Environmental Legal Risk in Mergers and/or Acquisitions

 I. Background

As a consequence of the promulgation of Environmental Laws in México over the past five years, the topic of risk and environmental liability has become a major issue of merger and acquisition operations.

Moreover, in this type of operation, it is crucial to take into account the very nature of the transaction in question so as to fully understand the risk and liability corresponding to each project.

II. Modalities

Basically, we have two main types of modalities: A) the purchase-sale of stocks and B) the purchase-sale of assets.

  • Purchase-Sale of Stocks

In this case, past, present and future environmental liability is acquired fully by the purchaser, independently of the fact that liability for the seller may be agreed to for past irregularities, such as the case of soil contamination.

Inasmuch as the legal personality of the corporation remains intact and, therefore, the new owner shall be liable for the facts and/or omissions implied by violations.

  • Purchase-Sale of Assets

In this case, personal liability ends since it is not acquired by the corporation and, consequently, legal personality is extinguished.  Subsisting are solely real liabilities, procte rem, as, for example, soil contamination.

Therefore, environmental liability pursue the item, that is, the property.

It is of major importance to review the possibility of assigning the rights of the corresponding permits, licenses or concessions so as to validate their transfer before the legal personality of the corporate entity in charge thereof is terminated.

Once having distinguished between the modalities of transaction in question, I list below the legal actions to be reviewed so as to carry out precise and proper environmental due diligence.

III. Analysis of the Legal Actions to be Follower

  • Ad Hoc Check List

It is quite common to see that the majority of our colleagues use standard forms applying to all merger and acquisition operations, thereby committing a big mistake, given the fact liability for the hotel industry is not the same as for the chemical industry.

It is our opinion that a specific checklist must be worked out for the industry in question.

  • Study Phase 1 vs. Legal Review

In particular, it is often used for the parties involved in this type of transaction to measure environmental risk by solely carrying out a Phase 1 study.  The problem lies in the fact that, though it is true the aforementioned reports deals with the risk level of the company´s operation vis-à-vis soil contamination, it does not deal with the scope and validity of the environmental permits required to operate nor with the risk of revocation and/or closure thereof.

  • Measurement of Risk and Liability

To resolve the environmental legal-risk factor of operations, it is essential to do an exhaustive legal review of the permits the company and/or industry needs to operate.

This will allow us to prepare an integral strategy, which, on the one hand, allows us to reliably measure environmental legal risk, and, on the other hand, with this hard data, leads to an integral strategy of regularization, should such be necessary.

  • Measurable Costs

After all is said and done, an integral legal report must provide us with the: i) legal risk of the operation; ii) legal liability of the parties; iii) parameters of the fines and/or administrative sanctions that might be levied for existing environmental irregularities; iv) approximate costs of the regularization of the company.

IV. Conclusions

  • The growing legal regime of environmental liability in Mexico makes it essential to do an exhaustive review of compliance in the area applicable to all mergers and acquisitions.
  • It is crucial to fully understand the type of modality of the transaction in question.
  • An exhaustive legal review is fundamental to measuring legal risk, as well as the scope of the civil, environmental, administrative and/or criminal liability of the parties involved in the transaction.
  • The elaboration of a report at the level of compliance and limit of environmental liability is essential, as are parameters of the cost of regularization.
  • In the case, contamination is found in the site, there must be ex profeso clauses within the contract.
  • Finally, in the interest of avoiding lawsuits brought for unreviewed defects and unnecessary risk in mergers and acquisitions, the involvement of an environmental expert with more than 20 years knowledge and proven
Humberto Celis Aguilar Alvarez

Humberto Celis Aguilar Alvarez

Email: hcaguilar@hcambiental.com
Tel: +52 55 52 51 0775

Humberto Celis, a cutting-edge expert in energy, environmental, natural resources law, and areas thereof related, has been in the business for over 25 years. His work ranges from regulatory compliance, liability counselling, dispute resolution, litigation, class actions, enforcement and response to corporate, real estate transactions, climate change, green markets, oil/gas, power generation and renewables.

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About Humberto Celis Aguilar Alvarez

Email: hcaguilar@hcambiental.com
Tel: +52 55 52 51 0775
Humberto Celis, a cutting-edge expert in energy, environmental, natural resources law, and areas thereof related, has been in the business for over 25 years. His work ranges from regulatory compliance, liability counselling, dispute resolution, litigation, class actions, enforcement and response to corporate, real estate transactions, climate change, green markets, oil/gas, power generation and renewables.