European Union: Industrial Site Contaminations Likely To Be-Come More Transparent In M&A Transactions In Near Future

As of 7 January 2013, certain industries will become subject to more stringent environmental investigation and reporting obligations. From that date, the operators of those industrial installations that are subject to the IPPC/IED regime will have to draw up so-called "baseline reports" comprising site-related soil and groundwater information. Drawing-up that report will go hand in hand with investigating the environmental state of the industrial sites concerned. Any contaminations will become transparent to national authorities and supervisory bodies. This possibility should be duly considered in M&A transactions.

Background

On 24 November 2010, the European Parliament and Council adopted Directive 2010/75/EU on industrial emissions (integrated pollution prevention and control), hereinafter referred to as "IED". The IED replaced the IPPC-Directive and also other existing EU environmental legislation in order to harmonize the European legal framework on industrial emissions. Chapter II of the IED stipulates the obligation to draw-up a baseline (environmental) report with regard to those activities which are listed in Annex I of the IED (e.g. energy industries, production and processing of metals, mineral industry, chemistry, waste management). It primarily applies to new industrial installations submitted to the administrative authorities for approval. However, the extension or update of an existing industrial plant permit might also trigger the obligation to draw-up a baseline report. It should be noted that the IED contains numerous transitional provisions that exclude certain industries from the application of the IED investigation and reporting obligations for a limited period of time.

Baseline report – a "toxic paper"

The baseline report has to contain the information required to determine the state of soil and groundwater contamination so as to make a quantified comparison with the state upon definitive cessation of the activities possible. Inter alia, the report must include information on the present and historical use of the site. It must also provide information on the present soil and groundwater conditions on site. Therefore, detailed site investigations (soil and groundwater measurements) will have to be carried out in order to obtain the required reporting data. Evidently, sensitive and so-far unknown environmental issues might come up while investigating the site for reporting purposes. These issues have to be included in the baseline report, which must then be submitted to the approval authority.

Increased risk of environmental liability

By comparing the state of soil and groundwater contamination at the time of drawing-up the baseline report with the state at the time of site closure, one can assess whether the installation caused significant pollution of soil or groundwater. If this is the case, the operator will be obliged to take appropriate measures to clean-up the site. That kind of clean-up obligation is nothing new, as the environmental laws of most EU Member States anyway provide for obligations to investigate and, if necessary, clean-up sites upon closure of the installation. However, the obligation to draw-up a baseline report upon approval, extension and update of facilities will have different practical consequences in terms of environmental liability risks:

  • In drawing-up a baseline report, so far unknown environmental damages might be identified. This might trigger the obligation to take immediate action against the pollution identified under applicable EU and/or national environmental liability law. This increased risk of environmental liability primarily applies to the extension or updating of existing -- and, in particular, old -- installations where environmental damages are likely to have occured in the past.
  • The baseline report has to be submitted with the competent authorities and, therefore, environmental damages will be more transparent to supervisory bodies than before applying the IED rules. It can be further assumed that the number of remediation proceedings initiated by the authorities will increase significantly. Thus, the risk of being obliged to take immediate remediation and safety will increase substantially.

Potential consequences for M&A transactions

The IED provisions on baseline reporting have to be carefully considered in M&A transactions, by both sellers and buyers. Especially when the transaction is driven by the buyers' intention to expand the purchased site significantly (in terms of exceeding specific thresholds as provided in the IED) or when an update of the installation will be required soon after completion of the transaction (in order to comply with the Best Available Technique [BAT]), the risk of environmental damages to be disclosed to the environmental authorities will be substantially higher than before the introduction of the new investigation and reporting obligations. In of the event that detailed information regarding potential site contaminations is lacking, it will be highly recommended that seller and buyer conclude e.g. appropriate escrow agreements addressing the risk of future baseline reporting and environmental liability issues in relation thereto. Especially the transitional provisions on BAT-updates (as set out in the IED) should be duly considered, as baseline reports will have to be drawn-up at the time of updating the installations (in accordance with BAT) at the latest.

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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