Navigating Cross-Border M&A Tariffs Efficiently and Effectively

The latest tariffs imposed by the United States on Canadian goods are expected to have a significant impact on the M&A market. Parties engaged in M&A transactions must carefully strategize to minimize risks associated with tariffs and be prepared for how tariffs could influence negotiation processes and the terms of the deal.

With ongoing uncertainty surrounding the imposition of tariffs and the potential for further tariffs, participants in M&A deals are facing a period of great unpredictability. The ambiguity created by tariffs could result in a reluctance to engage in cross-border M&A deals as parties await clarification on the tariffs maintained by the US government and potential retaliatory actions by Canada.

To navigate these challenges, parties involved in M&A transactions need to address tariff implications at various stages of the deal negotiation process. Adjustments to standard market terms may be necessary to account for tariff-related risks. While it is premature to establish standard practices under these circumstances, some critical considerations have been highlighted for parties to take into account.

During the initial letter of intent (LOI) stage, parties should incorporate discussions about the potential impact of tariffs and outline expectations concerning tariff-related matters. Setting high-level agreements on provisions related to tariffs early on can prove beneficial, with detailed negotiations potentially left for the definitive agreement phase.

The due diligence process is a crucial phase for buyers to assess and mitigate tariff risks. Buyers will need to scrutinize a target company’s supply chain, customer, and supplier relationships, as well as focus on contracts that may be affected by tariffs. Understanding how tariffs could impact a target’s operations, and identifying alternative suppliers and post-closing integration plans, will be essential to minimize tariff-related consequences.

In negotiating definitive acquisition agreements, parties should consider provisions addressing the implications of US tariffs. Purchase price adjustments are a key consideration, with buyers seeking protections against the uncertain tariff landscape. Price reductions, earnouts, tariff-specific indemnities, and holdbacks may be utilized by buyers to safeguard their investment in the target. Negotiations will also need to cover the duration and caps on tariff-related protections to ensure a fair deal for all parties involved.

In conclusion, while there is no one-size-fits-all answer to navigating the challenges posed by tariffs, parties engaged in M&A transactions need to be vigilant and proactive in addressing tariff risks at all stages of the deal. By implementing strategies to mitigate tariff-related uncertainties and adapting negotiation terms accordingly, parties can enhance their preparedness to withstand the impact of tariffs on M&A transactions.