A Connecticut Environmental Lawyer's Take on
Why Deals Die
October 24, 2016
As a relatively small firm, we have been involved in a surprising number of major development projects. We have represented buyers, sellers and lenders on very substantial acquisitions and represented large corporate clients in court and arbitrations as plaintiff’s counsel or defendant’s counsel. We have had many successes (which feel great!). We have also seen deals fail.
Deals die for many reasons. From an environmental perspective, most transactions do not fail because the property contains contamination. They fail for the following reasons:
The parties do not understand the liabilities associated with the site or if the site is suitable for the prospective purchasers’ use. Sellers who do not allow the prospective purchaser reasonable due diligence or try to control the extent of due diligence will have difficulty transferring their site. Depending on their level of risk aversion, sophisticated buyers will not accept sellers’ limited site characterization reports which do not reasonably quantify site liabilities and do not provide a basis for a reduction in purchase price based on anticipated future costs of investigation and remediation.
The parties cannot agree on Transfer Act applicability. It is not simply a question of whether the statute applies, but often deals with the question of which Transfer Act Form is appropriate. Those questions are often matters of judgment. If the parties cannot agree on Transfer Act applicability issues, they will not likely reach an understanding on the underlying site liabilities and costs of investigation/remediation. If potentially high cost issues (such as tank releases, PCBs or contaminated drinking water) are not addressed, most prudent buyers will not gamble that the seller’s Transfer Act interpretation is correct.
Quantifying likely environmental costs and resolving Transfer Act applicability issues requires the use of environmental consultants and attorneys who are competent in their fields and want to make deals happen. It requires professionals who understand their clients’ objectives and put those objectives in front of their own.
The parties to the transaction ultimately have to determine the importance of the deal and their tolerance for risk given their strategic plans. They need to exercise a level of control over consultants who may be recommending additional investigation that is unneeded. They need to control their attorneys who may be micro-managing the other party’s due diligence or imposing unreasonable conditions for site access and indemnification. They sometimes need to be directly involved in the negotiations to assure that the key issues remain the focus of attention.
In summary, if the environmental issues are understood and not overwhelmed by unknown and undetermined costs and liabilities, contamination concerns will not often kill deals. Sophisticated deals do not generally work when one side underestimates the other. They do work when the parties and their professionals understand their roles and want the transaction to come to fruition.