Environmental Protection Agency

Office of Enforcement and Compliance and Assurance

New Owners Audit Policy Working Session 

Summary Notes

Washington, DC

June 13, 2007

INTRODUCTION

With a May 14, 2007 Federal Register (FR) Notice, “Enhancing
Environmental Outcomes from Audit Policy Disclosures through Tailored
Incentives for New Owners,” (72 Fed. Reg. 27,116), Environmental
Protection Agency’s (EPA) Office of Enforcement and Compliance
Assurance (OECA) launched a 60-day public comment process to explore
ways to increase environmental outcomes through implementation of the
Agency’s leading compliance incentive settlement policy, the “Audit
Policy,” and to encourage the Policy’s use by “new owners” after
M&A transactions.  

EPA is exploring the idea of offering tailored incentives to encourage
new owners to audit their newly acquired facilities and self-disclose
violations they find to the Agency.  This is part of an Agency effort to
increase disclosure and resolution of environmental violations that,
once corrected, will yield significant pollutant reductions and
environmental benefits.  

As part of the public comment process, EPA set up a docket to accept and
record written comments from the public; held two public meetings to
discuss the FR Notice and take oral comments for the public record; and
also invited a diverse, but balanced, group of industry, government,
academic and interest group participants to working sessions focused on
the questions posed in the FR.  The working sessions were envisioned as
a chance for the Agency to hear the views of a variety of individuals
with different perspectives and experiences in a relatively informal,
frank atmosphere.  No consensus of opinion was sought or presented.

The notes below summarize the comments made at the working session in
Washington, DC, and the general discussion about ways to encourage the
self-discovery, correction, disclosure, and prevention of environmental
violations by new owners.  The summary represents participant
observations and recommendations, but no comment is attributed to any
individual participant.  The individuals who accepted EPA’s invitation
to participate are, however, identified below, by name and affiliation. 
EPA will make this summary part of the public record, and will consider
it, along with all the other public input, in deciding whether and how
to proceed with the development of incentives for new owners.

PARTICIPANTS

EPA

Walker Smith 

Director, Office of Civil Enforcement, OCE, OECA

Susan O’Keefe 

Acting Director, Special Litigation and Projects Division (SLPD), OCE,
OECA

Caroline Makepeace

Jonathan Libber

Phil Milton

Danielle Fidler 

ALL: SLPD, OCE, OECA

IEc (Consultants to EPA)

Gail Coad

Mark Ewen

Kailin Kroetz

 

DOJ

Anna Thode

Public

Jeanne Cohn-Connor 

Kirkland & Ellis

Bruce Pasfield 

Alston & Bird

David Buente 

Sidley & Austin

Bruce Adler 

General Electric and Corporate Environmental Enforcement Council

Bill White 

Moore and Van Allen

Steven Murawaski 

Baker & MacKenzie

Ira Feldman 

Greentrack

Eric Schaeffer 

Environmental Integrity Project

Sylvia Lowrance  

Joel Gross 

Arnold & Porter

Sara Beth Watson 

Steptoe & Johnson and 

American Bar Association Section on Environment, Energy and Resources 

Tim Wilkins 

Bracewell & Guiliani

Sarah Stafford 

College of William & Mary

Steve Herman 

Beveridge and Diamond

Catherine Little 

Hunton & Williams

Frank Friedman 

Frank B. Friedman and Associates

Matt Gerhart 

Beveridge and Diamond, law clerk

 

INTRODUCTORY COMMENTS

Walker Smith, Director, OECA-OCE

Ms. Smith thanked the participants for coming, and provided contextual
detail on the issues up for discussion.  She noted that EPA’s
overarching goals continue to be maximizing compliance with
environmental laws and regulations, and increasing disclosures of
violations that, once corrected, will yield significant pollutant
reductions and environmental benefits.  She said that the Agency
believes that the situation of new ownership may present a unique
opportunity to facilitate environmental compliance.  Ms. Smith asked the
group for comment on the definition of a new owner, the current
marketplace for mergers and acquisitions and the bearing this
marketplace would have on designing a policy applicable to new owners. 
She stressed the need for approaches that are straightforward and fair,
but could be easily and simply implemented, to help preserve limited
enforcement resources.

