Analysis Of Environmental Liabilities And Risk Management In Acquisition Processes

INTRODUCTION

Acquisition processes are complex procedures that involve a comprehensive evaluation of a company's financial, legal, and operational status. In such transactions, the target company is subject to legal, financial, and technical due diligence, covering a wide range of aspects including corporate structure, assets, licenses and permits related to its field of activity, and intellectual property rights. However, one of the most critical, yet often overlooked, elements of this process is the assessment of the company's operations from an environmental law perspective. Evaluating a company's activities in terms of environmental compliance involves assessing the potential environmental harm arising from its operations, the necessary preventive measures and investments required to mitigate such harm, and the extent to which the company complies with environmental legislation. A proper analysis of the target company's environmental liabilities is essential for managing potential risks that the acquiring party may face following the transaction. Indeed, Turkish environmental legislation includes detailed provisions regarding environmental obligations and severe sanctions that may be imposed in case of non-compliance.

A. ENVIRONMENTAL ASPECTS OF LEGAL DUE DILIGENCE

The scope and significance of environmental reviews to be conducted during due diligence processes may vary depending on the field of activity of the target company and its potential to cause environmental harm. For example, environmental reviews to be conducted for companies operating a facility such as a factory, mine or similar site, which have a high potential to cause environmental damage, will be of greater importance compared to other fields of activity due to the severity and administrative nature of potential sanctions. Environmental reviews carried out at the due diligence stage cover matters such as the completion of environmental impact assessment (EIA) processes for the target company's projects, the obtaining of necessary environmental permits, the management of waste, and issues such as water and air pollution. During the acquisition process, the company's historical environmental performance and potential future environmental impacts must be thoroughly evaluated. This assessment not only helps the acquiring company minimize its potential costs and environmental liabilities, but also allows for the establishment of mechanisms in the transaction agreements to resolve environmental issues before the acquisition, to calculate potential damages, and to include provisions such as indemnification and guarantees accordingly. Given that environmental sanctions may involve substantial administrative fines and, in some cases, may even lead to suspension of activities, the inclusion of such provisions in the share purchase agreement is of great importance in order to protect the buyer's interests in the transaction.

On the other hand, the detailed identification of environmental liabilities through legal, financial, and technical due diligence is also important as it reveals the obligations that the buyer will be required to comply with when carrying out the relevant activity after the acquisition. In this context, the buyer can clearly identify the costs to be incurred and the deficiencies to be addressed in order to ensure compliance with environmental laws, thereby enabling the formulation of a more effective business plan.

B. MANAGEMENT OF ENVIRONMENTAL LAW-RELATED RISKS AND THEIR REFLECTION IN TRANSACTION DOCUMENTS

During the due diligence phase, the environmental regulations applicable to the target company are identified in connection with a detailed analysis of the company's scope of activities. Identifying the environmental legislation to which the target company is subject enables the assessment of its compliance with such legislation and allows for a comprehensive risk analysis. Based on the findings of this risk analysis, various provisions may be incorporated into the transaction agreements to safeguard the legal and commercial interests of the buyer.

One of the most significant reflections of environmental risks on share purchase or asset transfer agreements in merger and acquisition processes is the inclusion of indemnity provisions. It is typical to include specific indemnity clauses to ensure that the buyer is not held liable for, or exposed to, damages arising from environmental violations that occurred prior to the acquisition but may surface afterward. These clauses may include penalty provisions or the right of recourse. In particular, risks with a high potential for severe sanctions—such as the transportation of hazardous materials without the required licenses and vehicle specifications, or failure to fulfill obligations related to waste disposal or recycling—are identified, and specific provisions are included to ensure that the buyer is compensated for any direct or indirect damage arising from such risks.

In transaction agreements, it may also be stipulated as a closing condition that the seller must remedy certain environmental deficiencies before the completion of the acquisition. Examples of such provisions include the completion of missing waste declaration forms, renewal of existing environmental permits and licenses, or the rectification of environmental compliance deficiencies identified by the administrative authorities and communicated to the seller party.

Lastly, in mergers and acquisitions, the scope and nature of the environmental permits and licenses held by the target company are of particular importance prior to the completion of the transaction. Certain environmental permits may be granted specifically to the company or to a particular facility/project, and therefore may become invalid following the acquisition. In such cases, prior notification to the relevant authority, obtaining approval, or submitting a new application may be required. For instance, under the Environmental Impact Assessment Regulation effective as of 12 May 2025, in the event of a change in the project owner for any reason, the new project owner is obligated to submit the documents and information related to the transfer (such as the notarized transfer agreement, title deed, approved enforcement/tender result documents by the relevant authority, etc.), the final environmental impact assessment report/project introduction file and its annexes along with a declaration stating that the new owner assumes responsibility for such documents, as well as the signatory's notarized signature circular and trade registry gazette to the relevant provincial directorate within six months. Accordingly, any legislation containing specific provisions regarding the transferability or continued validity of environmental permits should be carefully reviewed prior to the transaction; if necessary, communication with the authorities should be established in advance and the potential impact of such requirements on the transaction timeline should be taken into consideration.

C. CONCLUSION

In conclusion, a comprehensive assessment of environmental obligations in mergers and acquisitions is essential for transaction security and legal predictability. Determining the level of compliance with environmental legislation not only contributes to pre-transaction risk analysis but also enables the proper structuring of post-transaction responsibilities. In this context, considering the legal requirements for the transfer of environmental permits and licenses, incorporating contractual indemnity mechanisms, and ensuring the necessary coordination with relevant administrative authorities are key components of a sustainable merger and acquisition strategy. Reflecting identified environmental risks in the transaction agreements through special indemnity clauses, conditions precedent, and post-closing undertakings is critically important for the control of legal and financial risks.