Environmental "auditing" has in the past been used primarily as a tool for assuring that ongoing production operations comply with pertinent environmental regulatory requirements. The audit may have resulted from detection of a single incident of environmental non-compliance, may be imposed as a condition of a consent agreement in settlement of an environmental enforcement proceeding, or may be undertaken as an exercise of corporate prudence in light of recent federal and state guidance (including a December 1995 EPA environmental audit policy), providing reduced sanctions for companies which audit and self-report. Audits may also be driven by new ISO 14000 standards which, as adopted in some countries during recent years, require independent audits as a condition of doing business.

Risk Avoidance Techniques

Today, however, the emphasis is changing as management becomes increasingly aware of the potential significance to the corporate balance sheet of the costs of dealing with the cleanup of past waste disposal areas. Under the federal and state Superfund programs, cleanup costs are often in the range of tens of millions of dollars. To avoid unintentional assumption of such liabilities, a thorough investigation of the current and past waste handling practices of an industrial concern (and its predecessors), both on-site and off-site, is essential. This evaluation should consider all potential sources of contamination, including toxic, radioactive, and hazardous materials. The development of full environmental information is also necessary for valuation of the transaction and proper allocation of risk between the parties. Moreover, some states such as New Jersey and Connecticut require an environmental review (and cleanup of any contamination) as a prerequisite to a business or financial transaction involving industrial property. Other states (notably Michigan) have created a special "innocent purchaser" status for companies that perform audits and disclose results.

Environmental due diligence in support of mergers, acquisitions, divestments, and financing transactions typically involves an initial paperwork review of permits, compliance records, and governmental regulatory files concerning the facility or facilities in question, and evaluation of any off-site waste management facilities used by the facility. A title search to develop information on prior uses of the properties may be undertaken. Visual inspections of the properties for obvious signs of problems with past disposal practices, such as stained soil or leaking underground storage tanks, must also be done. Structural hazardous substance issues such as those arising from lead paint, asbestos, PCB-containing equipment, and radon are evaluated. Additional sampling and analysis may be undertaken based on the results of this initial effort.

The standard of due diligence in the environmental area is rising with the increased recognition in the business community of the potential liabilities involved. These concerns have been heightened by the establishment in the 1986 Superfund amendments of the "innocent purchaser" defense (subsequently adopted by many states), which contemplates minimum standards of pre-acquisition environmental due diligence. This would include both a records review and an on-site inspection of the property. Minimum requirements have been further clarified in recent environmental due diligence guidelines issued by the American Society for Testing and Materials (ASTM). Similar guidelines have been promulgated by the FDIC and lending organizations for use by lenders in the credit review process. For radiological wastes, the NRC has placed a renewed emphasis on cleanup of contaminated sites, including sites no longer holding NRC licenses.

• Determine successor liability for acquired companies and assets.
• Perform due diligence activities required under ASTM, Innocent Landowner Defense, international requirements (such as ISO 14,000), and other standards.
• Assess liabilities associated with on-site and off-site contamination.
• Evaluate the potential for non-governmental third-party claims such as toxic tort suits, diminution of property value claims, and private cost-recovery actions.
• Evaluate and quantify costs of complying with current and foreseeable environmental compliance requirements such as those arising under the Clean Air Act Amendments of 1990.
• Perform environmental audits of industrial, commercial, and institutional facilities to increase levels of compliance and provide for self-reporting in appropriate instances.
• Review federal, state, and local environmental enforcement and regulatory compliance files; perform searches of relevant environmental databases to identify facilities targeted for governmental enforcement or subject to super-priority liens.
• Assure compliance with state and local environmental transfer laws such as those described below.
• Identify and ensure compliance with disclosure obligations under federal securities law.
• Evaluate as necessary the regulatory and other implications of on-site radioactive contamination.
• Evaluate corporate environmental compliance programs and report to management or board of directors respecting the same.

Morgan Lewis uses its own comprehensive guidelines for performing environmental audits and due diligence reviews, enabling our team of experts to concentrate quickly and cost-effectively on client concerns. Kenneth Rubin and Eric Rothenberg, who hold graduate engineering degrees from Cornell and Harvard, respectively, coordinate Morgan Lewis environmental auditing and due diligence work, having conducted dozens of environmental audits at industrial and commercial facilities throughout the United States and abroad. Other attorneys participating in environmental reviews include Bill Lewis, Bob Collings, Randy Visser and Lowell Martin. Kenneth Myers wrote an article on environmental audits summarizing the benefits of an auditing program and the procedures for its implementation. Eric Rothenberg is the editor of Environmental Risk Management: A Desk Reference (2d ed. 1998), which provides a comprehensive analysis of major environmental compliance concerns. In addition, Don Silverman is experienced in radioactive cleanup and waste management requirements.