Susan O'Keefe, Acting Director, Special Litigation and Projects
Division, OECA-OCE

Ms. O'Keefe also thanked the participants for coming, and reiterated Ms.
Smith's goals for the meeting. She emphasized that the Agency feels that
there exists a unique opportunity to facilitate environmental compliance
with new owners.  After purchase, new owners are likely already
assessing environmental compliance issues and developing plans to
operate their newly acquired facilities, and their budget commitments
may still be relatively flexible, with funding available to fix
problems.  EPA also believes, based on some recent experience, that new
owners may be interested in using the audit policy to make a clean start
for their operation of a recently acquired facility.  And, importantly,
EPA believes that focus on disclosures from new owners might allow EPA
to achieve significant reductions in pollution.  EPA is interested in
thoroughly exploring ways to implement the audit policy to encourage new
owners to come forward, and to allow EPA to maximize the Agency's
limited resources.  Ms. O'Keefe specifically asked for input on how to
define “new owners,” and on the possibility of adjusting the
calculation or assessment of penalties for economic benefit, and
requested suggestions regarding the implementation of a pilot project,
if one were developed.  

PARTICIPANT DISCUSSION OF OFFERING NEW OWNERS TAILORED INCENTIVES UNDER
THE AUDIT POLICY

Basis for Offering Tailored Incentives - Should EPA Offer Incentives to
New Owners, and Why?

Comments:

(1) Look at the bigger picture.  Under Title V, EPA already has around
30,000 major facilities that need to report whether or not they are in
compliance once per year.  EPA should make the requirements to report
under Title V central to this program, and maximize its results.

(2) EPA needs to shorten the odds.  EPA says that if they find a company
is noncompliant, it will be much worse than self-disclosing.  But this
threat needs to be real.  In reality, there is a very slim chance EPA
will find a violation and the violator will pay the higher penalty.

(3) Those who are disclosing currently are smaller facilities and are
disclosing because they have an audit coming up, or are likely to be
audited (e.g., small dry cleaners).  Also, after reporting, a company
gets a pass for a while, such as no audit for longer than might
otherwise be the case.  It is unlikely that the same enforcement and
inspection incentives will provide the impetus for new owners.

(4) EPA needs to guard against "over-lawyering."  If new owner
self-disclosure is similar to negotiations for a consent decree, firms
will not self-disclose.  Making this work may require not being as
legalistic as EPA has been in the past.  If the Agency got companies to
come in and gave them more of a break then they otherwise would be
inclined to do, the Agency is getting more than they normally would - a
schedule and a clear path forward, a disclosure, and getting the entity
on the Agency's radar.  The Agency can also go back and see if the
policy really worked, by following up with the company.  

(5) Enforcement ought to be directed towards compliance.  Regulations
should be directed at pollution reduction.  Why should companies
consider the amount of pollution in regard to the question of whether or
not to disclose?  

(6) Industries should not need an incentive to comply.  EPA should
enforce compliance, but could reasonably provide incentives to disclose.
   

(7) Logic of focusing on new owners is understandable.  EPA should look
at property transfer laws that trigger environmental disclosures at
state levels, for example in New Jersey.  

(8) The EPA should be careful not to encourage sham transactions.  

(9) Sham transactions could actually be useful in achieving
environmental results sooner.  

(10) EPA should say that Title V is serious.  Eventually issues need to
be disclosed, and this is how EPA makes it easier.  If Title V program
worked, we wouldn't need to be here. Technically something is not
working there.  It should be simple.  What isn't working about Title V,
how to bring Title V to life - rather than the dead piece of paper it is
in some states.  

Realities of Merger & Acquisition (M&A) Transactions Today

Comments:

(1) No one at the meeting represents investment banking.  It is
important to get this perspective.  

(2) Most M&A deals do not involve consideration of environmental issues.
 People used to be more aware of environmental issues - now it is more
of an afterthought.  Need to think differently than twenty years ago,
when people knew all or nothing.  Today there are varying degrees of
disclosure and understanding of the entity being acquired.

(3) Environmental issues are only explicitly dealt with if due diligence
reveals a huge problem.  Generally environmental issues are not a
consideration in setting a purchase price. Environmental issues may be
incorporated in indemnification, escrows, etc., but not in price
setting.  In some deals, a company may say that the purchase will not go
forward unless a huge environmental problem is solved (i.e., the need to
get a permit).  For smaller issues, the buyer will just purchase the
facility and fix the problems.

