# Presentation: 118045

## Enhancing Environmental Outcomes from Audit Policy Disclosures Through Tailored Incentives for New Owners

- Washington, DC Public Meeting
- June 12, 2007
- San Francisco, CA Public Meeting
- June 20, 2007

## Overarching Goals

- Maximize compliance with environmental laws and regulations.
- Increase disclosures of environmental violations that, once corrected, will yield significant pollutant reductions and significant benefits for the environment and human health.

## Audit Policy Results

- Audit Policy is highly successful to date – resolved disclosures of over 3,000 entities.
- However, the majority of disclosures have been of reporting violations.
- While these disclosures are important, they have not directly resulted in many pounds of pollutants being reduced or removed from the environment.

## Breakout of Resolved Disclosures by Primary Law, FY 96 - 06

- EPCRA over 50% because 1) Federal Program and 2) Once comply – Feds know

## New Owners

- EPA is exploring the idea of offering tailored incentives to new owners to encourage them to self-audit and disclose violations at their recently acquired facilities.
- May present an opportunity to achieve significant environmental benefits more quickly than might otherwise happen.

## Why New Owners?

- New owners may be well-situated and motivated to focus on, and invest in, making a clean start, by addressing environmental issues.
- Not responsible for facility when violation arose.
- May already be auditing and assessing new facilities.
- Funding to fix problems may be available or budget commitments still relatively flexible.
- Opportunity to manage and reduce risk by addressing and disclosing noncompliance.

## Why New Owners?   (continued)

- In recent years, EPA has entered into corporate auditing agreements with new owners after mergers or acquisitions valued at over $1 billion, which offer promising opportunities for significant environmental outcomes.
- Active M&A Market
- Estimated 80 M&As over $25 million annually in Chemical Industry (source: Young & Partners).

## New Owners FR Notice –Poses a Series of Questions

- Should EPA offer tailored incentives to new owners to maximize environmental outcomes, and why?
- Who is a bona-fide “new owner” and what should a pilot program require?
- What incentives should be considered?
- How to measure success of pilot?

## Should EPA offer tailored incentives to new owners?

- Do the circumstances of new ownership warrant special consideration or handling -- if the new owner was not responsible for creating a violation and there exists potentially significant environmental benefit that could result from new owners’ disclosures and correction of violations?
- Or does the Audit Policy as currently implemented already offer sufficient incentives?

##  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)?
- To what extent are these liabilities reflected in purchase price?

## Realities of M&A Transactions Today

- 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?

## Who is a bona-fide “new owner?”

- Need clear, straightforward, easily administered approaches to making determinations.
- EPA is concerned about using its enforcement resources to delve into complex corporate structures or histories to determine authenticity of new ownership.

## Who is a bona-fide “new owner?” 						 (continued)

- What would a company need to provide to demonstrate “new ownership?”
- Require self-certification?
- What should it contain? Other proof?
- How long is an owner “new?”
- How to treat different acquisition situations?
- Mergers; Chapter 11 bankruptcies; Controlling interest with firm uninterested in managing operations; Employee-purchased.

## Other Eligibility Issues for any New Owner Incentives

- Should new owners have to do a certain level of pre-acquisition due diligence?  And if so, what level?
- Should EPA take into account the extent to which purchase price reflects noncompliance liabilities?  And if so, how?
- Should indemnification agreements have any bearing on eligibility? And if so, how?

## What incentives should be considered?Reducing penalties for economic benefit

- When should clock start for the calculation of economic benefit?
- Date of acquisition?
- Date audit completed?
- How long is reasonable to finish audit?
- Date of the end of a reasonable period to install controls?
- Take any indemnification into account?
- Allow offsetting of cost of audit?
- How to fairly, objectively, efficiently establish audit cost?

## What incentives should be considered?Allowing Audit Policy consideration for otherwise ineligible violations

- Certain violations are not eligible for Audit Policy penalty mitigation because their discovery is already legally required, and thus not “voluntary” as the Audit Policy requires.
- But, EPA wants to encourage new owners to examine compliance and operations at their newly-acquired facilities, correct violations and upgrade deficient equipment and practices.

## What incentives should be considered?Allowing Audit Policy consideration for otherwise ineligible violations  (continued)

- EPA has made new owners eligible for the Audit Policy when they disclose violations Clean Air Act Title V violations before the first required annual certification at the new facility, or when they discover the violations as part of a compliance exam they agree to undertake before then.

## What incentives should be considered?Allowing Audit Policy consideration for otherwise ineligible violations  (continued)

- Are there other similar categories of violations disclosed by new owners that should be eligible for Audit Policy consideration?
- Should new owners that, for example, undertake in good faith a Risk Management Plan triennial Audit, and then discover and disclose violations, be similarly eligible for Audit Policy consideration?

## What incentives should be considered?Providing Recognition

- 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?
- Any other incentives?

## How to measure success of pilot?

- Number of disclosures?
- Significance of violations involved?
- Significance of pollutant reductions?
- Transparency of program?
- Efficiency of administration?
- Low transaction costs?
- Other measures?
- Measurement methodologies?

## Objectives of any New Owners Pilot Program

- Increase # self-audits and disclosures that yield significant environmental benefits.
- Transparent, straightforward, clear.
- Ensure only bona-fide new owners.
- Efficient to administer with limited resources.
- Minimal transaction costs for Agency and new owners.

## New Owners – Public Process to Explore Idea of Tailored Incentives

*    **Federal Register* Notice, May 14, 2007
- 60-day comment period, ends July 13
- Docket for written comments
- Docket ID# EPA-HQ-OECA-2007-0291 (_[www.regulations.gov](http://www.regulations.gov/)__ or by hand or mail as described in Notice)_
- Oral Comments
- Public meeting in D.C., June 12
- Public Meeting in San Francisco, June 20
- EPA will review comments and decide whether to develop pilot program to test idea
- Proposal for pilot program would be published for comment