Product Warranty, Recalls, and Product Liability Representations Clause

Summary

This clause provides representations and warranties concerning a target company's products-related liability risks and exposure. This clause includes practical guidance and drafting notes. For transactions involving companies that design, manufacture, and/or distribute physical products, buyers will demand sellers provide assurances regarding those products via product-related risks representations and warranties. These representations serve to uncover the target's product warranty, recall, and liability risk, historical issues, and compliance with applicable laws, regulations, or policies. Most commonly, these representations are included when the target's business involves industries with heightened regulatory scrutiny or substantial product liability risk profiles, including: • Consumer products • Medical devices • Pharmaceuticals • Industrial equipment • Food and beverage When drafting and negotiating these representations, counsel should focus on these key considerations: • Lookback Period. The time period covered in the provision is called the ''lookback'' period. Buyer will want a longer period, while seller will want a shorter period to reduce liability exposure. Typically, the period will range from 3 to 5 years. • Knowledge Qualifiers and Materiality Thresholds. Sellers will want to strategically add knowledge qualifiers for forward-looking and difficult to assess issues (such as latent defects and potential future recalls), balanced against buyer's desire to maintain absolute representations for historical issues or current compliance status. In addition, sellers will want to add materiality qualifiers to filter out inconsequential claims while buyer will want to ensure it is properly protected against significant issues. • Fit to Regulatory Framework. Counsel should make sure to tailor these template provisions to address industry-specific regulatory requirements, laws, and compliance regimes relevant to the target's line of business. The capitalized terms and section references used in this clause should be conformed as necessary to align with the facts and circumstances presented, and to align with the terms set forth in the applicable acquisition agreement. For a full listing of M&A provisions clauses, see M&A Provisions Resource Kit. For template full acquisition agreements, see Stock Purchase Agreement (Pro-Buyer) (DE) and Asset Purchase Agreement (Pro-Buyer) (DE).