Explore how to mitigate environmental remediation costs in M&A transactions through a real-life case study. Learn from a legal perspective about managing environmental uncertainties in stock purchase agreements.
M&A Stories
January 17, 2019
In 2014, a business owner in Palo Alto, California, specializing in metal electroplating, decided to sell their company to a buyer for around $20 million. Due diligence revealed issues, reducing the sale price to $9.3 million, and the deal closed in 2015.
During due diligence, the seller disclosed that their company had an environmental remediation agreement with California regarding contamination by chemical solvents used in electroplating. The company cooperated with California’s assessment and remediation requirements, incurring expenses.
Both parties had environmental consultants. The buyer’s consultant submitted a report in November 2014, and while they didn’t estimate cleanup costs, the buyer could have requested one.
The seller’s consultant couldn’t provide a precise cost due to the lack of a definitive remediation plan, but ballpark figures of $150,000 to $250,000, plus $58,000 in state fees, were discussed.
To address the environmental uncertainty, the stock purchase agreement required the buyer to deposit $300,000 of the purchase price in escrow for remediation costs. If costs exceeded this amount, the excess would reduce the buyer’s promissory note given to the seller.
After closing, the seller arranged a meeting between the buyer and the company’s environmental consultant. In March 2015, it became clear that remediation costs might exceed $300,000 due to California’s requirements.
In 2016, the buyer (now owner) sued the seller, alleging breach of representation and warranty regarding remediation costs. The seller argued they were only responsible up to the $300,000 escrow amount and the promissory note.
The court ruled in favor of the seller, stating that the agreement anticipated costs beyond $300,000, and any excess would be paid by the company with a corresponding reduction in the promissory note.
In hindsight, it’s clear that specifying full indemnification for remediation costs in the stock purchase agreement would have been beneficial to the buyer.
Case Reference:
This case is referred to Hammon Plating Corporation v. Wooten Case No. 16-CV-03951-LHK, United States District Court, N.D. California, San Jose Division, (July 13, 2017). https://scholar.google.com/scholar_case?case=1051374585555893937&q=%22stock+purchase+agreement%22&hl=en&scisbd=2&as_sdt=2006&as_ylo=2017
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