(4) Indemnity agreements are all over the map and often include a myriad
of details.  The Agency could get mired in trying to sort them out. 
Some sort of certification from the new owner could help avoid that
problem.

(5) Different types of transactions should be treated differently, for
example asset purchase versus stock purchase versus merger.  

(6) Big M&As are often fast and may involve bidding wars.  Purchase
prices do not include any accommodation for economic benefit of
noncompliance.  Sometimes in smaller deals, price may be adjusted for
environmental compliance issues.

(7) EPA can simplify the approach to defining new owners, but preserve
some flexibility.  For example, concentrate on classic M&A but exclude
spin-offs, or include straight asset purchases but exclude
inter-affiliate transactions.  Look at New Jersey transfer language as
an example.

(8) Only major and specific issues are included in the price.  If an
environmental issue came up at the last minute, the question would be
whether or not the company could, once having fixed the issue, still
make a return on its investment.  Such an issue would not be cause for
renegotiation of the actual price.  The purchasing company would take
the range of compliance costs and estimate whether or not a return can
still be made.  This calculation is rarely a deal-breaker; the finance
people always say they can handle it.   It is good to make sure they
know the potential environmental costs up front, so it is known and can
be dealt with later.  

(9) Pricing is often set in bid process, and compliance costs are small.

Motivation for Self-Auditing and Disclosures

Comments:

(1) Usually motivation on part of new owner would be fear: specifically
fear of enforcers, fear of accidents, and fear of stigma.   Motivation
factors in addition to fear (versus just waiting for enforcement to
occur) are penalties and the general uncertainty of where the company
will be at the end of the process.  

(2) May need to create additional incentives to create the fear.    

(3) A major fear is the fear of criminal prosecution.  EPA needs to talk
about criminal implications relative to self-reporting.  What happens if
you self-report?  Or the company takes over a new facility -- what if
you find out later that there has been a violation, while you have been
operating for a nine-month period?  If you just found out, can the
agency ensure you won't be criminally prosecuted for operating during
that period?

(4) There is a benefit of addressing criminal liability issues and
resolving criminal investigations as soon as possible.

(5) What is the basis for the agency's thinking that the preponderance
of data issue reporting has to do with anything but the fact that issues
are not eligible to be reported - for example one can not get around the
Title V disclosure mechanism. 

(6) Two factors affecting whether a company will disclose are: (1) can
you continue to operate without resolving environmental issues - if you
can't, will disclose; (2) the 21 day deadline, if can't make it, won't
disclose.  Other issues are not likely relevant for disclosure.

(7) My recollection of the hearings with respect to the 1995 Audit
Policy indicated that many of us suspected that the disclosures would be
primarily limited to recordkeeping violations.  There is a great
description of the development of that Policy in Frank Friedman’s
Practical Guide to Environmental Management [Environmental Law
Institute, 10th edition, 2006. Pp. 304-10].

(8)  Industry is also concerned that EPA will request copies of their
audit reports, and that the audit reports will used against them,
especially in the context of criminal investigations.  Also, when good
faith disclosures lead directly to hefty civil settlements, it can deter
some from voluntary auditing and disclosure, while penalizing those are
trying to do things right.  These issues are discussed in Frank
Friedman’s Practical Guide to Environmental Management [Environmental
Law Institute, 10th edition, 2006. P. 277].

Economic Benefit - Barrier to Self-Disclosure?  Should Economic Benefit
be Negotiable?

Comments:

(1) There are two kinds of groups: large companies with lots of deals
and also small companies that just have general counsel and no
environmental counsel.  With smaller companies there is the opportunity
to get some real compliance.  These companies, though, are fearful
because they can not afford economic benefit but often they take over
even smaller entities with violations.

(2) If a firm is eligible to disclose but doesn't, it is either because
it can fix it quickly enough that no one will find out, or for fear of
the large economic benefit penalty payment.

(3) Understand the appeal of trading economic benefit for new owner
disclosures, because EPA would get good information. How significant is
economic benefit?  EPA isn’t routinely collecting economic benefit
anyway.  As an incentive though, how important is it to companies that
you won't have to pay something the Agency never even collects?

