Our review and advice on M&A deals is structured around our four-point program that involves: early detection and evaluation; deal structuring to minimize environmental risk including (where appropriate) our layered LLC (or LP) on top of a corporate entity structure; attorney management of investigations (with focus on litigation risk control and maximizing the attorney client and attorney work product protections); and financial focus (monetizing the risk or opportunity) rather than placing too much reliance on representations, warranties and indemnities. In addition to our four point program, our relationship with IR Global based in London (www.irglobal.com) provides us with global reach to service cross-border transactions.
Our Four-Point Program
1. Early Detection and Evaluation
In our view, putting off a serious analysis of environmental risks and opportunities until end of deal “due diligence” can be a costly mistake. We have seen incidents in which the late revelation of environmental risks has required the complete restructuring of a deal, which wastes time and money. For example, Norm Bernstein had occasion to review a transaction in which the stock of a group of affiliated companies was being purchased as part of a single deal. One of the companies was identified late in the transaction as having potentially serious environmental risks due to historical contamination. The deal had to be restructured to convey the stock of only the other companies and the purchase of certain selected assets of the vulnerable company, whose operations had to be restarted at a greenfield site in another jurisdiction. In another deal, the waste handling practices of a company considering going public made good business sense, but were found late in the process to be potentially inconsistent with certain environmental laws, posing a personal risk to some of management involved and an unanticipated disclosure problem for the company. The sooner problems of these types are uncovered, the sooner they can be dealt with.
2. Deal Structuring
Apart from the issue of asset purchase versus stock purchase, there are collateral issues that can jeopardize the benefits of an asset purchase deal. These include continuity of equity ownership, management, location, and operations. All need to be reviewed. Some deals (such as acquisition of landfills) inherently carry significant environmental risk but offer the potential for very large returns. In those contexts, particularly in deals of five or ten million or more, consideration needs to be given to Norm Bernstein’s two-tier structure – a limited partnership or LLC on top of an operating corporation. Typically, the LLC or limited partnership would hold notes and warrants but no or very little stock in the operating corporation and avoid any direct involvement with environmental issues. This may provide the limited partners (or the LLC members) with a substantial liability shield, combined with potential tax efficiency in passing note repayments through the LLC or LP and the upside of stock ownership through the timed exercise of the warrants.
3. Attorney Management
The risk of allowing environmental engineers to provide reports directly to an acquirer was starkly illustrated in a case we recently won. The defendant real estate company, as part of due diligence, had an environmental engineering firm inspect the property it was going to buy. The engineering firm issued a report warning that the potential target property was contaminated. The buyers bought anyway. During the litigation that our client brought years later, we obtained a copy of that report through discovery. It clearly showed the buyer knew it was buying contaminated property. An effort by defense litigation counsel to “claw back” the engineering report failed. The case settled shortly thereafter on terms highly favorable to our client. Moreover, in order to make the best use of the attorney client privilege and work product doctrine, the supervising attorney has to understand the potential litigation context of what is being done and reported. Because we have an intense environmental litigation background (see our Litigation Services tab) we can take steps to minimize litigation risk during an M&A deal.
4. Covenants, Indemnities and Financial Focus
We can, of course, write, review and revise complex interlocking environmental covenants and indemnities. However, environmental covenants and indemnities may not provide the value in the environmental area that many corporate lawyers might suppose. The seller’s representations, warranties and indemnities may turn out to be unenforceable (unless all of the potentially needed funds are placed in a third-party escrow) without expensive, time consuming litigation or can be cut off entirely through bankruptcy. Therefore, a better solution may be to understand and monetize the risk (or opportunity) up front. Additionally, impending changes in environmental regulations may adversely (or favorably) effect business valuation models based on projected earnings that do not take into account changing environmental regulations that will, but have not yet, impacted the business or the business of competitors. By way example, since certain Clean Air Act regulations are geographically specific, having a manufacturing plant in an area that is already in compliance with new regulations may provide an advantage against a competitor located in an area that is not in compliance with new regulations and which therefore may face more stringent regulation. Environmental covenants and indemnities will generally not cover those types of risks or opportunities.
If you are an acquirer that is buying or investing in a business that, for example, prints, packages, or manufacturers just about anything, or that owns potentially impacted real estate, you (or your M&A counsel) might benefit from talking to us early on. That may avoid overpaying for assets or having to try to renegotiate late in a deal. Similarly, if you are selling a business, we may be able to inoculate your buyer against exaggerated claims by its attorneys of environmental risk (while they seek better deal terms), or point out unrecognized environmental benefits and offer a deal structure that helps the buyer minimize its risk. Thus, whether you are a buyer or a seller, you (or your M&A counsel) might well benefit from talking to us early in the process.