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Help It or Hurt It: How are Environmental Matters Going to Affect Your Growth or Exit Strategy?


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Learn how foresight and management of environmental matters can be leveraged for better outcomes in business mergers, acquisitions and facility divestitures.

Gain insight on:
- Preparing for and using the due diligence process to your advantage

- Preventing environmental issues from affecting or delaying a business transaction

- Knowing the tools and tactics available when environmental issues threaten your sale or acquisition

Published in: Business
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Help It or Hurt It: How are Environmental Matters Going to Affect Your Growth or Exit Strategy?

  1. 1. [Main Title]Help It or Hurt It: How are Environmental Matters Going to Affect Your Growth or Exit Strategy? John Kollmeier & Grant E. Nichols Room: Magnolia AB
  2. 2. [Title – 2 lines] • How environmental can affect your transaction • What to expect from the due diligence process • Options to manage environmental knowns and unknowns • Tips and tactics to use to your benefit Strategies, not technical detail
  3. 3. [Title – 1 line]Who are we? Sr. Vice President John Kollmeier Grant E. Nichols Sr. Vice President
  4. 4. Preparing for and using the due diligence process to your advantage How Environmental Can Hurt Your Transaction: • Reduced pool of interested / capable buyers • Long-term obligations • May not get the desired asking price • Change the financing package • Interfere with planned operations • Increase your health and safety burdens for workers / tenants • Impose property use restrictions • Affect the re-sale value of the land • Bring costly and distracting litigation Both Sides: • Delayed timing of deal • Kill the deal Seller’s Perspective: Buyer’s Perspective:
  5. 5. Phased Approach • Transaction Screen (ASTM e 1528) • Phase I ESA (ASTM e 1527, EPA AAI) • Phase II Investigation(s) • Remediation, if necessary [Title – 2 lines]The Environmental Due Diligence Process (know what you’re buying) Possible Probable Actual $ $$ $$$
  6. 6.  Prescribed Scope (ASTM 1527-13, AAI)  Non-intrusive, no samples collected  Limited scope, limited answers  Liability Protections and Business Risk [Title – 2 lines]Phase I Environmental Site Assessment
  7. 7.  Specific Scope  GPR, soil borings, groundwater sampling, vapor monitoring  Media samples compared to state cleanup standards  May require more than one effort to sufficiently define issues [Title – 2 lines]Phase II Environmental Investigation
  8. 8. Natural attenuation active removal / treatment [Title – 2 lines]Remediation
  9. 9. [Title – 2 lines] • More defined problems cost less than less-defined problems • Price off-sets are based on the unknowns + a risk multiplier • How do you manage the risk so you can still get the deal done? So the environmental guy has bad news… Source:
  10. 10. [Main Title]Tools and Tactics When Environmental Issues Threaten to Ruin Your Deal Grant E. Nichols
  11. 11. Costs Associated with Environmental Issues First-Party • Cost Overruns Associated with Cleaning Up Known Contamination • Clean Up Costs upon the Discovery of Unknown Contamination Regulatory and Legal • Mandate from Agency to Clean Up Contamination • Fines and Penalties and Government Oversight Costs • Governmental Re-Opening of Previously “Closed” Environmental Issues • Associated Legal Defense Costs Third-Party • Obligation to Clean Up Other Properties • Bodily Injury Claims as a Result of Contamination • Claims as a Result of Loss of Value of Property • Associated Legal Defense Costs Business Risks • Interruption to Business Operations • Loss of Rents • Increased Development Costs
  12. 12. [Title –1 line] Contractual • Transferring or retaining obligations via indemnification language Statutory • CERCLA (and state equivalent) defenses Financial • Escrow agreements and trusts Traditional Insurance • Pollution legal liability insurance Possible Responses to Environmental Issues
  13. 13. [Title –1 line] • Move away from traditional indemnity and escrow structures. • Desire for certainty and flexibility for Sellers. • Use of “Rep and Warranty” insurance. • In lieu of Seller indemnity or to facilitate wind-up • As a backstop or limitation on Seller indemnities or escrows • “Rep and Warranty” coverage typically excludes environmental claims and losses. • Use of pollution insurance on a primary or “excess of indemnity” basis. Trends in Transactional Risk Management
  14. 14. [Title –1 line] • “Ring fences” known environmental conditions at one or more facilities. • Coverage for remediation of “unknown” pollution conditions. • Provides third party support and credit enhancement to environmental indemnifications or escrows. May be designed as the primary method of recovery in lieu of escrow or indemnity. • Coverage for regulatory reopeners. • Coverage for future spills and releases at operational sites; no need to argue about commencement of release for coverage. Pollution Liability Insurance as a “gap filler”
  15. 15. [Title –1 line] Seller Retains Environmental Liability • Insurance can be used to mitigate risk of remedial cost overruns or reduce/avoid the need for ongoing reserves after closing. Buyer Assumes Environmental Liability • Insurance can secure Buyer’s obligations and minimize the need for ongoing Seller reserves, particularly if the SIR (i.e., deductible) exposure is adequately addressed as part of the transaction. • Either party can obtain insurance for the benefit of Seller, Buyer, tenants, lenders and subsequent owners. Use of Environmental Insurance