(4) Economic benefit is not a real incentive -- a company could just
disclose to a state, and the EPA will never over file.  States pretty
much write you a check for disclosing, they never ask for economic
benefit.   A company can just go to a state and get the whole penalty
written off.

(5) Everyone knows that EPA is very flexible regarding economic benefit.


(6) Companies don't care about prior economic benefit being recovered
from competitors.  More concerned with competitors getting into
compliance now.

Audit Policy - How to Deal with Sellers?

Comments:

(1) Currently in audit policy, EPA reserves right to go back after
seller.  May need to change that.

(2) If there is an incentive for new owners to disclose - even
responsible sellers will worry about whom they are selling to.  Will
create incentive to sell to people who are not responsible - since the
seller won't want someone going and disclosing everything and turning
over every rock.  Sellers worry about criminal liability.

(3) Creating significant protections for sellers will create more of a
risk to getting this accepted publicly versus worries about sham
transactions. Right now, seller does not need protection. Generally the
seller has not discovered the problem through its own audit, or would
have disclosed it.

(4) How much protection does EPA want to give to sellers?  This would be
a bad policy, will not be publicly accepted.  The opportunity stems from
new ownership (someone is buying the company) - focus on buyers.

(5) If you protect the seller, EPA will give away the ability to go
after the sham transactions. 

(6) If a buyer does due diligence and tells the seller and insists that
the seller fixes before the sale - seller should be able to take
advantage of buyer's diligence as auditor, and be treated as someone who
disclosed on their own.

(7) This is a self-limiting issue.  Consider a company in the business
of buying run-down companies who always includes indemnity agreements. 
No one will sell to them.

(8) EPA should convey that this will not be a new tool to be used to
target sellers.  Agency didn't get to sellers before, probably can't say
never, but EPA should say they are not aiming at targeting sellers.

(9) Maybe EPA should implement something similar to Brownfields tools. 
Brownfields recognize nature of new owners.  Lawyers guide buyer/seller
to get comfort on both sides regarding environmental issues.  This
approach would bring agency in too - and provide more comfort for all. 
The whole process is five to ten years back on Brownfields, and here is
the opportunity to do something similar.  Maybe something similar to
“comfort letters” in CERCLA?  Maybe sellers’ penalties should be
waived to the extent that they would have waived as if the seller had
reported themselves.

(10) Suggest joint disclosures by seller and buyer. The seller advantage
is that the audit policy allows seller to disclose under current scheme.
 New owners would have the advantage under this policy.  Would confine
total enforcement action, put more comfort on both sides.

(11) Buyers and sellers may disagree on what property is worth.  Both
agencies and states and markets developing ways to get more certainty in
what contaminated property will cost.  There is nothing like that on the
compliance side. Is an audit something you do before or after?  When
does audit occur?  It would be good to allow for it before and after
purchase.

Timeline Defining a “New Owner”

Comments:

(1) Companies need three to six months for people to realize that this
may be an issue.

(2) Companies need at least a year, and perhaps flexibility in what is
committed to.

(3) At least a year is a good idea.  Think of companies with multiple,
large facilities -- it will take time for them to inspect.  Furthermore,
may not be able to get companies to admit certain things up front.  But
you could get them to commit to a process.  

(4) The first step should be, “we've just completed a transaction -
here is the transaction - here is the plan.  If I find something I'll
disclose it.”   EPA should work to get companies into the policy - but
there is no need for a decree, etc.  The only requirement should be to
do what you said you'd do, not commit to audits... the company should be
allowed to look first.

(5) Companies may not want to raise their hand early on - if they don't
know what they are raising their hand to. 

(6) Assume that for the first year a company qualifies as a “new
owner.”  During that period a company can come into the audit policy
in two ways.  Within the first year, the company can negotiate an audit
agreement.  The second model lets people get in, get feet wet - set up a
timeframe for auditing, along with the discretion to disclose.  Give
time period after audit - based on size/number facilities involved.

 (7) Time is an issue.  Say a company has 20 plants, certifying air,
water, etc; all “correct” takes a while.  Maybe something where you
have a year, but no guarantee you won't be caught in the meantime.

(8) Not so concerned about the notification period - more concerned
about time to correct.  Absent policy, EPA would find them, force them
to correct.  But this policy could be a way to delay compliance. 
Companies might otherwise feel obligated to correct right away.

