The recently imposed tariffs from the United States on Canadian products, as well as the uncertainty regarding further tariffs, is likely to significantly affect the M&A market. Parties in M&A transactions should carefully consider what strategies to implement to mitigate tariff-related risks and how tariffs may affect the negotiation of key transaction documents and deal terms.  

Participants in M&A transactions face considerable uncertainty as the implementation of certain tariffs has come into effect and the potential impact and duration of announced tariffs remains unknown. Tariffs could have a chilling effect on cross-border M&A as parties wait for clarity on what tariffs the US government will maintain and what retaliatory measures Canada will take in response.

Parties proceeding with M&A transactions should address tariff implications throughout various stages of deal negotiations and consider appropriate changes to standard market terms to address tariff-related risks. While it is too early to discuss prevailing market practices in relation to these unprecedented conditions, we have flagged several key considerations that parties may want to address.

Letters of intent

At the letter of intent (LOI) stage, parties will want to consider the impact of tariffs and how comprehensively to address relevant provisions in the LOI. We anticipate that parties will want to set at least some high-level expectations with regards to tariff-related matters in the LOI. Some may get into specifics, whereas others may prefer to leave the detailed wording and negotiations for the definitive agreement stage. 

The approach that parties take to address tariff-related risks will vary on each transaction but some high-level matters that parties may wish to address early on in the LOI stage could include purchase price reductions or alternative pricing mechanisms such as earnouts, holdbacks, specific indemnities and/or purchase price adjustments relating to tariffs. While parties are likely to add tariff-related representations and warranties, we suspect that most will not do so at the LOI stage. At most, we would expect to see a reference to the definitive agreement including detailed representations and warranties, including those related to tariffs without specific representations set out in the LOI.

Due diligence

Buyers will need to consider how to address tariff risks when conducting due diligence. While the impact of tariffs will vary significantly from deal to deal, we anticipate that buyers will be more focussed on tariff-related matters than we have seen in the past.

For example, buyers are likely to drill down on a target’s supply chain and enhance their review of customer and supplier relationships and contracts to determine what inputs and outputs for a target business are crossing the US/Canadian border and may therefore be subject to tariffs. Additionally, when reviewing material contracts, buyers may want to specifically focus on any withholding or gross-up provisions that could be triggered by tariffs. Finally, buyers may want to understand a target’s contingency plans in response to tariffs and the availability of alternative suppliers and manufacturing locations for the business, as well as post-closing integration plans, all in an effort to minimize the impact of tariffs post-closing.

Definitive acquisition agreements

The following are some of the provisions in a definitive agreement that parties may want to consider in light of the US tariffs.

Purchase price adjustments

As the quantum of tariffs remains uncertain, buyers may seek purchase price protections with some potentially simply reducing the price they are willing to pay for the target. Apart from a straight reduction in purchase price, some approaches for buyers to bridge the potential value gap could be through earnouts, tariff-specific indemnities and/or holdbacks or purchase price adjustments which would be triggered if tariffs are in effect prior to closing. Parties will need to negotiate, among other things, the duration of how long any tariff-related protections will last and what types of caps will apply. Inevitably, there will be tension between buyers and sellers on these provisions and they will be extensively negotiated and potentially tied into termination rights in certain circumstances.

Representations and warranties

While some buyers may add stand alone tariff-related representations, we suspect that in most cases, buyers will add language to existing representations to address tariff-related risks. These representations could include: (i) more fulsome representations and warranties regarding a target’s customers and suppliers and their associated supply chains; (ii) detailed disclosure on supply chain matters such as country of origin of goods and where goods are supplied from or shipped to; and (iii) enhanced tax representations and warranties. Additionally, parties will need to consider how to address the bring down of tariff-related representations and warranties on closing if there is the possibility of additional tariffs being in place on closing which are not in place as of signing which would cause the tariff representations to be inaccurate as of closing. Careful consideration will need to be given to the wording of these representations and warranties.

Indemnities

Buyers may seek standalone indemnities for tariff-related matters or alternatively may seek protection through incorporating tariff-related matters into the indemnities for pre-closing taxes and/or breaches of tax-related representations and warranties, or other representations. We anticipate that buyers may have greater success in incorporating tariff-related risks into the tax indemnities by adding tariff-specific language to the applicable tax definitions rather than introducing standalone indemnities for tariff-related matters. Additionally, we believe that this approach would be more favourable than a standalone indemnity for tariff matters in the event the transaction involves representation and warranty insurance as it may result in fewer exclusions from coverage under any applicable representation and warranty insurance policy.

