Environmental Spinoffs: The Attempt to Dump Liability Through Spin and Bankruptcy

17 Pages Posted: 11 Nov 2020

See all articles by Andrew C. Baker

Andrew C. Baker

Stanford University, Law School, Stanford University, School of Law, Student

David F. Larcker

Stanford University - Graduate School of Business; European Corporate Governance Institute (ECGI); Stanford University - Arthur & Toni Rembe Rock Center for Corporate Governance

Brian Tayan

Stanford University - Graduate School of Business

Date Written: November 9, 2020

Abstract

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?

Keywords: Corporate governance, environmental liability, Tronox, Chemours, Solutia, Kerr-McGee, Anadarko, DuPont, Monsanto, dumping, fraudulent conveyance, spinoffs, spin off, fraud, bankruptcy, risk, risk management, ESG, boards of directors, corporate governance research

Suggested Citation

Baker, Andrew C. and Larcker, David F. and Tayan, Brian, Environmental Spinoffs: The Attempt to Dump Liability Through Spin and Bankruptcy (November 9, 2020). Rock Center for Corporate Governance at Stanford University Closer Look Series: Topics, Issues and Controversies in Corporate Governance No. CGRP-87, Available at SSRN: https://ssrn.com/abstract=3727550

Andrew C. Baker (Contact Author)

Stanford University, Law School, Stanford University, School of Law, Student ( email )

Stanford, CA
United States

David F. Larcker

Stanford University - Graduate School of Business ( email )

Graduate School of Business
518 Memorial Way
Stanford, CA 94305-5015
United States
650-725-6159 (Phone)

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Stanford University - Arthur & Toni Rembe Rock Center for Corporate Governance ( email )

Crown Quadrangle 559 Nathan Ab
Stanford, CA 94305-8610
United States

Brian Tayan

Stanford University - Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States

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