Member Article

In our October 22, 2002 Alert, we discussed the importance of the new compliance history rules of the Texas Commission on Environmental Quality (“TCEQ”). Basically, a company’s compliance history will affect permitting, availability of innovative programs, and enforcement, including unannounced inspections. Be alert that the TCEQ compliance history rules ignore traditional distinctions between mergers and assets acquisitions involving successor liability. The TCEQ rules specify the events that will be used to develop the compliance history classification (e.g., notices of violation, agreed orders, and court judgments) and the method that the agency uses to arrive at compliance history ratings for both facilities and companies. Based on those ratings, companies and facilities are rated as poor, average, and high. Poor performers are unable to take advantage of innovative programs and are subject to increased scrutiny and penalties. All incidents of non-compliance will be factored into the compliance history, regardless of whether violations occurred before assets were acquired. As a result, if you acquire a facility in Texas, whether by a merger or by an assets acquisition, you also acquire that facility’s compliance history, which in turn will affect your company’s compliance history rating. For facilities with a poor compliance history that are not in compliance, a purchaser may enter into a compliance agreement to take actions to bring the site into compliance and raise the poor rating to average. Unfortunately, the rules provide no mechanism to raise a facility with a poor compliance history to average when the facility is in compliance at the time of acquisition. Because of these new rules, due diligence investigation becomes more important and should focus not only on onsite conditions, but also on the facility’s past and present compliance. If you have questions, please contact your Haynes and Boone environmental lawyer.