Due diligence in mergers and acquisitions (M&A) often focuses on environmental issues, both remedial and compliance. Due diligence associated with health and safety (H&S) concerns is not prevalent during transactions. Typically, limited site observations are combined with an assessment of Worker's Compensation trends (injury and illness statistics). Unfortunately, this approach ignores a significant source of potential M&A liability - compliance with the Process Safety Management standard (29 CFR 1910.119). Process safety management issues, especially those of mechanical integrity and adequate hazards analysis, can cost substantial sums of money to correct, and if uncorrected, can lead to catastrophic loss exposures. Recent accidents and subsequent follow-up reports and findings show how important PSM issues can be in managing a company's risk.
This article discusses an approach to M&A due diligence that optimizes on-site evaluation time; reduces the uncertainty associated with acquiring PSM-subject facilities; and allows an acquirer to develop a rational approach to implementing a PSM program consistent with their firm's PSM approach and values.
Mergers and acquisitions (M&A) are an increasingly familiar part of life in international business. In 2006, more than $3.6 trillion in transactions were consummated. With increasing activity comes increasing interest in more competitive deals and less ability to complete "leisurely" due diligence. As such, the scope of due diligence is being constantly reduced, and the time allowed for conducting due diligence has nearly evaporated.
Within the environmental, health and safety (EHS) arena, due diligence generally focuses on past environmental remedial liability (defined in large part by CERCLA - Comprehensive Environmental Response, Compensation, and Liability Act). However, after experiencing acquisitions with significant environmental compliance liabilities, more proactive companies have increased their emphasis on environmental regulatory compliance.
In the realm of H&S, however, little attention has been paid to overall compliance. In general, acquisition due diligence consists of a desk survey of current Worker's Compensation costs and illness and injury statistics (OSHA 300 logs). In some instances, field observers completing environmental due diligence may be asked to make safety observations, but in general they have little competency in the PSM arena and can only spot the most egregious issues.
As such, acquiring firms may be subject to liability for potentially catastrophic events resulting from process safety concerns. For example, in 2004, an explosion at the Formosa Plastics Corporation facility in Illiopolis, IL resulted in the death of five employees. The U.S. Chemical Safety and Hazard Investigation Board (CSB, 2007a) found that a root-cause of the explosion was failures in the PSM-required analyses conducted by the prior owner, Borden Chemical.
