Explore the legal intricacies of M&A deals involving environmental liabilities. Learn about the concept of de facto mergers and when a cash buyer may or may not be held responsible for a seller’s cleanup obligations. Dive into a real-life case for insights.
M&A Stories
April 29, 2019
Introduction:
In the world of mergers and acquisitions (M&A), understanding environmental liabilities is crucial. The federal CERCLA, or superfund law, places responsibility on companies to clean up properties contaminated by hazardous waste disposal. However, when a buyer acquires assets from a responsible company, they are typically not held liable for cleaning up the contaminated property unless they explicitly assume the seller’s environmental liability in the asset purchase agreement.
But there’s a legal twist. Certain federal and state laws, often referred to as successor liability laws, can make the buyer liable for seller liabilities even if not assumed in the agreement. One such law applies in what lawyers term a “de facto merger.”
So, what’s a de facto merger? Essentially, it’s an asset deal where the buyer continues the seller’s operations, utilizing their assets and employees. Importantly, it typically applies when the seller or its owners end up with an ownership stake in the buyer, and the seller ceases its operations after the deal is finalized.
In such cases, the buyer may find itself responsible for the seller’s environmental cleanup obligations.
Let’s dive into a real-life example:
The Deal:
This case involves a century-old paper mill in Dayton, Ohio. The seller had operated the mill for two decades, resulting in contamination of the property with hazardous waste.
In 1991, a buyer stepped in, acquiring most of the mill’s equipment and assets for cash. Importantly, the buyer assumed no environmental liabilities. It hired the seller’s non-management employees and continued to operate the paper mill using the purchased assets. However, it did not buy the real estate or one of the paper machines, nor did it hire the seller’s senior management or family members who owned the seller.
The Lawsuit:
The current owner of the paper mill sued the buyer in an Ohio federal district court, seeking to recover cleanup costs for the seller’s contamination. The buyer argued that it bore no responsibility for the seller’s cleanup obligations because it hadn’t assumed any of these liabilities in the asset purchase agreement.
The current owner contended that the buyer was liable for cleanup costs due to its purchase of the seller’s assets, which they argued amounted to a de facto merger under the successor liability law. The buyer countered that it wasn’t a de facto merger because neither the seller nor its owners received buyer stock in the deal; it was an all-cash transaction.
The Verdict:
The court sided with the buyer, ruling that it had no responsibility for the seller’s cleanup obligations because the transaction did not constitute a de facto merger.
In its decision, the court acknowledged that the buyer’s continuation of the seller’s operations with the seller’s non-management employees and most of the assets made it resemble a de facto merger. However, the court emphasized that a “sine qua non of a de facto merger” is that the purchase price includes buyer stock in the deal. In simpler terms, it’s highly unlikely for a court to find a de facto merger in an all-cash asset deal.
Case Reference:
Garrett Day, LLC v. International Paper Co., Case No. 3:15-cv-36, United States District Court, S.D. Ohio, Western Division, (March 25, 2019)
By John McCauley: I help businesses minimize risk when buying or selling a company.
Email: jmccauley@mk-law.com
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