American Bar Association Newsletter
The Impact of Environmental Liabilities on M&A Transactions
This article aims to highlight the relevance of environmental conditions sought and found during a due diligence process in M&A transactions. We acknowledge that the main purposes of the due diligence process of an M&A transaction are (i) providing the client with an overview of the company or stocks to be acquired; (ii) analyze the feasibility of the transaction; (iii) highlight the contingencies encountered during the due diligence process; and (iv) try to evaluate these contingencies to help the client negotiate prices, indemnities and terms that will rule the transaction.
For these reasons, environmental conditions have gained increasing importance in M&A transactions, to identify better environmental conditions that can constitute “environmental liabilities”. An environmental liability must be understood as a financial obligation of a person or entity that consists of remediating environmental damage or alleviating breaches of environmental regulations.
In this sense, environmental liabilities can go well beyond the boundaries of the property that will be the subject of the transaction. For example, an environmental liability may also entail the emission of dust or particles that could damage the health of the neighboring community, or the contamination of underground water that could contaminate adjacent properties as it moves.
The main reason is that many liabilities are active processes, and the longer it takes to detect them, the greater their impact on the company’s finances is likely to be.
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