On Aug. 1, 2008, the Environmental Protection Agency (EPA) announced a new policy designed to motivate owners to audit newly acquired facilities, and disclose and correct violations of environmental laws. The policy would enhance EPA's current self disclosure policy by offering new owners lower penalties for disclosed violations than would be offered to long-time owners. EPA has labeled the policy as "interim" and is seeking comment on it.
New owners would obtain certain incentives by complying with the Audit Policy. Among other benefits, the incentives often amount to relief from enforcement for quick self-disclosure and correction of violations. Incentives such as reduction in and, in some cases, the elimination of civil penalties and an EPA determination not to recommend criminal prosecution are available to entities that meet Audit Policy's nine conditions. If an entity meets only some of the conditions, only some mitigation and reductions of penalties would be available. New owners that want to make a "clean start" at the newly acquired facilities by addressing noncompliance that existed prior to acquisition would be rewarded under the Audit Policy.
One concern to the regulated community, however, is whether the Interim Approach could have a "chilling effect" on mergers and acquisitions. Encouraging new owners to disclose pre-existing violations under the Audit Policy could lead sellers to shun buyers who are likely to audit and disclose, or to include a "no tell" clause in their transaction, making indemnification dependent on new owners refraining from disclosure of environmental violations.
EPA responded to the concerns by noting that environmental compliance liabilities, as opposed to environmental contamination liability, are generally not a driving force in M&A transactions. Additionally, EPA notes that "no tell" clauses may be voidable as contrary to public interest. EPA considers the self-audit policy to be potentially beneficial for negotiations to encourage sellers to address violations prior to closing or giving leverage for violations found during due diligence process.
Under this interim policy new owners of regulated facilities generally have a grace period of either 21 days from discovery of violations or 45 days from the closing of the transaction, whichever time period is longer. New owners also have the option of entering into an audit agreement during the first nine months after acquisition that will stop the clock with regard to prompt disclosure for violations.
Additionally, on Aug. 7, 2008, EPA announced a pilot project that would allow regulated facilities nationwide to disclose environmental violations on the EPA's website. Regulated facilities in Arkansas, Louisiana, New Mexico, Oklahoma and Texas will be able to disclose violations of all environmental laws, with the possibility of the program expanding to other states in the near future.
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