Interim operating covenants

We anticipate that the interim operating covenants which are included in definitive agreements may be heavily negotiated as it relates to what will be permitted in response to tariffs. There is an inherent tension between buyers and sellers with respect to a seller taking actions which are outside of the ordinary course of business in order to respond to tariffs or the threat of tariffs. We note that the importance of the interim operating covenants in a transaction and how heavily they are negotiated will likely depend in part on the duration of the interim period and the applicable regulatory requirements and closing conditions which need to be satisfied before closing can occur. A longer interim period will result in increased focus on the interim operating covenants.   

Given the unpredictable impact of tariffs and the potential need for businesses to respond to a changing and dynamic environment, we anticipate that sellers will seek increased flexibility with respect to the operation of their business during the interim period without being required to obtain buyers' consent in order to provide the seller with the necessary flexibility to rapidly adapt their operations in response to tariffs. Conversely, buyers are likely to want to clearly define what actions fall outside of the ordinary course of business and when their consent will be required for a seller to implement such steps. Parties may agree on a requirement for buyer consent which may not be unreasonably withheld, however, this will raise the question of what is reasonable in unprecedented circumstances (such as altering supply chains, manufacturing processes or the onshoring of operations). Furthermore, parties will need to consider novel issues such as what happens if a buyer refuses to provide its consent to a proposed seller action during the interim period which ultimately causes the seller to incur tariff-related costs and the transaction does not close.  

Material adverse effect

Parties will need to consider if tariffs or the threat of tariffs may constitute a material adverse effect (an MAE) which could allow a buyer to walk away from a transaction. We note that Canadian M&A transactions have rarely been terminated based on the occurrence of an MAE and in determining if an MAE has occurred Canadian courts will likely examine the amount and the expected duration of the tariffs and their impact on an acquisition target’s long-term earning power. The challenge in the context of tariffs and determining if they constitute an MAE is that it is difficult to determine if the impact of tariffs will be long term or short term and correspondingly whether a court would take the view that tariffs or the threat of tariffs constitutes an MAE. 

If tariffs are to be addressed in the MAE definition, clear and unambiguous language is essential to avoid future disputes and litigation and thoughtful negotiation will be required to determine how to deal with tariffs in the MAE definition. We expect that market practice with respect to how tariffs are treated in relation to MAEs will evolve in a similar fashion to COVID-19. As the tariff situation evolves, we anticipate that parties will negotiate whether tariffs or the threat of tariffs constitutes an MAE and include specific language to that effect in the MAE definition, subject to specifically negotiated exclusions.     

Tariff-related closing conditions

Buyers may seek to include tariff-related closing conditions rather than relying on a generic “MAE out” in order to allow the buyer to terminate the transaction if tariffs are imposed. This could include, among other things, conditions related to specific thresholds regarding the impact of tariffs on the acquisition target’s operations, revenues and/or net income. We note that there may be challenges associated with determining the impact of tariffs on the relevant metrics associated with any standalone tariff-related closing condition and the inclusion of such a condition is likely to be resisted by a seller. 

Outside date extensions

Parties may wish to include language allowing for the extension of the drop-dead date for the completion of the transaction (which is commonly known as the “outside date”) if tariffs have been proposed or announced prior to closing but not yet implemented, similar to what is sometimes adopted to address outstanding regulatory approvals. While the parties to a transaction will presumably not want to see the transaction terminated on the basis of the outside date being reached, they will not want to be contractually bound under the definitive agreement indefinitely if tariffs continue to be delayed and the outside date is repeatedly extended. We anticipate that if parties do include an extension of the outside date on account of tariffs, it will likely be limited to a one-time extension.   

Key takeaways

There is not a one-size-fits-all solution to tariff-related risks in M&A transactions and the approach taken by parties will vary with each transaction. However, as parties involved in M&A transactions wait for tariff-specific market practices to evolve, they should be mindful of risks associated with tariffs and the various provisions discussed above that could help reduce or mitigate tariff-related risks.

If you have any questions about this insight, please reach out to the authors, Danny Wakeling, Jason Saltzman, Tom Redekopp and Ahad Ahmed.

We recommend closely monitoring tariff developments, as they remain fluid and are likely to evolve. Visit our Navigating today’s shifting tariff and trade environment hub for additional resources, including our  Border Talks webinar series. You can access the recording of our Border Talks webinar on Navigating tariffs in cross-border M&A here.