A key issue when selling a middle market aerospace and defense manufacturing company is environmental liability.
Effective February 13, 2023*, the US Environmental Protection Agency (“EPA”) has modified the definition of the All Appropriate Inquiries Rule (“AAI Rule”) under 40 CFR part 312. Under the Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA”), enacted in 1980, a buyer of a property can be held liable for clean-up costs caused by the seller, unless the buyer can reasonably prove that it did not cause the contamination. The AAI Rule sets forth the environmental due diligence that a buyer must accomplish prior to a purchase to prove that it did not cause prior contamination.
Under the new AAI Rule, when modified, All Appropriate Inquiries will be defined as follows (summarized):
- Phase I: Documentary research to determine if there are any reasons to suspect that hazardous materials may have been utilized on site in the past.
- Phase II: Sampling of surface and subsurface soil and water to determine if there has been any environmental contamination from the hazardous materials that are utilized on site.
- Phase III: During this final phase, the size and source of the contamination is characterized. A formal remediation plan is granted governmental approvals and then implemented.
As was the case before modification, we expect nearly all buyers will conduct environmental due diligence when buying a middle market aerospace and defense manufacturing companies.
Accordingly, we continue to advise our manufacturing clients to retain qualified environmental professionals before a sale process begins, to help prepare and guide them through buyer environmental due diligence.
*A sunset provision allows for the utilization of the prior AAI definition until February 13, 2024.
Have a great rest of the day,
Bruce Andrews
Managing Director, Defense
