Explore a legal case study on environmental liabilities in M&A deals. Learn about the dispute between a stock seller and buyer regarding contamination issues and indemnification.
M&A Stories
November 29, 2018
In this transaction, a company dealing in industrial combustion controls, including burners, gas valves, and systems, was sold in 2007 through a stock purchase agreement. The deal involved a significant escrow for indemnification purposes.
The company’s assets included a facility in Muncie, Indiana, which had a history of being a trucking terminal with underground storage tanks. After the sale, undisclosed soil and groundwater contamination was discovered at this site.
The buyer promptly informed the seller of the contamination in March 2011, citing levels of benzene and vinyl chloride exceeding state guidelines. Indiana required the buyer to report the contamination and initiated investigations.
In April 2011, the buyer invoked the stock purchase agreement’s indemnification provisions, estimating costs related to Indiana’s cleanup requirements. The parties retained $3.3 million in escrow.
By late 2011, the buyer entered Indiana’s voluntary remediation program, working on a cleanup plan approved in July 2017. The buyer had incurred over $1.5 million in investigation and remediation costs.
The seller, however, denied responsibility under the stock purchase agreement and sought a court ruling. Technical arguments by the seller were rejected by the court, resulting in ongoing litigation.
Key Takeaway: This case underscores the importance of addressing environmental liabilities in M&A deals. Buyers should ensure sellers represent and warrant the absence of environmental issues and secure indemnification through escrow when necessary.
Case Reference:
Hammond, Kennedy, Whitney & Co., Inc. v. Honeywell International, Inc., Case No. 16-cv-9808, United States District Court, N.D. Illinois, Eastern Division, (January 29, 2018).
Those provisions put Buyer in a strong position in this litigation.
By John McCauley: I help people start, grow, buy and sell their businesses.
Email: jmccauley@mk-law.com
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