Environmental Due Diligence: An Essential Step in M&A Transactions

Troutman Sanders LLP
Andrew J. Perel and M. Buck Dixon

September 1, 2019

This publication was originally published in the Troutman Sanders Law Blog

The risk of shortcutting environmental due diligence cannot be overstated. There is a tendency during mergers and acquisitions (M&A) transactions to view such due diligence as simply another box to check before closing. It is not. What might appear to be a time-consuming, costly and burdensome process, will not be fully appreciated until businesses are faced with the consequences of not doing so. 

This overview highlights several important benefits of proper environmental due diligence, discusses risk allocation and mitigation strategies, and identifies emerging issues.

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Impact of PFAS on Private Equity: Preparing for the Coming Wave of Regulation and Litigation

Akerman LLP
Ellen S. Robbins and Matthew J. Schroeder

July 11, 2019

Regulation of Per and Poly-Fluoroalkyl Substances (PFAS) is increasing at the state and federal level as costly PFAS-related litigation is on the rise throughout the United States. Found in everyday products such as food packaging, stain, water and grease-resistant materials, and nonstick cookware, as well as being present on virtually all military bases and airports, the prevalence of PFAS combined with the heightened awareness of the public and the plaintiffs’ bar, make private equity funds and their portfolio companies prime targets for litigation and regulation.

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Five Essentials for Managing Deal Risk

WilmerHale LLP
Robert F. Fitzpatrick, Jr., Mark C. Kalpin, H. David Gold, Bonnie Heiple

February 25, 2016

Oil prices have fallen below $30 per barrel for the first time in more than a decade. This trend, along with the shale gas boom, evolving regulatory constraints, and a growing focus on renewables, have made one thing clear: the oil and gas industry is getting a makeover.

While these developments are subjecting many companies to financial distress, the current market is creating opportunity for others—including investors who are new to the space. Crucial to each forthcoming transaction is a thoughtfully crafted, well-implemented diligence program. From the real estate and environmental perspectives, such a program should confirm asset valuation, identify risks, and provide a basis for estimating contingent or future financial obligations.

Based on recent developments, here are five things to consider in shaping a diligence program at the front end of a transaction.

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Don’t Skip the Credits: The Oft-Overlooked Importance of Air Emission Credits in Mergers and Acquisitions

Latham & Watkins LLP
Michael Scott Feeley and Aron Potash

March 26, 2015

There is no shortage of environmental matters to navigate when buying a company or facility.  Environmental counsel must first lead a diligence effort that delineates the target’s environmental footprint and then suss out the environmental risks and liabilities attendant to the deal.  This diligence process often involves Phase I environmental site assessments, environmental, health and safety compliance evaluations, interviews of target personnel, and review of seller-provided permits, reports, and other documentation.  The knowledge gained from the diligence process feeds into negotiation of purchase agreement terms, including the purchase price, environmental representations, warranties and covenants, corresponding definitions and indemnification provisions, disclosure schedules, and permit transfer provisions.  Myriad environmental matters must be addressed, including compliance with environmental laws, the release of hazardous substances, the presence and validity of environmental permits, ongoing environmental litigation or the possibility of it, and health and safety matters.

One issue that all too frequently gets lost in the shuffle during the diligence and purchase agreement negotiation process is the evaluation of whether air emission credits are necessary to run the business, and if so, how these credits will be treated in the deal documents.  Air emission credits take many shapes and forms but, at bottom, are governmentally issued or approved authorizations to emit air contaminants.

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Seven Environmental “Do’s” and “Don’ts” for Private Equity Investors

Paul Hastings LLP
Thomas R. Mounteer

August 4, 2014

Private equity (“PE”) investment opportunities abound in many commercial sectors, including those with a history of more intensive chemical use and, hence, greater risk of environmental liability. Over the past two decades, PE investors, and lenders to PE investors, have become much more sanguine about environmental liability risk. As they gear up to participate in an active market, the following “do’s” and “don’ts” will help PE investors avoid unnecessary environmental liability risk.

  1. When Acquiring Equity, Do Proper Diligence into Legacy Environmental Liabilities

 When a PE firm buys a portfolio company from another PE firm, the acquisition is almost always structured as an equity purchase (e.g., the purchase of the target’s stock or LLC member interests). With that structure, and without indemnities, equity purchasers succeed to all the target’s legacy environmental liabilities.

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Insurer Launches New Environmental M&A Product

Business Insurance.com
Crain Communications, Inc.
Bill Kenealy
Associate Editor

September 4, 2014

Ironshore International has expanded insurance coverages to address environmental risks that arise during a transaction, allowing brokers and agents to provide consumers with a new innovative risk management plan.

Originally created in the wake of the subprime meltdown and catastrophic losses from hurricanes Katrina, Wilma and Rita, the company products ultimately aim to provide insurance protection against the adverse financial outcome of environmental incidents and liabilities.

“Ironshore Environmental is thrilled to be joining forces with our M & A group to provide environmental solutions to issues that can often hinder a domestic or international M & A transaction from closing or adversely affect the offer terms and conditions,” said John O’Brien, Ironshore Environmental CEO.

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How Private Equity Sponsors Are Using Responsible Investing to Drive Value

King & Wood Mallesons
Mark McNamara, Mark McFarlane, Michael Barker, Jason Watts,
Lee Horan and Alex Elser

European Union, USA
December 11, 2013

Many private equity sponsors are now proactively managing the environmental, social and governance (ESG) risks in their investment portfolios. This greater focus results not only from a desire to undertake sensible risk management but also from the realisation that such an approach can increase the underlying value of their portfolios. Some private equity sponsors are even going the step beyond and using proactive responsible investing as a way to differentiate themselves in the fundraising market.

In this article we highlight some of the market-leading practices in relation to responsible investing, outline what constitutes responsible investing and the benefits of taking active steps to address ESG issues, and discuss some of the challenges for private equity sponsors in quantifying and reporting on the benefits of their responsible investing programmes.

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ACE: With M&A Uptick Comes Need to Review Environmental Liabilities


August 22, 2013

The rate of global mergers and acquisitions (M&A) has seen a recent uptick, prompting a need for growing companies to review their global environmental liability strategies, says a report by ACE’s retail operations group.

2012 showed M&A growth, according to Mergermarket statistics, with the year’s first quarter topping three successive quarters of the highest M&A values experienced in the last five years.

“Certainly, for those companies with strong balance sheets, access to inexpensive debt and superior working capital management practices, M&A will remain a core part of their strategic growth priorities, both domestically and abroad,” says Seth Gillston, senior vice president of Ace Global Mergers & Acquisitions Industry Practice and co-author of the study. “Companies seeking a stronger foothold in emerging markets–particularly within those countries that have liberalized foreign ownership rules–will continue to pursue M&A as a means of entry. In doing so, they will confront compliance with a patchwork quilt of constantly shifting environmental laws and regulations.”

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