Environmental Liability for Private Equity

Keeping deals on track, getting the details right

In Private Equity, speed counts – and so do the details. When buying and selling companies, there are a lot of moving parts and considerations to weigh when determining how to maximize value and minimize risk. Environmental liabilities can be overlooked but come with a long tail of costly obligations if not properly insured against.

An asset transaction in all cases does not necessarily provide liability protections from being brought into an environmental obligation. There have been court cases where that veil of protection has been pierced. Strict Joint & Several Liabilities have long-term financial implications for Private Equity firms purchasing target companies. Specifically, there are five main areas of environmental liability concern that need to be identified in a transaction:

• Historic operation(s) at an operating facilities
• Former operating divested sites
• Environmental liabilities assumed by predecessor companies where former operators assumed liabilities from earlier acquisitions
• Compliance violations & housekeeping issues
• Non-owned disposal sites.

Environmental due diligence reports typically focus on these areas of concern however, although there are professional standards for environmental assessment reports, a report performed on the sell side may look very different than the buyer side. It is not economically feasible to test an entire site to determine the risks present and the type of review performed and areas selected for testing can greatly alter the report’s conclusions.

While it is likely the lowest cost element in any transaction, the transfer of environmental risk through the purchase of environmental liability insurance can mitigate potentially high costs issues by eliminating the long-tailed risk of liability.