Environmental Liability - Regulatory Compliance - Insurance Coverage (Or Not)

After looking at numerous investment opportunities, you bite the bullet, assemble a syndicate of lenders and close on a leveraged buyout transaction resulting in control of the operating company target through the use of a holding company. You were careful in your diligence, having conducted a Phase I environmental investigation, with nothing significantly adverse to report despite the regular use in its business by the target of certain contaminants. Now fast forward, and, five years later, you have received an attractive offer to buy your interest from a strategic buyer. The buyer and its lenders proceed to conduct their own due diligence and, lo and behold, the contamination levels that were previously below reportable levels have, according to the buyer, exceeded permissible levels and have now reached groundwater. What is the consequence of this? How did it happen? Who caused it? What are the issues?

At the outset, is the verbal report from the buyer complete and accurate? Is there a lab report or confirming consultant report, in draft form or otherwise, in existence to support the allegation? What is the remediation cost and how long will it take? Have you violated any federal or state laws and are you continuing to do so? What obligations do you as the majority owner and current indirect operator of the tainted property have and to whom? Do you have any indemnity rights against the former owner? Did the contaminated groundwater migrate from an adjoining property? Will it migrate further into public drinking water? What insurance do you have and does your pollution policy cover the existing situation?In addition, the buyer and its lenders have become nervous about the entire transaction, and, if they proceed, now wish to exclude the tainted facility from the purchase and are requesting a separate escrow, indemnity and insurance coverage.

Lots of questions—lots of uncertainty. What should you do and what are your alternatives?

First, you must ascertain the facts. The buyer has made an allegation which may or may not be true or be as severe as claimed. It hired a consultant which undoubtedly has an economic interest in participating in an expensive remediation effort. Do you want the buyer to control that process? If it proceeds with the purchase, the buyer itself is incentivized to reduce the purchase price and to create as large an escrow and indemnity as possible. Under many state and federal environmental statutes, once an owner or...