Buyers Urged to Manage Risk in Mergers, Acquisitions

Buyers and sellers have conflicting interests in business transactions involving potential environmental liabilities, but the parties can avail themselves to many flexible legal strategies and management tools for allocating risk prior to the closing process, a panel of environmental attorneys said Oct. 29.

Lydia Duff, general counsel for W.R. Grace & Co., said mergers and acquisitions can become incredibly complex when a seller is carrying known environmental liabilities on its books and ostensibly clean assets that could manifest as environmental liabilities at some point in the future. The seller naturally will want to negotiate purchase agreement terms that limit environmental representations and indemnities to minimize their post-closing exposures.

Conversely, Duff said buyers need to know as much as possible about past problems and presumably clean assets that could spiral into future environmental trouble. In this context, naturally buyers will want to negotiate purchase terms that shield them from legacy problems and insulate them from unanticipated environmental liabilities.

Despite the conflict, Duff said both sides are united around the goal of closing the transaction, frequently under intense time pressures. She said legacy and unquantified environmental liabilities need not turn into “deal killers.”

“There are an incredible variety of tools out there to allocate the risk,” Duff told environmental attorneys.

The comments came during a panel discussion at the fall meeting of the American Bar Association's Section of Environment, Energy and Resources in Chicago. Members of the panel summarized views expressed in a report for the ABA meeting, “Current Environmental Considerations in Business Transactions.”

Seller Considerations

Jeffery Gracer, a partner with Sive, Paget & Riesel P.C. in New York City, said sellers need to be forthright about environmental issues in their dealings with buyers. All known environmental problems, which he characterized as “hair,” must be disclosed. Phase I environmental site assessments should be presented to buyers to accelerate the due diligence process and build a foundation for good-faith negotiations.

Gracer stressed that sellers should steer clear of vague or uncertain representations about the assets in play to minimize questions of credibility.

“If there is hair, you should identify it in a neutral way, and try to put it in the best light,” he said. “But you don't want to hide it and not overstate the extent to which there is uncertainty. To the extent you do that, it gives the rest of the seller side reports added credibility.”

Buyer Considerations

Abbi Cohen, a partner with Dechert LLP in Philadelphia, said buyers need to look closely at the Phase I environmental site assessments during the risk assessment process, but they shouldn't rely on them exclusively. She said buyers need to use a wide range of publicly available resources to learn as much as possible about the assets being acquired, focusing on disclosures made to the Securities and Exchange Commission and applicable environmental agencies.

In addition, Cohen said buyers should use computer-assisted legal research tools to determine whether the sites have been the subject of litigation or investigation. Buyers also should consider the hot environmental and regulatory issues applicable to the seller's assets and examine the seller's responses to these trends.

Finally, Cohen said buyers need to pay close attention to reports by consultants assisting in the due diligence process.

“I rely a lot on who the consultant is. There are about three of them that I see all the time in the M&A world,” Cohen said. “If it's one of them, they know they are just as likely to be working for me in the next deal, so I assume they will deal with me on an even basis.”

Environmental Insurance

Cohen and Gracer said disputes over existing or unanticipated environmental liabilities can be minimized with environmental insurance.

They pointed to two types of environmental policies—pollution legal liability (PLL) or cleanup cost cap (CCC).

A PLL policy generally covers legal liability coverage for cleanup, bodily injury, property damage and defense of preexisting and new pollution conditions. CCC policies generally cover cost overruns for cleanup of known conditions, new conditions discovered during a remediation project and off-site pollution linked to covered locations.

“I use it all the time to help make deals,” Cohen said, referring to PLL policies. “They really have been a game changer in the last five to 10 years. So I am a big advocate for insurers.”

For More Information 
The ABA report, “Current Environmental Considerations in Business Transactions,” is available at http://src.bna.com/SN.