Environmental liability and asset/share transfers

1. In what circumstances can a buyer inherit pre-acquisition environmental liability in an asset sale/the sale of a company (share sale)?

Asset sale

A buyer inherits pre-acquisition environmental liability in an asset sale of a company in the following two circumstances:

  • Transferring obsolete technologies, equipment and products. No entity or individual can produce, sell, transfer or use technology, equipment and products that may cause major environmental pollution (Environmental Protection Law). If a buyer purchases such technology, equipment or products, the buyer will bear the environmental liability caused by the purchase.
  • Transferring the contaminated land. Under the Ten regulations on soil (see Question 14, Legislation and regulator), the entity or individual that inherits credits and debts bears related liability. When transferring the land use right, the transferee or responsible person agreed between the parties bears related liability. Therefore, if the Prevention and Control of Soil Pollution Law is issued in 2017 and provides for the Ten regulations on soil, the buyer will inherit pre-acquisition environmental liability.

Share sale

If a buyer purchases 100% of a company’s shares, he or she bears the same environmental liability as in an asset sale.

2. In what circumstances can a seller retain environmental liability after an asset sale/a share sale?

Asset sale

See Question 1.

Share sale

See Question 1.

3. Does a seller have to disclose environmental information to the buyer in an asset sale/a share sale?

Asset sale

There is no statutory requirement for a seller to expressly disclose environmental issues in an asset sale. If the seller is a pollutant discharging entity under intensified supervision, it must disclose environmental issues (Environmental Protection Law), in a way accessible through public records. If the seller is not an entity discharging pollutants under intensified supervision, the buyer can only obtain information voluntarily provided by the seller.

Share sale

This is the same as in an asset sale (see above, Asset sale).

4. Is environmental due diligence common in an asset sale/a share sale?

Scope

Environmental investigation and assessment includes a review of:

  • Environmental management systems, management organisation and responsible persons.
  • Air pollution.
  • Water pollution.
  • Soil pollution.
  • Solid wastes (including dangerous wastes).
  • Noise and other pollution such as radioactivity.
  • Environmental impact assessment and environmental protection acceptance of the construction project.
  • Clean production and energy saving.
  • Dangerous chemicals management.
  • Complaint report, administrative penalty and environmental litigation.

Types of assessment

Investigations are mainly related to legal compliance investigations concerning whether the enterprise’s environment management complies with environmental laws and regulations. They do not tend to involve environmental technology investigations.

Environmental consultants

Companies obtain legal advice in relation to new circumstances and new questions about the environmental laws. In addition, companies engage lawyers to investigate and assess the environmental legal risk of a target company or proposed investment project. Further, companies engage lawyers as agents or consultants when the company is subject to environmental administrative penalties and environmental litigation.

In the engagement letter, the parties generally agree on the scope of legal services, legal service fee, commercial terms, anti-corruption terms, terms concerning presents and entertainment, conflicts of interest, confidentiality, limitation of liability, and so on.

5. Are environmental warranties and indemnities usually given and what issues do they usually cover in an asset sale/a share sale?

Asset sale

If the assets are pollution prevention facilities, land use rights may involve environmental liabilities. In the purchase agreement, the seller and buyer usually include special clauses addressing distribution of potential environmental liabilities, in addition to due diligence and tests on soil contamination. The seller usually provides representations and warranties, such as that they:

  • Obtained a pollution discharge licence.
  • Paid pollutant discharge fees.
  • Obtained the environmental impact assessment for construction, reconstruction and extension projects, and environmental protection acceptance.
  • Had the indexes for control of the total discharge of major water pollutants and air pollutants, and no excessive emissions over the past two years.
  • Ensured dangerous waste disposals were in accordance with the law over the past two years.
  • Have had no environmental complaints or reports over the past two years.

Share sale

See above, Asset sale.

6. Are there usually limits on environmental warranties and indemnities?

There is no specific regulation on the limits of environmental warranties and indemnities. Parties can negotiate the extent of and limits on environmental warranties and indemnities on a case by case basis, depending on the specific circumstances of their transactions.