Over-regulating the US M&A market could have a serious impact on the number of deals done, according to Nigel Stanford.

Over-regulating the US M&A market could have a serious impact on the number of deals done, according to Nigel Stanford.

On March 20, 2007 the US Chemical Safety and Hazard Investigation Board (CSB) published its report into the explosion and fire at the BP refinery in Texas City in which 15 workers were killed. It concluded that the incident was caused by organisational and safety deficiencies at all levels within BP.

The report is divided into technical findings and organisational findings and, for the first time, the CSB conducted an examination of corporate safety culture. In particular, the investigation highlighted the detrimental safety implications of organisational changes within BP.

In 1998, BP had one refinery in North America. In early 1999, BP merged with Amoco and then acquired Arco 2000. BP emerged with five refinerys in North America, four of which had been acquired through these mergers. The company replaced the centralised management systems of Amoco and Arco with a decentralised management system.

The CSB investigation found that BP executives made spending cuts without assessing the safety impact of those decisions and in particular the effect of decentralising Arco’s management systems resulted in a loss of focus on process safety.

The CSB report emphasises the need to manage organisational change and referred to good practice guidelines that have been issued by corporations such as the American Chemistry Council and the U.K. Health and Safety Executive. These guidelines warn that major acquisitions can have a negative impact upon the health and safety compliance of the acquired business.

The report recommends that the United States Occupational Safety and Health Administration (OSHA) strengthen its enforcement of workplace health and safety by requiring that the safety impact of major organisational changes, such as mergers, acquisitions or reorganisations, are reviewed. It also states that companies should assess the impact on health and safety compliance of organisational changes resulting from major reorganisations following mergers or other high level changes.

The investigation suggests that the adoption of broader management of change requirements by OSHA would help companies like BP avoid catastrophic events. The report also included a new recommendation to the Center for Chemical Process Safety to develop guidelines for how to conduct the organisational management-of-change reviews envisaged in the recommendation to OSHA. In short, the CSB is seeking to impose a statutory obligation on the proposed buyers of businesses to make a detailed assessment of what impact if any their proposed acquisition may have on the target’s ability to comply with its ongoing obligations under health and safety legislation.

Frankly it is hard to see that adding further regulation in the manner suggested will be able to prevent a further BP-type disaster. A prospective acquirer’s due diligence activities are usually extremely detailed in relation to financial, legal and commercial issues. However, for many reasons not least confidentiality and the fact that the target may well be un co-operative if the proposed acquisition is a hostile one, it is rarely possible for a prospective acquirer’s due diligence to drill down into the detail of how its target manages its compliance with issues such as health and safety.

Adopting prescriptive measures such as those suggested by the CSB may well negatively impact upon M&A activity in the US. In the writer’s view it is preferable for the relevant authorities to focus on ensuring that the relevant legislation addressing the issues in question, in the CSB case health and safety, is sufficiently robust.

M&A activity is a fundamental part of the free market and seeking to over regulate it is contrary to free market principles and arguably unnecessary as long as the base legislation itself that is already in place adequately addresses the relevant legal issues.

Despite the writer’s view, prospective acquirer’s of US-based businesses would be well advised to watch carefully how the CSB report is received in the US and whether or not any of its recommendations are enacted into legislation.

Nigel Stanford is a partner at Cripps Harries Hall LLP.