Acquisitions is like buying an environmental pig in a poke
Increasing alarm about what humankind has done to itself by polluting its surroundings is making the public and policymakers turn an ever more watchful eye on the effects of business activity on the environment. To this end, and in an attempt to harmonize with European Union standards, Polish environmental law is in the process of being revamped, and a comprehensive environmental statute should be enacted within the next few years. This does not mean businesses do not need to concern themselves with pollution before the statute becomes law. Environmental issues can result in a number of serious, and even unexpected, risks and liabilities to business. Every potential investor should consider the possible environmental problems that may arise from an investment in a Polish company.
Environmental liabilities can have a major impact on the financial status of a Polish company. These liabilities can result from both past operations (known as "historical contamination") and present activity. As a general rule, legal obligations relating to environmental protection, including responsibility for cleaning up contaminated land, refer to the persons or entities causing the damage or threat of environmental deterioration. In mergers and acquisitions this usually means the entity being acquired, as despite the change in ownership it is the legal person responsible for the pollution.
In assets deals, where all or a significant portion of the assets of a company, but not the company itself, are being acquired, the situation is quite different. Both the seller and the buyer remain jointly fully liable after the deal is completed for any environmental problems caused by the company's operations at the acquired site, unless the buyer was not aware of the problems at the moment of the sale. In any event, the liability of the buyer is limited to the value of the acquired assets.
So generally, in both acquisitions and assets deals, the new site owner assumes at least some potential liability for any necessary cleanups related to historical contamination.
Before all of you potential investors cross Poland off your list of target countries for investment, you should know that it is possible to structure the acquisition in a way that reduces your potential liability for historical contamination. There are, however, no foolproof methods; it is probably not possible to preclude all potential liability for ground contamination, especially if the costs of the cleanup are relatively substantial in comparison to the property value.
As a barometer of the conservative approach, the Treasury Ministry has worked out some specific mechanisms for the cleanup of contamination in privatization deals. One of the mechanisms gaining increasing acceptance at the treasury calls for an escrow account or delayed payment account. A portion of the purchase price for the privatized asset is paid into the account to cover potential cleanup costs of identified (usually during a due-diligence review or environmental audit preceding the sale) environmental liabilities.
A number of other solutions have been used in past privatizations where possible environmental liabilities have been identified, including:
adjustments in the purchase price to reflect the purchasers' potential liability for cleanup;
transfer of an increased number of shares in exchange for assuming responsibility for removal of the contamination;
establishment of a contingency fund to cover any unexpected costs of cleanup;
and agreement by the purchaser to commence environmental remediation within a set time frame and cost-sharing arrangement with the treasury.
When it comes to liability for current contamination in cases where the polluter is identifiable, Polish law provides for numerous and detailed regulations specifying various forms of liability for causing damage to the natural environment. Generally speaking, an entity that pollutes or has the potential of polluting as a byproduct of its business activity may be subject to the following:
payment of fees for contaminating the environment;
payment of fines for contaminating the environment;
an obligation to conduct operations in accordance with specific requirements contained in decisions and/or various building and local development plans issued by administrative authorities;
an obligation to restore the environment to its prior state;
liability toward owners or possessors of neighboring real estate for damaging the environment;
and a duty to temporarily refrain from an activity that is harmful to the environment.
The rule of thumb on pollution is that the person who caused damage is obligated to remove it and restore the environment to its former state, at the expense of the polluter.
In summary, Polish law does not clearly regulate the issue of liability for environmental damage and, in particular, does not provide sufficient guidance as to who is responsible for causing the damage. An investor who intends to acquire the ownership or assets of a Polish company, whether in private deals or in a privatization transaction, should inquire about past pollution and seek to allocate liability for past and future environmental contamination.
This article was prepared by Lejb Fogelman, managing partner of Hunton & Williams Poland, with the assistance of Ewa Rutkowska-Subocz, an associate attorney who specializes in environmental law matters.