(9) Look at it from a technical perspective, and on a case-by-case basis
- how long does on the engineering side would it take to find out about
issues, how long would it take to get into compliance.  

Design of Potential Incentives - What Should New Owners Get?

Comments:

(1) If dealing with a major transaction (major facility, multiple
facilities), often multiple violations, will likely take time to even
find the problem, never mind correct.  Also, new owners are often not
making huge new capital investments right off.  May need to balance and
relax to create an incentive.  May want to tailor the audit with input
from the companies - what are key environmental issues that they want to
come in on?  Allow companies to just come in under a few issues, rather
than committing to a broad, over-arching audit.

(2) Add something about certainty - especially with regard to the pilot
program.  EPA needs to clarify if internal reports will be protected? 
Will EPA be coming to inspect?  Global inspection?  Surprise inspection?
 This is especially important when owners are financiers who won't want
to take the risk.

(3) People running companies today are financial people, not operational
people.  One thing they are looking for is certainty.  Maybe they can't
get complete certainty, but the closer EPA can get to certainty, the
more companies will come in.

(4) In first audit policy discussion respondents said that the majority
of disclosures would come from smaller firms.  EPA should go back and
look at first set of comments.  

(5) If you disclose, there is always a huge information request after. 
This is very annoying and EPA should eliminate this.

(6) Even with the best owner doing everything they can to fix a problem,
there could still be a big economic benefit.  Often companies care less
about the money than the stigma.  Given that, and given the fact that
you have a new owner - don't ask them to pay a penalty right away.  Find
a way to divest economic benefit without calling it a penalty such as
divesting audit, SEP-like activities - things that they otherwise
wouldn't have to do.  

Measurement of Success 

Comments:

(1) Success should be measured by the number of violations corrected.

(2) Success should be measured as the number of violators back in
compliance.

(3) If the Agency got people to come in and gave them more of a break
then they otherwise would be inclined to do, the Agency is getting more
than they normally would - a schedule and a clear path forward, a
disclosure, and getting the entity on the Agency's radar.  The Agency
can also go back and see if the policy really worked, by following up
with the company.

CONCLUDING REMARKS

Walker Smith, Director, OECA-OCE

Ms. Smith thanked the participants for taking the time to participate
and sharing their very helpful thoughts and opinions with the Agency. 
She further encouraged the participants to submit formal written
comments during the public comment period which runs through July 13.

Enhancing Environmental Outcomes from Audit Policy Disclosures

Through Tailored Incentives for New Owners:

Working Session Questions

Basis for Offering Tailored Incentives – Should EPA Offer Incentives
to New Owners, and Why?

Motivation of Self-Auditing and Disclosures

Do the circumstances of new ownership warrant special consideration or
handling, if the new owner was not responsible for creating a violation,
is willing to promptly address that violation and make changes to ensure
the facility stays in compliance in the future, and significant
environmental benefit could result?

Or, does the Audit Policy as currently implemented already offer
sufficient incentives to induce new owners to undertake self-audits and
disclosures?   

Realities of M&A Transactions Today

To what extent do pre-acquisition due diligence reviews reveal
environmental noncompliance (as opposed to environmental contamination
and remedial liability), and to what extent are these liabilities
reflected in purchase price?

If a selling firm has indemnified the purchaser for violations which are
ultimately disclosed by the new owner, are tailored incentives to
self-report needed at all? 

What are the potential effects on environmental compliance and on due
diligence reviews that might result from offering tailored incentives
for new owners?

Eligibility Requirements for a Pilot Program Offering Tailored
Incentives – What Does a “New Owner” Have to Be and Do to Get
Incentives?

Aspects of the Transaction which Might Affect Eligibility or the
Structure of a Program.

Would it be appropriate to require that new owners have performed a
certain level of pre-acquisition due diligence to qualify for tailored
incentives, and if so, what that level should be?  

Should any tailored incentives take into account the extent to which
environmental noncompliance liabilities (as distinguished from
environmental remediation liabilities) are reflected in purchase price
and, if so, how?

Given the Agency’s interest in encouraging appropriate accountability
and buyer/seller agreements on environmental compliance issues, should
the existence or terms of an indemnification agreement have any bearing
on a new owner’s eligibility for tailored incentives and, if so, how? 
 

