ENVIRONMENTAL TIP #28 - Asset Purchase or Merger and the TCEQ Compliance History Rules



Dot Com decides to go into the business of widget manufacturing.  Dot looks at the Wally’s Widget World, a small widget manufacturer with operations in Waco and Waxahachie, Texas.  WWW has had a lot of environmental compliance problems in the past few years, but has corrected them.  WWW and Dot enter into an agreement for Dot to buy the assets of WWW.   Once the sale is complete, Dot applies to the Texas Commission on Environmental Quality (“TCEQ”), formerly the Texas Natural Resource Conservation Commission, for so-called flexible permitting and other innovative (and presumably cost-saving) programs for her new operation.


Dot is out of luck.  WWW was rated as a "poor" environmental performer based solely on past compliance violations, and its bad compliance history follows the asset under the TCEQ's new Compliance History Rules.   Because of the poor compliance history, Dot not only cannot participate in innovative TCEQ programs, but also may be the subject of unannounced inspections, may have trouble renewing permits, and may face increased penalties in subsequent enforcement actions.


Although generally the buyer of assets does not become responsible for past violations attributable to those assets, under TCEQ’s new Compliance History Rules, a company's past noncompliance with environmental law, even if resolved, is relevant in asset purchases and should be a part of the due diligence process.  The prospective purchaser, if she discovers there  is an ongoing compliance problem, should explore the use of a compliance agreement to have the compliance history adjusted.  This option, however, is not available to facilities that are in compliance at the time of the asset purchase, but still rated poor based solely on past violations.

Note:  See October 22, 2002 and November 6, 2002 Alerts for more information.

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