Environmental Issues

Like death and taxes, environmental issues are virtually unavoidable in the world of acquisitions and divestitures in the chemical industry.

A vast array of federal, state and municipal laws and regulations have been enacted over the last 15-20 years throughout the United States which have a substantial impact on almost every transaction in the industry.

Along with the rise of this complex regulatory framework, specialized professionals in many fields have developed sophisticated and creative ways of dealing with environmental issues in the context of an acquisition or divestiture of a chemical business.

In the article that follows, we will touch on these issues from the perspectives of the seller and the buyer.

Environmental Issues

In an acquisition or divestiture in the chemical industry, environmental issues generally are the second most important matter to be negotiated, behind price. In terms of time spent by each side in a deal, environmental issues invariably consume more than any other single issue.

Sellers

Don’t Be an Ostrich – The days when environmental issues can be glossed over or finessed are long gone. Today’s chemical industry buyer is typically sophisticated and experienced in dealing with environmental issues. Don’t wait for the buyer to ask the usual questions (see section below on ‘The Basics"). Be prepared to address environmental issues head on at an early stage.

Don’t Fret – A Solution Exists to Almost Every Environmental Problem – Along with the sophistication and experience that exists today, there are a whole host of ways to solve seemingly intractable environmental issues. Acquisition and divestiture activity in the chemical industry has continued unabated over the years despite the existence of difficult environmental issues. It is rare for a deal to collapse for environmental reasons.

Buyers

The Basics – Due diligence on environmental issues encompasses a broad range of subjects, some of which include:
  • Ownership history – Buying from a DuPont or a BASF can make due diligence relatively simple if contractual protections are obtained. Buying a small company or from individual shareholders or from a not-so-strong company is more problematical. Here, contractual indemnities may not be enough.

  • Compliance – What has been the history of compliance in the past, what is the current state of compliance, and what issues and costs may arise out of laws that may come up in the future?

  • On-Site/Off-Site Contamination – As those in the chemical industry well know, activities that were in compliance in the past may still give rise to liabilities in the future.

  • Asset Deal/Stock Deal or Merger? – The structure of a deal can also have a significant bearing on the environmental risks associated with an acquisition.

A Creative Approach Can Set You Apart From Other Potential Buyers – When a business is attracting a lot of interest, a potential buyer sometimes can distinguish itself from other interested parties by taking a different approach on environmental matters. In doing so, a seller can be faced with a decision that is not only based on price. There are even some situations where price takes a back seat to environmental factors in determining who buys the business.

Contingent Liabilities Can Be Huge: But Can Also Be A Figment of the Imagination – Everyone has heard of or experienced the disasters that have occurred when a business bought in the past is subsequently beset by very large environmental liabilities that were not sufficiently factored in when the decision to buy was made. There are actual situations where the environmental liability that surfaced years after an acquisition exceeded the original purchase price. Because of these past disasters, there can be a tendency to overestimate the contingent liabilities that may exist in a chemical deal. Buyers need to examine environmental risk rationally and distinguish between what is real and what is extremely remote or non-existent.




WOULD YOU RATHER SELL 2 PLANTS FOR $30 MILLION OR ONE PLANT FOR $40 MILLION?

This was the question facing a seller that had two plants, one of which had severe environmental problems and therefore a negative value. One potential buyer offered to buy only the good plant for $40 million. Another potential buyer offered to buy both plants for $30 million.

In this case, even though the environmental risk associated with keeping the problem plant was less than $10 million, the seller decided to go with the buyer who offered to buy both plants for $30 million.