By: Bruce Martin
In today’s highly competitive merger and acquisition environment, where shorter exclusivity periods and representations and warranty insurance are the norm, acquirers need to proactively ensure they are managing deal risks, including those associated with environmental, health and safety (EH&S) concerns. From Pre-Letter-of-Intent (LOI) assessments to divestiture support, this article discusses the solutions available for managing environmental, health & safety risk throughout all phases of a deal.
Pre-LOI EH&S Support
To help buyers get a head start on the due diligence process, a high-level assessment can be performed on the target company using basic information pertaining to the industry, nature of operations, location and publicly available information. This short evaluation, which may include the top items to consider in the particular industry from an EH&S perspective, to specific company-related items, helps buyers pinpoint the key technical environmental-related questions that should be asked during management meetings. This improves positioning later in negotiations during auction processes, allowing sellers to hit the ground running following execution of the LOI.
EH&S Due Diligence During Exclusivity Period
As soon as the LOI is signed, it is imperative to not only perform, but also go above and beyond a standard ASTM Phase I environmental site assessment (which identifies recognized environmental conditions at a property) and really understand critical questions needed to evaluate risks that include:
- What is the actual extent of the environmental liabilities and what is the potential effect on the transaction in dollar amounts?
- In addition to investigation/remediation (i.e., contamination) liabilities, what are the other material EH&S concerns in the transaction? (e.g. Regulatory compliance and related capital expenditures, Health and safety programs and culture, or Target company EH&S management systems and sustainability initiatives)
- What are the different mechanisms that can be used for protection within the purchase agreement and related transaction documents?
EH&S liabilities uncovered during due diligence have the potential to significantly affect purchase price and purchase agreement language adjustments, and may even lead to a seller walking away from a deal should the risk out-weigh the reward. For these reasons, a well-planned approach to due diligence that is customized to the target company can result in significant value-add and risk mitigation for the buyer.
Pre-Close Purchase Agreement Support and EH&S Program Integration Planning
Building on the EH&S due diligence, acquirers need to protect themselves from the environmental risks identified. Transactional tools, such as set-aside agreements and representations and warranty insurance, are just some of the ways acquirers can protect themselves post-acquisition from the risks uncovered during due diligence, allowing for increased confidence around issues buyers may have missed during shortened exclusivity periods.
Likewise, proper EH&S program integration planning is essential for the business to hit the ground running post-acquisition. As outlined in more detail in EHS Support’s Health and Safety team article, Reduce Risk and Increase Employee Morale through Post-Acquisition Health and Safety Integration, acquirers should consider planning for the following steps to properly integrate an effective EH&S program post-transaction:
- Evaluate and develop a firm understanding of the corporate culture of the business and the attitude toward EH&S activities as a whole.
- Create one H&S program all employees can unite around and adhere to.
- Plan to maximize representation from all sides.
- Develop measurable benchmarks and guidelines to monitor progress.
- Have a plan to encourage participation through engagement.
- Consider cultural and regulatory differences between international locations.
Overall, from thorough EH&S diligence, to transactional risk-mitigation tools and EH&S program planning, proper EH&S planning during the exclusivity period is essential to managing environmental liability and maximizing value post-acquisition and includes the following:
- Virtual Data room EH&S review and assessment.
- Publicly available database EH&S review and assessment
- EDR database Desktop Review
- ASTM 1527 AAI Phase I
- Phase II
- EH&S Liability Transfer Evaluation (i.e. Insurance, set-asides/buckets)
- Purchase Agreement Review (EH&S sections)
- EH&S Due Diligence Risk and liability spreadsheet
- Post-Close EH&S Integration
Post-Acquisition EH&S Items
Once the purchase agreement has been executed, acquirers focus on items such as the financial and legal aspects and may overlook the areas where EH&S matters could be improved. Measures including proper EH&S program management and training, or implementing regular regulatory compliance audits, have the potential to add significant value to a deal. Improving the EH&S aspects of a business can improve compliance status, reduce worker injury rate, improve morale and more – all reducing risk and saving money, leading to a greater future return on investment.
Maximize value during your hold period by implementing best EH&S Practices:
- EH&S Compliance Audits
- EH&S Regulatory Enforcement and Interpretation
- EH&S Permitting, Training and Program Development
- Mock OSHA Audit & Inspection
- EH&S Leadership Training & Coaching
- Safety Committee Implementation
- EH&S Program Management
- Safety Management Systems Implementation
- Company-Specific H&S Training
- Industrial Hygiene
- Workers’ Compensation Reduction
- EH&S Hiring Processes
- Environmental Reserves Support
- Remediation Management
Preparing for Divestiture from an EH&S Perspective
In preparation for a sale of a business, most sellers concentrate on focusing on and highlighting a variety of business-related aspects of their company such as recent financial performance and important customer information. These sellers often miss out on the opportunity to demonstrate potential value and future risk mitigation associated with an emphasis on environmental, health and safety prior to sale.
From sell-side EH&S audits and purchase agreement review to EH&S marketing material creation, addressing environmental matters pre-sale allows sellers to stay ahead of the environmental due diligence process and control the quality and flow of information provided during diligence. Properly packaging and presenting EH&S activities can significantly help sellers achieve the most value upon exit and best position them for a clean exit.
EH&S Divestiture Support Services:
- Sell-side Pre-Close EH&S Audits
- Sell-side Purchase Agreement Review (EH&S Sections)
- Sell-side EH&S Liability Transfer Evaluation (i.e. Insurance, set-asides/ buckets, exclusions)
- Sell-side EH&S Legal and Insurance
- Agreement Review and Assessment
- Sell-side EH&S Marketing Material Creation
In summary, dealmakers can achieve more value and decrease risk by increasing their focus on environmental, health and safety matters throughout all phases of a deal. For more information on how your company can protect against EH&S liability during transactions, contact Bruce Martin at Bruce.Martin@EHS-Support.com or (703) 944-4709.