From a purchaser's perspective, a number of criteria must be considered before engaging in a business transfer. Timing is one, as most investors look at acquisitions with a 'Day-1 operation' mindset. Under a framework in which regulatory requirements may differ from one authority to another (largely influenced by specific internal procedures), proper planning and structuring is key for the timely completion of acquisitions and the mitigation of potential implications for business dealings.
Regulatory approval plays an important role in the transfer of assets or lines of business. With certain exceptions, where permits are issued in consideration of assets being sold and therefore transfer to the buyer on completion along with the assets, the transfer will generally entail a new authorisation procedure to be undertaken by investors. This is also the case for environmental authorisation; however, as local authorities do not consistently deal with the applicability of the various regulations in this regard, mitigating potential temporal and structural hurdles will generally require coordination with the respective authorities involved.
Certain triggering formalities may, to a certain extent, influence the general structure and timeline of a transfer of assets. Investors should be aware of the following challenges and adequately allow for them in the overall timing of a transaction.
Establishment and allocation of environmental (historical) liabilities
Any sale of assets or lines of business entails a notice procedure with the relevant environmental authorities, whereby both sellers and buyers must undertake certain procedural steps to reflect the split of liabilities. The procedure involves the seller informing the environmental authority of its intention to transfer the assets or lines of business, following which the authority communicates the environmental liabilities to be undertaken by the involved parties (ie, the seller and buyer). As a post-closing formality, both the seller and buyer must report their allocation of liabilities through a certified document within 60 days from closing.
Although no specific deadline has been set for environmental authorities to establish and communicate the environmental liabilities incumbent on the parties to a transfer, this is – in practice – largely influenced by:
- the decision of the relevant local authority to perform site visits, as well as the extent to which they are performed and their length; and
- the authority's local practice and internal procedures.
The environmental liabilities to be assumed by the parties are established:
- by reference to the obligations already captured in the respective permit; or
- following the results of the on-site visit.
Consequently, to address the topic of historical liabilities and their corresponding contractual allocation to the seller (for the period before the envisaged transfer), an investor will often insist on the preparation of an environmental audit report (the scope and methodology of which is to be mutually agreed), which will also form the basis for the parties' reporting of liabilities to the environmental authorities.
Buyer's environmental authorisation
A buyer's environmental authorisation requires the submission of several documents, including proof of an ownership title over the production premises, which transfers from the seller to the buyer on the closing date. Consequently, any launch by the buyer of its environmental authorisation may take place only following closing, in which case a Day-1 operation may be hard to achieve.
An environmental authorisation process involves, among other things, an initial public announcement on the filing for the issuance of an environmental permit, followed by an analysis of the documents submitted and finalised through a public consultation procedure to assess the respective activity's environmental impact on the surrounding area.
The timeframe for the issuance of an environmental permit is largely influenced by the authority's assessment on the completeness of the application file, in which case additional requests for information or documents may be received, therefore extending the timeline for obtaining the permit.
In practice, to mitigate the above concerns and optimise the timeline of the transaction, a buyer and seller may enter into a short-term lease agreement for a determined period between signing and closing, which will evidence title over the production premises and therefore allow the buyer to start its environmental authorisation as soon as the transaction has been signed and the allocation of environmental liabilities has been performed. In turn, this will also ensure the headquarters requirement for the registration of the buyer's business office with the trade registry is met, which is also a prerequisite for environmental authorisation.
Revision of seller's environmental permit as pre-condition for buyer's authorisation
To the extent that only some lines of business are envisaged to be transferred through the contemplated transaction (the seller continuing to retain other lines of business), the seller must first file for the revision of its environmental permit to reflect the contemplated cease of activity, which commonly occurs after the reporting of a split of liabilities. From the authorities' standpoint, the completion of the seller's revision process generally represents a pre-condition of the buyer's filing of its own environmental authorisation, which represents an additional factor in delaying the buyer's Day-1 operation following closing.
Although dependent largely on each authority's own local practice and internal regulations, in order to eliminate the above concerns, parties may attempt to approach the authorities with a request for simultaneous processes, whereby both the seller's revision of its environmental permit and the buyer's authorisation are operated simultaneously.
Investors seeking to acquire assets or lines of business should also be aware of the following additional collateral issues regarding due diligence exercises concerning the target assets, which although not material for the effectiveness of the transfer, may signify potential problems with implications for the subsequent regulatory process:
- The seller's degree of compliance – although a sale of assets does not entail any transfer of environmental liabilities incumbent on the company that owns the target assets or lines of business to the transferee, the level of its compliance may enable an assessment of potential operational risks at the level of the respective company having in mind a subsequent authorisation procedure.
- The existence of investment plans and their implication on investors' subsequent authorisation – to the extent that an action plan (attached to the company's environmental permit) exists and imposes several investment actions with respect to the assets or lines of business being transferred, which are outstanding at the time of the transfer, there is a risk that the environmental authority may pre-condition the issuance of a new permit to the buyer with the prior completion of the investment measures within potentially stricter implementation deadlines. A softer scenario may include the issuance of a new permit to the buyer, with an action plan enclosed, in which case failure to meet the measures by the set deadline could entail fines up to the suspension of the permit.
- A lack of permits which are issued in consideration of the assets being transferred requiring reauthorisation – certain permits are issued in consideration of the assets or equipment being transferred (eg, firefighting permits and certain technical permits attesting compliance of pressure recipients and lifting installations or ventilation and technical installations) and therefore follow the asset on the transfer's completion, without requiring other formalities. Nonetheless, a lack of such permits on the contemplated closing of the transfer requires the buyer to perform a separate reauthorisation procedure.
Acquiring assets or lines of business in an environment in which the various local authorities do not consistently consider the applicability of regulations carries its own risks. It is therefore essential to plan and structure a deal properly and realistically and to monitor the potential pitfalls.
For further information on this topic please contact Alexandra Munteanu at Schoenherr by telephone (+40 21 319 67 90) or email (email@example.com). The Schoenherr Attorneys at Law website can be accessed at www.schoenherr.eu.
This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.