environmental concerns in chinese transactions, paul davies (may 2012)

ENVIRONMENT: THE CHALLENGE

PAUL DAVIES

2012

ENVIRONMENT: THE CHALLENGE

ENVIRONMENT

• AGENDA

– Environmental Risks

– Structuring Transactions

– Due Diligence

– Risk Management and Solutions

– Case Study

ENVIRONMENTAL RISKS

Contamination- Same issues as contaminated land – but consider, contamination in water can easily spread and effect manypeople

Waste- Stewardship – cradle to grave- Know your waste- Consider final end disposal

Hazardous substances- Fully evaluate/audit supply chain?- Hazardous substances in products - Asbestos- Brand issues?

REACH- Placing the onus on producers/manufacturers- Supply chain- Information disclosure issues- Combined effects

Quality issues- Product liability

Reclamation/remediation- Liability transfer

Contamination- Contamination/nuisance Issues- Triggers for remediation and also publicity- Disclosure issues – access to information

Climate change- Risks of climate change include increase in litigation from effects of climate change- Difficult causation issues

Air pollution- Nuisance issues- Air quality

Flooding?- See climate change“Water is the new carbon”

- Undervalued commodity- Increasingly valued and scarcity will lead to increase in contentious issues

ENVIRONMENTAL RISKS

AIR

WATER PRODUCTS

LAND

STRUCTURING TRANSACTIONS

• Corporate Interests

– Shares, Assets, Joint Ventures, Minority Interests

• Property Rights

– Freehold, Leases

• Others

– Acquisition of Debt

STRUCTURING TRANSACTIONS

• Corporate Interest

– Share Acquisitions

• Former Businesses and Former Properties

– Asset Acquisitions

• Assumed/Excluded Liabilities

– Joint Ventures

• Issues over Control

STRUCTURING TRANSACTIONS

• Property Rights

– Nature of Interest

– Indirect risk – delay in obtaining product, value of interest

• Acquisition of debt

– Lender liability issues?

– Underlying value of secured asset

DUE DILIGENCE

• Nature of transaction and interest being acquired

• Vender due diligence and Purchaser due diligence

• Supply chain issues

• Role of Consultant

– Liability issues and operational issues

– New risks: Climate change, supply chain

– “Deep diving”

• Efficiency savings for investment?

• Turnaround potential – Costs vs Rewards

• Eco screening for institutional investors

RISK MANAGEMENT AND SOLUTIONS

• Warranties and Indemnities

– Traditional protection

– Increasingly unreliable – Covenant strength/Restructuring?

• Baselines?

– Certainty in scope

• Insurance

– Difficult for environmental issues

RISK MANAGEMENT AND SOLUTIONS

• Innovation

– Escrow arrangements

– Fixed Price Remediation/Liability buy-outs

– More sophisticated cost models and liability allocation

– Regulatory Comfort

CASE STUDY

• Commodities Co based in China is looking to invest in natural resources

businesses. It comes across Dirty Steel Co, a business within Conglomerate Co,

which has been operating for over 100 years in Europe and, in particular,

Germany. Commodities Co strikes a deal to buy the shares of Dirty Steel Co for

US$800 million. It is looking to close certain loss making plants and upgrade the

most profitable plants, considerably increasing production in order to meet

expected demand from another investment owned by Commodities Co.

CASE STUDY

• Options

– Assets vs Shares

– Due diligence

– Environmental protection?

– Regulatory comfort?

ENVIRONMENT

PAUL DAVIES

Macfarlanes LLP 20 Cursitor Street London EC4A 1LTT +44 (0)20 7831 9222 F +44 (0)20 7831 9607 DX 138 Chancery Lane www.macfarlanes.com

This presentation is given on behalf of Macfarlanes LLP. Macfarlanes LLP is not authorised under the Financial Services and Markets Act 2000, but it is able in certain circumstances to offer a limited range of investment services to clients because it is regulated by the Solicitors Regulation Authority. It can provide

these investment services if they are an incidental part of the professional services it has been engaged to provide. © Macfarlanes LLP 2011