Navigating Trade-Related Risks in North American M&A

The recent dynamic shifts in global trade policies have triggered multifaceted questions for North American M&A transactions. Trade-related issues can significantly impact different targets and transactions, making it crucial for buyers, sellers, and their counsel to adjust their negotiation, deal structure, and risk allocation strategies. This article outlines key considerations for navigating trade-related risks, including valuation and due diligence, supply chain contracts, representations and warranties, ordinary course of business clauses, material adverse effect clauses, closing conditions, and earnouts.

Key Takeaways:

Valuation and due diligence should be tailored to trade-exposure and may require consultation with financial advisors to assess potential impacts of tariffs and trade uncertainty.
Supply chain contracts are critical for due diligence, requiring in-depth reviews of supplier/customer relationships, country-of-origin classifications, inventory levels, and potential exposure to retaliatory tariffs.
Representations and warranties should include additional trade-specific terms to address trade-related issues, such as the target's compliance with laws, financial robustness, and material contracts.
Ordinary course of business clauses should be customized to address potential trade-related concerns, including bespoke negative and affirmative covenants, termination of material contracts, and adjusting procurement practices.
Material adverse effect (MAE) clauses can be used to allocate internal, target-specific risks to the seller and external, systemic risks to the buyer, with changes in tariff policy arguably falling into the latter category.
Closing conditions and closing risks should be closely attended to, with potential bespoke conditions including the absence of tariffs, thresholds regarding adverse impact, or rights to extend the closing date.
Earnouts can be used to allocate trade-related risks, particularly in cases where the potential adverse impact of tariffs is indeterminable or where a new tariff is threatened or imposed during the interim period.

Statistics:

A detailed review of customer contracts may be necessary to address the degree to which tariff-related costs can be passed on to customers, with tools such as trade risk matrices and valuation simulations helping to assess potential impacts under various trade scenarios.
In a typical MAE clause, the core definition of a material adverse effect is followed by a series of exclusions or "carve-outs", which generally allocates internal, target-specific risks to the seller and external, systemic risks to the buyer (approximately 70-80% of MAE clauses include these exclusions).
A carefully constructed earnout can be a win for both the buyer and seller, particularly when structured around EBITDA, which can be repurposed to hedge against negative impacts on the target's EBITDA post-closing.

Sources:

Fasken. (2025). [Mr Gesta Abols Fasken 333 Bay Street, Suite 2400 Bay Adelaide Centre, Box 20 Toronto Ontario ON M5H 2T6 CANADA Tel: 4163668381 Fax: 4163647813 E-mail: sdookhoo@fasken.com URL: www.fasken.com]
Mondaq Ltd. (2025). [http://www.mondaq.com]
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