirm representations, warranties and other critical deal terms.
  • Insurance: Although difficult to obtain or enforce in certain cases, insurance can be a useful risk management tool where available, if exclusions and premiums are not excessive. Review of existing policies should be undertaken where relevant.

Every transaction or project differs, and some are significantly more complex than others; hence, these factors comprise only a few of those which may be relevant to a given situation. As this summary illustrates, however, regardless of the deal size or parameters, it's critical to ensure a thorough yet focused due diligence protocol including a back end risk mitigation plan.

It's equally important not to navigate the treacherous shoals of EHSS due diligence without legal counsel experienced in managing the process across multiple jurisdictions, in helping to properly engage and direct consultants, and in assessing and helping to mitigate legal risks which may be identified through the due diligence process both during negotiation and after closing.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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