The rate of global mergers and acquisitions (M&A) has seen a recent uptick, prompting a need for growing companies to review their global environmental liability strategies, says a report by ACE's retail operations group.

2012 showed M&A growth, according to Mergermarket statistics, with the year's first quarter topping three successive quarters of the highest M&A values experienced in the last five years.

“Certainly, for those companies with strong balance sheets, access to inexpensive debt and superior working capital management practices, M&A will remain a core part of their strategic growth priorities, both domestically and abroad,” says Seth Gillston, senior vice president of Ace Global Mergers & Acquisitions Industry Practice and co-author of the study. “Companies seeking a stronger foothold in emerging markets–particularly within those countries that have liberalized foreign ownership rules–will continue to pursue M&A as a means of entry. In doing so, they will confront compliance with a patchwork quilt of constantly shifting environmental laws and regulations.”

Risk management is crucial to transferring exposures from a target company's previous activities, which may include pollution, contamination, mold, hazardous waste, and toxic chemicals in water, air, and on land- especially when it comes to acquiring industrial manufacturers.

Since 2010, the U.S.'s Environmental Protection Agency (EPA) has required mandatory reporting of regulated pollutants for companies in 41 industries, meting out up to $32,500 in penalties against the EPA's Clean Air Act transparency requirements per day, excluding further criminal penalties.

Among recent EPA actions is a total of $6.8 million in fines levied against fuel transportation companies for failure to comply with a federal mandate to blend a percentage of biofuel into their gas and diesel.

By 2010, all 27 members of the European Union (EU) council had written a directive into their national laws that makes companies financially responsible for repairing damage they caused to protected species, natural habitats, water, and soil. The ACE report says the laws demand that while the law establishes a Superfund-like “polluter pays” standard, it not apply joint and several-liability, and require companies to clean up any imminent environmental damage.

Several policies can be applied to ease the uncertainty of this regulatory landscape, including traditional Directors and Officers (D&O) coverage. However, these must usually be in place prior to a merger's closing in order to be viable; to this end, D&O “tail” coverage can be purchased as far as six years after a transaction closes, with an optional additional layer for subsequent directors and officers hired after the deal's close or for executives of the target company that then go on to work for the acquiring entity.

Other coverage lines include Environmental Impairment Liability Insurance, which absorbs financial costs associated with cleaning up accidental spills or pollutant leaks, and Premises Pollution Liability (PPL) for first-party liabilities for on-site and off-site environmental cleaning and remediation as well as third-party liabilities from lawsuits brought by others for bodily injury, property damage or environmental cleanup.

Special Reports /

Ace: With M&A Uptick Comes Need to Review Environmental Liabilities

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