DealLawyers.com Blog

Several states have recently enacted extended producer responsibility (EPR) statutes making manufacturers responsible for the entire lifecycle of their products, most notably with regard to end-of-life management issues like recycling and disposal. This DLA Piper blog reviews the key due diligence issues raised by these EPR laws and points out that they raise significant valuation, pricing, and integration issues, particularly in packaging intensive sectors. Here’s an excerpt from the blog’s discussion of where parties should consider addressing EPR concerns in their deal terms:

– Representations and warranties. Specify representations on producer status under each state regime, PRO registration and membership, completeness and accuracy of material volume reporting, timely payment of dues, absence of notices or penalties, and compliance with labeling and recyclability standards. These include provisions that 1) require the representations to be re confirmed at closing (i.e., bring downs), 2) apply “knowledge” qualifiers where appropriate, and 3) measure materiality against a defined “Material Adverse Effect” – all specifically for EPR matters.

– Covenants. Address 1) pre-close registration and reporting, where required; 2) maintenance of data systems and controls; 3) cooperation for audits and historical substantiation; and 4) interim restrictions on packaging and material changes that could alter dues. Establish post close remediation plans with milestones for redesign and PRO compliance.

– Pricing mechanics. Address working capital treatment for accrued or unbilled dues, targeted purchase price adjustments for known schedules and assessments, and earn-outs linked to redesign milestones or eco modulation credits. Size short tail escrows to audit or reassessment cycles.

The blog also suggests using specific indemnities to address pre-closing liabilities with separate baskets, caps and survival provisions aligned to statutory lookbacks and producer responsibility organization audit windows. It says that parties should also address producer status issues in co-packer, private label and license agreements if a counterparty’s non-compliance threatens market access, and establish termination and price adjustment provisions triggered when verified EPR costs exceed agreed caps at various milestone points during the transaction.

– John Jenkins