Case Studies

Case Study No. 7 – Purchaser of Wholesale Distributor Gets a “Bonus”

A wholesale distributing firm is seeking to acquire a similar firm that operates in a geographic territory that is adjacent to that controlled by the first company.  The parent of the seller not only operated the distribution business, but also owned and operated a fuel services business that included bulk fuel storage and retail service stations (18 sites in all).  The seller did not operate these two businesses as separate entities.

The proposed sale involves a two step process:

a. The purchaser will buy the stock of the parent corporation.

b. The fuel services sites will immediately be transferred back to the seller.

The purchaser wants to be certain that it is protected from future liabilities arising from the former fuel services properties.

Exploring Risk Management Possibilities Associated with this Transaction

The 18 fuel services sites include two that will require considerable remediation:

a. A bulk fuel storage site is expected to cost $1.4 million for cleanup

b. A former truck stop is expected to cost $1 million for cleanup

The seller refuses to clean up the sites or to set aside funds for environmental contingencies in an escrow account.  While the purchaser can demonstrate that it did not own or operate these sites when the releases of contaminants occurred, there may be a problem with an alleged fraudulent transfer of assets related to the sale of the wholesale distribution sites and operations.

Risk Management Solution for Case Study No. 7

The purchaser acquired the two most seriously contaminated fuel services sites and remediated them under the state voluntary cleanup programs.  Money for the cleanup of one site was available under the state UST program (a maximum recovery of $300,000 per release was allowed).  When all required work was completed, the total out-of-pocket costs for both sites were $350,000.  The sites were subsequently sold to a third party for $210,000, leaving a final net cost to the purchaser of $140,000.

Insurance was written for cost overruns on the remediation of the sites.  Coverage was also provided for the discovery of additional contaminants and for third party tort claims.  The policy had limits of $25 million per occurrence and $25 million aggregate.  Third party claims arising from any of the other fuel services sites were also insured with a $25,000 self-insured retention.  The premium for a ten-year term was $165,000.