Learn how foresight and management of environmental matters can be leveraged for better outcomes in business mergers, acquisitions and facility divestitures. Gain insight on: - Preparing for and using the due diligence process to your advantage - Preventing environmental issues from affecting or delaying a business transaction - Knowing the tools and tactics available when environmental issues threaten your sale or acquisition

1. [Main Title]Help It or Hurt It:
How are Environmental Matters Going to
Affect Your Growth or Exit Strategy?
John Kollmeier & Grant E. Nichols
Room: Magnolia AB

2. [Title – 2 lines]
• How environmental can
affect your transaction
• What to expect from
the due diligence
process
• Options to manage
environmental knowns
and unknowns
• Tips and tactics to use
to your benefit
Strategies, not technical detail

3. [Title – 1 line]Who are we?
Sr. Vice President
John Kollmeier Grant E. Nichols
Sr. Vice President

4. Preparing for and using the due
diligence process to your advantage
How Environmental Can Hurt Your Transaction:
• Reduced pool of interested /
capable buyers
• Long-term obligations
• May not get the desired asking
price
• Change the financing package
• Interfere with planned
operations
• Increase your health and safety
burdens for workers / tenants
• Impose property use restrictions
• Affect the re-sale value of the
land
• Bring costly and distracting
litigation
Both Sides:
• Delayed timing of deal
• Kill the deal
Seller’s Perspective: Buyer’s Perspective:

5. Phased Approach
• Transaction Screen
(ASTM e 1528)
• Phase I ESA
(ASTM e 1527, EPA AAI)
• Phase II Investigation(s)
• Remediation, if necessary
[Title – 2 lines]The Environmental Due Diligence Process
(know what you’re buying)
Possible
Probable
Actual
$
$$
$$$

6.  Prescribed Scope
(ASTM 1527-13, AAI)
 Non-intrusive, no
samples collected
 Limited scope,
limited answers
 Liability Protections
and Business Risk
[Title – 2 lines]Phase I Environmental Site Assessment

7.  Specific Scope
 GPR, soil borings,
groundwater
sampling, vapor
monitoring
 Media samples
compared to state
cleanup standards
 May require more
than one effort to
sufficiently define
issues
[Title – 2 lines]Phase II Environmental Investigation

8. Natural attenuation active removal / treatment
[Title – 2 lines]Remediation

9. [Title – 2 lines]
• More defined problems cost
less than less-defined
problems
• Price off-sets are based on the
unknowns + a risk multiplier
• How do you manage the risk
so you can still get the deal
done?
So the environmental guy has bad news…
Source: foolishwisdom.com

10. [Main Title]Tools and Tactics When
Environmental Issues Threaten to
Ruin Your Deal
Grant E. Nichols

11. Costs Associated with Environmental Issues
First-Party
• Cost Overruns Associated with
Cleaning Up Known
Contamination
• Clean Up Costs upon the
Discovery of Unknown
Contamination
Regulatory and Legal
• Mandate from Agency to Clean
Up Contamination
• Fines and Penalties and
Government Oversight Costs
• Governmental Re-Opening of
Previously “Closed”
Environmental Issues
• Associated Legal Defense Costs
Third-Party
• Obligation to Clean Up Other
Properties
• Bodily Injury Claims as a Result
of Contamination
• Claims as a Result of Loss of
Value of Property
• Associated Legal Defense Costs
Business Risks
• Interruption to Business Operations
• Loss of Rents
• Increased Development Costs

12. [Title –1 line]
Contractual
• Transferring or retaining obligations via indemnification language
Statutory
• CERCLA (and state equivalent) defenses
Financial
• Escrow agreements and trusts
Traditional Insurance
• Pollution legal liability insurance
Possible Responses to
Environmental Issues

13. [Title –1 line]
• Move away from traditional indemnity and escrow
structures.
• Desire for certainty and flexibility for Sellers.
• Use of “Rep and Warranty” insurance.
• In lieu of Seller indemnity or to facilitate wind-up
• As a backstop or limitation on Seller indemnities or escrows
• “Rep and Warranty” coverage typically excludes
environmental claims and losses.
• Use of pollution insurance on a primary or “excess of
indemnity” basis.
Trends in Transactional Risk
Management

14. [Title –1 line]
• “Ring fences” known environmental conditions at one or more
facilities.
• Coverage for remediation of “unknown” pollution conditions.
• Provides third party support and credit enhancement to
environmental indemnifications or escrows. May be designed
as the primary method of recovery in lieu of escrow or
indemnity.
• Coverage for regulatory reopeners.
• Coverage for future spills and releases at operational sites; no
need to argue about commencement of release for coverage.
Pollution Liability Insurance as a
“gap filler”

15. [Title –1 line]
Seller Retains Environmental Liability
• Insurance can be used to mitigate risk of remedial cost overruns or
reduce/avoid the need for ongoing reserves after closing.
Buyer Assumes Environmental Liability
• Insurance can secure Buyer’s obligations and minimize the need for
ongoing Seller reserves, particularly if the SIR (i.e., deductible) exposure
is adequately addressed as part of the transaction.
• Either party can obtain insurance for the benefit of Seller, Buyer,
tenants, lenders and subsequent owners.
Use of Environmental Insurance

16. [Title –1 line]PLL vs. Regulatory Solutions
Regulatory Protections
• Usual rule is that covenant extends
only to known conditions that are
remediated to closure.
• Excess of indemnity arrangements
not available.
• Depending on the state,
contribution protections may be
included, but only for state claims.
• Usually a longer-term process;
covenant is granted only after
remediation is complete.
• No transportation, NODs or
business interruption protections
available; only contribution
protection from state claims.
Pollution Liability Insurance
• Coverage for cleanup of unknown
conditions.
• Coverage for “excess of indemnity”
conditions available.
• Third party bodily injury and
property damage coverage.
• Can be negotiated and
manuscripted quickly to
accommodate transaction needs.
• Transported cargo, non-owned
disposal sites and business
interruption and soft costs may be
covered.

