Mergers & Acquisitions and Environmental Due Diligence

Aug 09, 2022


People do not often think of the environmental consultant as a key advisor in a company merger or acquisition (M&A). However, in far too many cases, ignoring or relating a previous assessment of either specific or general Environmental, Health & Safety (EHS) issues can have a very negative impact on a transaction. The planning and implementation of a well-done transaction can take time. All too often the environmental work is done at the very end of the transaction process and issues that may have been resolved either kill or delay the deal and almost certainly will affect price and terms.

Mergers & Acquisitions (M&A) deals are not simply the purchase of a piece or pieces of real estate (RE). M&A can be structured any number of ways with significant past, current and future business, tax, and environmental consequences. A key issue with environmental in M&A is the type of purchase that is occurring. Is the transaction structure to include all or only select assets? Are all or select liabilities included in the purchase or retained by the seller? Is such inclusion fully understood by both parties? Use of the standard Phase l Environmental Site Assessment (ESA), Phase ll ESA, BEA conveyor belt may not fully mitigate liability of impairment issues. Although not included in a standard Phase l ESA, permits (e.g., air, NPDES), potential impending regulatory changes and contribution, real or perceived, can impact the businesses.

If liabilities are retained by the seller, especially environmental liabilities, accurate environmental costs and sufficient means to address such liabilities are critical.

The first step in EDD for M&A is to conduct a Phase I ESA per standard ASTM E 1527-21. In addition to a Phase I ESA, it may be warranted to look at environmental health and safety issues at the property in support of the acquisition. It is common for the consultant to be retained by an attorney. Even if the consultant is not retained by an attorney, as good business practice, M&A transactions will commonly have the “draft” Phase I ESA report submitted to an attorney for review. Some common questions that come up after the Phase I ESA is completed include:

  • If RECs are identified, what is next?
    • Is a Phase II ESA necessary?
    • Does the seller allow communication of environmental impairment?
    • Will the purchaser use environmental to re-negotiate agreement?
    • A Phase II ESA may trigger insurer, lender, or agency reporting requirements. Has such reporting been properly planned?
  • Depending on the transaction, is there an advantage to resolving/investigating all RECs? Select RECs?
  • Does the purchaser want the Phase II ESA to provide definition of impact beyond just REC investigation? Quantification of impact? Multiple stages of Phase II ESA or just one stage?
  • Can an Environmental Cost Estimate (ECE) be completed instead of quantification of impact? Can a presumptive remedy be completed for due care?
  • What might the value/loss of permits (NPDES, stormwater, air) have on the business value? (This can be a significant issue in M&A.)

These questions may have different answers depending on the specifics of the deal. EDD for M&A transactions can be complicated, expensive, and time consuming. Some purchasers choose to skip EDD, especially when the seller offers a discount if EDD is omitted or minimized. However, omitting or minimized EDD will be reflected when new financing is needed or at the time of the next sale, when it is too late. Keep in mind that the standard EDD products and procedures may not provide the right product at the proper point in the M&A process. When choosing an environmental consultant, it is imperative to choose a firm with a demonstrated history of experience in M&A projects. BLDI has ASTM trained professionals to help guide clients through the complexities of EDD in M&A transactions.