Environmental costs are a legal obligation of companies and proper corporate governance requires that they be dealt with responsibly. Unfortunately, disturbing examples exist where companies have taken aggressive action to separate their businesses from exposure to their legacy liabilities. In this Closer Look, we examine the practice of spinning off environmental liabilities into a separate company that is inadequately capitalized to satisfy them, in what appears, in retrospect, to be an egregious attempt to avoid legal obligation.
We ask:
- How widespread is this type of activity among companies with environmental liabilities?
- How rigorous, accurate, and reliable are estimates of liability at the time of spinoff?
- Do companies take advantage of accounting rules to low-ball estimates?
- How much underlying analysis does the board of directors review regarding environmental liabilities and capital structure prior to a spinoff?
- Are restrictions against fraudulent conveyance strict enough to prevent companies from assigning liabilities that a spinoff ultimately cannot handle?
- Do parent companies experience a net positive impact from their decision to spin off these liabilities?