“Conflict Minerals” Reps and Warranties Appearing in M&A Deals

Corproate By: Mark Tarallo

In connection with the Dodd-Frank Act, the SEC adopted certain reporting requirements for companies that use “conflict minerals” in their product-tantalum, tin, tungsten or gold that are sourced from the Democratic Republic of the Congo and surrounding nations.  The conflict minerals reporting obligations went into effect as of May 31, 2014, and apply to any issuer that files periodic reports with the SEC.  The disclosure obligations are very broad, and require the issuer to conduct some reasonable due diligence to determine if it (or any of its suppliers) uses conflict minerals in connection with the products and services of the issuer.

In an effort to comply with these new reporting requirements, public companies engaged in acquisitions are conducting conflict mineral-specific due diligence on targets and incorporating conflict mineral representations and warranties into purchase agreements.  Any target of a public buyer (or a private buyer that may plan to go public) should expect to see a representation and warranty as to the seller’s knowledge of the use of conflict minerals in the operation of the seller’s business.  The representation and warranty may further track the reporting requirements and require the seller to identify if the source of such conflict minerals is designated as “conflict free” by a third party audit or whether or not the conflict minerals originate from scrap or recycled sources.  A sample representation and warranty is set forth below:

To the Sellers’ Knowledge, to the extent the Company sources any Conflict Minerals in the operation of its Business, such Conflict Minerals (A) originate in countries other than the Democratic Republic of the Congo or a country that shares an internationally recognized border with the Democratic Republic of the Congo; (B) are obtained from a source set forth on Schedule 3.14(f) designated as “conflict-free” or a similar designation by a third party recognized in the industry for providing such designations or an independent third-party audit, the results of which are made publicly available; or (C) originate from recycled or scrap sources.

Any business contemplating a sale should consider inquiring of their suppliers and contract manufacturers regarding their use of conflict minerals in the seller’s products, in order to be prepared for the likely requests from the buyer.

Any questions, please feel free to contact Mark Tarallo.

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