Add the contaminant PFAS to the checklist of issues prospective buyers need to consider when acquiring a business. Buyers need to make PFAS part of due diligence in an acquisition, particularly in industries that have a history of products involving the family of chemicals, said attorney Dan Parmeter, a partner at the Grand Rapids office of Mika Meyers PLC. Parmeter spoke with MiBiz about how PFAS could play a role in future mergers and acquisitions.
At what point does PFAS become part of the conversation in a transaction?
It enters the conversation if the company has had any history of manufacturing products that have PFAS or the side effect of which is PFAS. The bottom line is it’s another kind of item on the due diligence checklist. If you are a buyer, one of the things you’re going to look at is the history of this manufacturer, what kind of items it manufactures, and is PFAS associated with any of that, because if it is, you need to know. You need to craft your due diligence accordingly.
What does that due diligence process include?
It’s more about figuring out whether there is a history associated either in the real estate or the history of the company’s operating process. Then based upon that, you can now start to have discussions with the seller about what are the risks, what is the history, how have you or did you dispose of products whether via landfill or wastewater discharges and so forth, so you have a better understanding of what are the risks associated with this.
It seems as though there is an awful lot of uncertainty around the issue.
Right now, the whole PFAS thing is in a state of flux. People generally think it’s bad, but it’s a little uncertain how bad it is. It’s uncertain what levels are acceptable and what levels pose a real risk. What is going to be the regulatory future that is going to be associated with PFAS isn’t 100 percent clear either yet. You just need to start taking those things into consideration as part of your due diligence process.
Is there awareness among buyers that they now have to add this issue to their checklist?
I don’t know exactly how aware or unaware all of the potential buyers are. My sense is it’s gaining, and particularly with their counsel. If they’re hiring counsel to assist them with their due diligence process, that should be one of the questions their lead counsel asks the buyer right off. The business that you’re looking at buying, what kind of products did they have and what are the environmental risks associated with those products, PFAS or otherwise?
Up until a few years ago, nobody understood PFAS or the risk of PFAS, so nobody was ever looking for it before. Now it’s something you need to make sure you have on your radar to look for and be aware of. Certain industries before, you knew there was going to be environmental risks. This probably brings in more industries and a different type of environmental contamination that just a few years ago people weren’t looking for.
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How could this affect how deals get structured?
Most of the time buyers are structuring things as asset purchases, and they do so for the reason of not inheriting seller liabilities, including past contamination the seller may have done and so forth. If, for instance, a seller had a past history of producing or manufacturing stuff where a side effect was PFAS, perhaps they don’t manufacture that anymore, but you are going to certainly want to set up a structure that you don’t inherit that past liability of the seller. And there are legal ways to do that. The analysis is similar to any business or any seller or evaluation of a seller that has certain liability risks associated with its past.
How do you limit your liability as a buyer?
You probably are going to want to set it up as an asset acquisition where you are just acquiring certain or specific assets of the company. There may be a limited number and specified liabilities of the company that you may be willing to take on, and you by contract leave all of those other liabilities with the seller. If the seller did not properly dispose of waste that has PFAS in it, then you want to make sure that liability stays with the seller and not with you.
Will this just add more complexity to deals?
It’s a little bit more straightforward in situations where these are past activities by the seller and they’re not currently doing it, so you’re not continuing on a product line or something like that where PFAS is an issue. It becomes much trickier and, obviously, much more risky, when you are continuing on with an activity that has current PFAS issues that have to be addressed. That just requires more negotiation and more certainty in the drafting for allocating liabilities.
Does this issue have the potential to disrupt transactions?
I think it has the potential to give pause in the due diligence process to make sure that the parties work through any potential liability that could be arising from it. It shouldn’t necessarily be a deal killer, but it depends on if the parties can come to a reasonable agreement and if they both similarly view the amount of risk that’s out there with it. If they view the amount of risk similarly, you can work out a mutually agreeable solution to it or an allocation of it. The seller will make the appropriate concessions and the buyer will get the appropriate protections.
Like with other potential liabilities, if the parties have significantly different views on the amount of risk associated — usually the seller minimizing the amount of risk and the buyer thinking it’s a bigger risk — then that sometimes can cause difficulties in a transaction.
Interview conducted and condensed by Mark Sanchez.