Determination of New Ownership

Authenticity of New Ownership 

Since the Agency is concerned about using its enforcement resources to
delve into complex corporate structures and histories to make
determinations about the authenticity of new ownership in the context of
such Audit Policy self-disclosures -- what would be a clear,
straightforward and easily administered approach to determining if a
“new owner” is bona-fide?

What should a company need to provide to demonstrate to the Agency that
it is a bona-fide “new owner?” 

What should the standard be, to demonstrate “new ownership” in this
context?

Should the Agency require each company to self-certify to the government
that it is indeed a bona-fide new owner, and eligible for tailored
incentives?  

If a self-certification is appropriate in this situation, what should it
contain?

Should other proof be offered along with the self-certification?  

Timing of New Ownership

How long after an acquisition should an owner still be considered
“new,” for the purpose of being offered tailored incentives? 

What would be a clear, straightforward and easily administered approach
to determining whether an owner is “new” enough to be eligible for
tailored incentives?

Context of New Ownership

How should the Agency treat different acquisition transactions?

Should the Agency make any distinctions between acquisitions and
mergers?

How should EPA handle disclosures by reorganized companies that emerge
from Chapter 11 bankruptcy?  

Should companies in which the controlling interest is purchased by a new
firm with no plans to participate in management or operations be
eligible for any tailored incentives?  

How should the Agency treat companies that are purchased by their
employees, who were employed by the company when noncompliance began?

Other Concerns

Should the Agency consider other eligibility criteria or participation
requirements if a program to offer tailored incentives is developed?  

Design of Potential Incentives - What Should New Owners Get?

Reducing Penalties for Economic Benefit

Calculation of Economic Benefit

When should the clock start running when calculating economic benefit?

From the date the facility was acquired?

From the date the post-acquisition audit was completed?  

How long is reasonable for new owner to complete the audit? 

From the date of any delays beyond the reasonable period the owner is
given to put on controls, particularly where those controls are complex?


Should the economic benefit calculation take into account whether and
the extent to which the seller has indemnified the buyer and , if so,
how?

In calculating economic benefit, should the Agency allow the new owner
to offset the cost of the audit?

What is a fair, objective and efficient way of establishing the cost of
the audit (especially when an audit has been performed by the company
itself)?

Audit Policy consideration of violations which would otherwise be
ineligible. (Certain violations are not eligible for penalty mitigation
because their discovery is already legally required, and thus not
“voluntary,” as the Audit Policy requires.)

Since EPA wants to encourage new owners to examine compliance and
operations at their newly-acquired facilities, correct violations and
upgrade deficient equipment and practices, the Agency has allowed Audit
Policy consideration for new owners that disclose Clean Air Act Title V
violations before the first required annual certification at the new
facility, or that discover (and subsequently disclose) such violations
as part of a compliance exam the new owners agree to undertake before
the first certification is due.  Are there other similar categories of
violations disclosed by new owners that should be eligible for Audit
Policy consideration? 

For example, should new owners that in good faith undertake a RMP
triennial Audit and inform the Agency of violations, which existed prior
to acquisition and are discovered through the audit, be eligible for
Audit Policy consideration?  

Recognition from the Agency of new owners who self-audit and disclose
under the Audit Policy.

Would positive recognition by the Agency, commending a new owner’s
willingness to voluntarily audit and disclose, encourage a company to
undertake such actions?

What sort of recognition, if any, would be most desirable?

d)  Are there other incentives that make sense to consider offering?

Measurement of Success – How Do We Tell if it has been a Good or Bad
Idea?

If the main goal of any program is to increase compliance with
environmental laws and regulations and attain significant environmental
benefit and pollutant reductions, what measures of success should the
Agency adopt for the evaluation of a pilot program?

Should we consider outcomes besides: 

the number of disclosures made under the pilot program, 

the significance of the violations involved, 

the significance of the pollutant reductions that can be attributed to
or associated with these disclosures?

Should we consider implementation issues besides:

transparency of the program, 

efficiency in administration,

low transaction costs and resource savings?

.    

d)   What methodologies should we use to accurately measure these
outcomes?

 Incentives for Self-Policing: Discovery, Disclosure, Correction and
Prevention of Violations, 65 Fed. Reg. 19618 (April 11, 2000), commonly
referred to as the “Audit Policy.”

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