17. [Title –1 line]
Cost is generally tied to several factors:
• Size and complexity of the insured property.
• Scope of coverage provided.
• Limit of coverage provided.
• Term of coverage-up to 10 years.
• Quality of due diligence submitted.
Costs and Scope of Environmental
Insurance

18. • Recent changes in market –
AIG out, newer carriers with
changing risk appetites
(Ironshore, Tokio Marine,
AWAC, Beazley, Aspen).
• Future of 10 year term - XL,
Zurich, Tokio Marine, Beazley,
AWAC.
• Limit thresholds and
“stacking” concerns.
• Availability of reinsurance.
[Title – 2 lines]The Future of Insured Remediation

19. Background:
• Client seeks to purchase privately held
defense firm involved in the production
of rocket fuel and its constituents. Company has a long-term and
unquantified residual liability associated with its former facility that had
closed after an industrial accident. Cleanup is ongoing subject to a state
Consent Decree with DEP.
Objective:
• Purchase the Company’s stock to facilitate tax goals of Seller without stepping
into the long-term residual environmental liability.
Other Facts:
• Public bid process for the Company; multiple bidders.
• Need for institutional equity and debt in acquisition.
• Residual liability could be long-term and potentially catastrophic.
[Title – 2 lines]2015 Case Study

20. [Title –1 line]
Step 1: Use “remediation trust/SPE” to segregate the long-
term residual liability from other assets.
• Assignment of Consent Decree to SPE held by Seller.
• Agency consent to Assignment.
• No release of Company.
• “Estoppel” language; no ongoing liability after assignment.
• Work Substitution to SPE. Secondary liability to Company.
2015 Case Study (cont’d)

21. [Title –1 line]
Step 2: Find and staff the SPE/Trust.
• Negotiate new financial assurance cost estimate with Agency, together
with a commitment to fund the financial assurance at closing with sales
proceeds.
• Seconding Agreement for long-term Company staff to support SPE/Trust
operations at legacy site.
• Transfer ownership of legacy site/land from Company to SPE/Trust at
closing.
2015 Case Study (cont’d)

22. [Title –1 line]
Step 3: Use pollution liability insurance to insure Company
operations, pre-existing pollution conditions at operating sites AND
any legacy liability that might accrue from the legacy site after
failure of SPE/Trust.
• 10 year term; $50 million limit of liability.
• Full coverage for Company operations (i.e. new conditions) at operating
sites.
• Include equity providers as Named Insureds.
• Lender as Additional Insured and Mortgagee Endorsement.
2015 Case Study (cont’d)

23. [Title –1 line]
Results
• All other bidders for Company dropped out due to environmental
concerns and their inability to underwrite the legacy liability.
• Two of the initial bidders joined GT’s client as equity participants near
the end of the transaction.
• Transaction closed December, 2015. The SPE/Trust has been functioning
without any problems. Client was able to utilize the PLL insurance to
fulfill all of its financing objectives in the transaction without undue
delays for due diligence or third party reviews.
2015 Case Study (cont’d)

24. [Main Title]
Help It:
Tips for Buyers and Sellers
John Kollmeier & Grant E. Nichols

25. [Title –1 line]
• Hire the right support team for you; ask for referrals
• Bring in your experts early
• Have abundant and relevant environmental language in the
agreement of sale
• Due diligence process, access agreements, data security, cost
sharing situations, specific end-points, regulatory thresholds, etc.
• Written by an environmental attorney
• Run all environmental due diligence through your attorney;
preserve confidentiality
Help it - Tips for Both Sides

26. [Title –1 line]
• If possible, get out ahead of environmental matters
(conduct an internal audit)
• Make environmental part of your exit strategy
• Keep your file cabinet tidy and complete
• Assemble and be ready to share your prior environmental
documents, data, regulatory documents, permits, etc.
• Designate an internal and knowledgeable person to manage
your environmental information
• Have external environmental representation in your corner
Help it - Tips for Sellers

27. [Title –1 line]
• Don’t expect that your Phase I will be accepted by the buyer
• Consider “brownfield” buyers
• Be prepared to fund an escrow account or reduce your
asking price
• Decide whether you want to manage post-closing
obligations or not
• Know in advance how you’ll handle non-compliant data
produced during the ESA
Help it - Tips for Sellers (cont’d)

28. [Title –1 line]
• Allow sufficient time and funding for due diligence process
(get advice on this while drafting an agreement of sale)
• Be wary of reliance on prior reports; most are out of date
and some are flawed
• Be wary of the convenience to use the consultant that
worked for the seller in the past
• Don’t get discouraged by environmental issues; expect and
manage them instead:
• Purchase price concessions, Buyer-seller agreements, Insurance
products, Fed/state assistance
Help it - Tips for Buyers

29. [Title –1 line]
John Kollmeier
BSTI
jkollmeier@bstiweb.com
(610) 593-5500
??? Questions ???
EEE Booth # 824
Grant Nichols
JLT Specialty, USA
Grant.Nichols@jltus.com
(215) 309-4603