  16. 16. [Title –1 line]PLL vs. Regulatory Solutions Regulatory Protections • Usual rule is that covenant extends only to known conditions that are remediated to closure. • Excess of indemnity arrangements not available. • Depending on the state, contribution protections may be included, but only for state claims. • Usually a longer-term process; covenant is granted only after remediation is complete. • No transportation, NODs or business interruption protections available; only contribution protection from state claims. Pollution Liability Insurance • Coverage for cleanup of unknown conditions. • Coverage for “excess of indemnity” conditions available. • Third party bodily injury and property damage coverage. • Can be negotiated and manuscripted quickly to accommodate transaction needs. • Transported cargo, non-owned disposal sites and business interruption and soft costs may be covered.
  17. 17. [Title –1 line] Cost is generally tied to several factors: • Size and complexity of the insured property. • Scope of coverage provided. • Limit of coverage provided. • Term of coverage-up to 10 years. • Quality of due diligence submitted. Costs and Scope of Environmental Insurance
  18. 18. • Recent changes in market – AIG out, newer carriers with changing risk appetites (Ironshore, Tokio Marine, AWAC, Beazley, Aspen). • Future of 10 year term - XL, Zurich, Tokio Marine, Beazley, AWAC. • Limit thresholds and “stacking” concerns. • Availability of reinsurance. [Title – 2 lines]The Future of Insured Remediation
  19. 19. Background: • Client seeks to purchase privately held defense firm involved in the production of rocket fuel and its constituents. Company has a long-term and unquantified residual liability associated with its former facility that had closed after an industrial accident. Cleanup is ongoing subject to a state Consent Decree with DEP. Objective: • Purchase the Company’s stock to facilitate tax goals of Seller without stepping into the long-term residual environmental liability. Other Facts: • Public bid process for the Company; multiple bidders. • Need for institutional equity and debt in acquisition. • Residual liability could be long-term and potentially catastrophic. [Title – 2 lines]2015 Case Study
  20. 20. [Title –1 line] Step 1: Use “remediation trust/SPE” to segregate the long- term residual liability from other assets. • Assignment of Consent Decree to SPE held by Seller. • Agency consent to Assignment. • No release of Company. • “Estoppel” language; no ongoing liability after assignment. • Work Substitution to SPE. Secondary liability to Company. 2015 Case Study (cont’d)
  21. 21. [Title –1 line] Step 2: Find and staff the SPE/Trust. • Negotiate new financial assurance cost estimate with Agency, together with a commitment to fund the financial assurance at closing with sales proceeds. • Seconding Agreement for long-term Company staff to support SPE/Trust operations at legacy site. • Transfer ownership of legacy site/land from Company to SPE/Trust at closing. 2015 Case Study (cont’d)
  22. 22. [Title –1 line] Step 3: Use pollution liability insurance to insure Company operations, pre-existing pollution conditions at operating sites AND any legacy liability that might accrue from the legacy site after failure of SPE/Trust. • 10 year term; $50 million limit of liability. • Full coverage for Company operations (i.e. new conditions) at operating sites. • Include equity providers as Named Insureds. • Lender as Additional Insured and Mortgagee Endorsement. 2015 Case Study (cont’d)
  23. 23. [Title –1 line] Results • All other bidders for Company dropped out due to environmental concerns and their inability to underwrite the legacy liability. • Two of the initial bidders joined GT’s client as equity participants near the end of the transaction. • Transaction closed December, 2015. The SPE/Trust has been functioning without any problems. Client was able to utilize the PLL insurance to fulfill all of its financing objectives in the transaction without undue delays for due diligence or third party reviews. 2015 Case Study (cont’d)
  24. 24. [Main Title] Help It: Tips for Buyers and Sellers John Kollmeier & Grant E. Nichols
  25. 25. [Title –1 line] • Hire the right support team for you; ask for referrals • Bring in your experts early • Have abundant and relevant environmental language in the agreement of sale • Due diligence process, access agreements, data security, cost sharing situations, specific end-points, regulatory thresholds, etc. • Written by an environmental attorney • Run all environmental due diligence through your attorney; preserve confidentiality Help it - Tips for Both Sides
  26. 26. [Title –1 line] • If possible, get out ahead of environmental matters (conduct an internal audit) • Make environmental part of your exit strategy • Keep your file cabinet tidy and complete • Assemble and be ready to share your prior environmental documents, data, regulatory documents, permits, etc. • Designate an internal and knowledgeable person to manage your environmental information • Have external environmental representation in your corner Help it - Tips for Sellers
  27. 27. [Title –1 line] • Don’t expect that your Phase I will be accepted by the buyer • Consider “brownfield” buyers • Be prepared to fund an escrow account or reduce your asking price • Decide whether you want to manage post-closing obligations or not • Know in advance how you’ll handle non-compliant data produced during the ESA Help it - Tips for Sellers (cont’d)
  28. 28. [Title –1 line] • Allow sufficient time and funding for due diligence process (get advice on this while drafting an agreement of sale) • Be wary of reliance on prior reports; most are out of date and some are flawed • Be wary of the convenience to use the consultant that worked for the seller in the past • Don’t get discouraged by environmental issues; expect and manage them instead: • Purchase price concessions, Buyer-seller agreements, Insurance products, Fed/state assistance Help it - Tips for Buyers
  29. 29. [Title –1 line] John Kollmeier BSTI (610) 593-5500 ??? Questions ??? EEE Booth # 824 Grant Nichols JLT Specialty, USA (215) 309-4603