The creation of an under-capitalized corporation is an oft used strategy for minimizing environmental risks. However, as many economists have said, “there’s no such thing as a free lunch”, and any business worth its salt understands that there are no guarantees when it comes to relying on such shell corporations.
The recent $5 billion record settlement between the U.S. Government and Anadarko Petroleum is a case in point. Kerr-McGee Corporation, which was purchased by Anadarko in 2006, had an extensive legacy of contaminated properties throughout the U.S.: everything from uranium mine waste to rocket fuel contaminated land. Prior to being purchased by Anadarko, Kerr-McGee transferred its environmental liabilities to one of its smaller subsidiaries, Tronox. Tronox was eventually spun off, went public in 2005 and filed for bankruptcy in 2009.
A group of plaintiffs, including the U.S. Government, sued Kerr-McGee, Tronox and its affiliates arguing that the transfer of the environmental liabilities to Tronox was a fraudulent conveyance. In other words, the U.S. asserted that Kerr-McGree had purposely transferred the environmental liabilities to Tronox shortly before Anadarko’s purchase of Kerr-McGee as a way of making Kerr-McGee more attractive to prospective purchasers. In December, 2013, the bankruptcy court agreed with the U.S. and ruled that Kerr-McGee’s environmental liabilities were fraudulently transferred to Tronox. On Thursday, the Department of Justice announced it had settled with Anadarko for $5 billion – the largest environmental enforcement award to date. A copy of the DOJ’s press release can be accessed here. Shortly after the settlement was announced, Anadarko’s stock rose 15%.