Along with Dave Larcker and Brian Tayan I recently wrote up a small memo for Stanford's Closer Look series, that can be found here - https://www.gsb.stanford.edu/faculty-research/publications/environmental-spinoffs-attempt-dump-liability-through-spin-bankruptcy?pid=Stanford_ExecEd-1070997460.1541742722.

Think this would be interesting to people interested in corporate governance / bankruptcy etc. @arpitrage @paulgp @vsjbuccola

Essentially we look at what appears to be a trend in recent financial tomfoolery. Companies saddled with loads of legacy environmental liabilities that no longer want to deal with them spin those assets off into a new company which then proceeds to go bankrupt shortly thereafter.

We look at three instances of this happening - Monsanto spinning off Solutia, Kerr-McGee spinning off Tronox, and more recently Dupont spinning off Chemours.

Full disclosure - I'm not a bankruptcy person. My interest here is more from the governance angle - could this possibly be right? As one example let's focus on the Kerr-McGee Tronox case. KM was swept up into a consolidation boom and wanted to get sold, but had decades of

liabilities that no one would touch. After pitching themselves to other parties it became clear the deal could only go through if they shed their liabilities. They spun off *all of the companies environmental liabilities* into a new company, along with the pigment whitening biz.

Shortly thereafter, Kerr-McGee - now free of the liabilities - sold to Anadarko, and the CEO who masterminded the spinoff walked away with hundreds of millions from the deal and a spot on Anadarko's board. The new company struggled under the weight of the liabilities and the

recession and pretty quickly entered bankruptcy. Anadarko was ultimately sued as the successor company, with the government (and by construction society) holding the bag for billions of dollars in remediation costs.

What's weird here is that the remedy is fraudulent conveyance - essentially showing that the spin was functionally insolvent at the time of the transaction, which seems a fairly odd remedy for what we consider to be the harm here.

Ultimately the court found fraudulent conveyance and found Anadarko liable for ~5-14B dollars. The DOJ settled for the absolute minimum of that range and Anadarko's stock increased 14% on the announcement, suggesting, at least to me, that a lot of money was left on the table.

Needless to say nothing happened to Kerr McGee's CEO or his pay, so from the governance angle the optimal policy for him was fairly clear. I think this raises a number of interesting angles from a governance / finance perspective:

But where are the frictions? Well, to start, @zingales and Roy Shapira, in a paper about the environmental liabilities for the Dupont/Chemours spin off showed that from the shareholder's perspective these types of activities are almost surely NPV positive. https://www.nber.org/papers/w23866 

For those of us that study corporate malfeasance and prosecutors, we know that the enforcement angle is one massive friction. The DOJ get's to trumpet a "historic" settlement, even though it was also most likely too low. https://www.justice.gov/opa/pr/historic-515-billion-environmental-and-tort-settlement-anadarko-petroleum-corp-goes-effect-0#:~:text=January%2023%2C%202015-,Historic%20%245.15%20Billion%20Environmental%20and%20Tort%20Settlement%20with%20Anadarko%20Petroleum,Assistant%20Attorney%20General%20John%20C.

In addition, for fraudulent conveyance claims there is a statute of limitations that is binding. It didn't affect the outcomes of these cases, but given the long-latency harms inherent to environmental claims it seems like this could be gamed fairly easily.

I may be looking into this more generally for a longer project, tracking the trends in this over time and thinking about the legal and consulting network that may be driving this "Solutia strategy". We thought this was interesting to write up and comments and thoughts are welcome

Oh - one last point. @Maceyjoshua and Jackson Salovaara have a great article documenting similar strategies from Coal companies for both environmental and pension liabilities, showing that they can be quite effective in shedding claims. END https://review.law.stanford.edu/wp-content/uploads/sites/3/2019/04/Macey-Salovaara-71-Stan.-L.-Rev.-879.pdf