CANADA TRENDS AND DEVELOPMENTS Contributed by: Kevin West, Andrea Hill, Priya Ratti and Meryam Kellow, SkyLaw
very cautious. As the likelihood and duration of tariffs are unknown, valuations become increas - ingly difficult. A day after imposing the tariffs on all goods from Canada, the USA gave a 30-day reprieve to automakers, whose parts can cross the border multiple times, reportedly as a result of pressure from the CEOs of the big three automakers. The uncertainty is unsettling for market participants. As a result, M&A activity so far in 2025 is far below the same period in pre- vious years. Many participants will be sitting on the sidelines to see what is next. Why tariffs matter Canada is the largest trading partner of the Unit - ed States. Tariffs imposed by the United States make Canadian products less competitive, lead - ing to a decline in exports from Canada. Com - pounding the issue, in response to Mr Trump’s tariff threats, Canada has imposed retaliatory tariffs. Mr Trump has promised to match any tariffs imposed on US products. This spiralling tariff environment will be devastating for Cana - dian businesses that depend on exports to the United States. On top of that, economic activity in the United States has been slowing, with Mr Trump’s abrupt moves to shrink federal spend- ing and halt regulatory activity. Consumer con - fidence is down, inflation will be accelerating. In the current environment, an economic slowdown seems inevitable in both the United States and Canada. The United States has imposed tariffs on Mex - ico and every other country as well. Econo- mists expect that these tariffs will reduce global exports and that global gross domestic prod - uct will decline. As a result, commodity prices, including the price of oil, could be negatively impacted, producing a double whammy for Can - ada since oil is one of Canada’s largest exports.
The challenge, above all, is that the nature and extent of the possible tariffs are still unknown. It makes planning incredibly difficult. Tariffs can cause significant damage to an economy. Productivity, wages and economic growth are likely to fall while prices rise to absorb the tariffs and the disruptions to supply chains. Moreover, the threat alone of tariffs can cause such sig - nificant uncertainty that it impacts M&A activity. In this case, the threat of tariffs is animated by Mr Trump’s desire to annex Canada, opening the door to potentially significant changes in all areas of the USA–Canada relationship. Considerations for transaction documents Investors doing business in Canada should review their transaction documents in light of the tariffs and turmoil. Many of the considerations are the same as those that were discussed at the time of the COVID-19 disruptions. When drafting M&A agreements, the parties will need to nego- tiate the allocation of the risk of escalating and punitive tariffs and other government actions. Material adverse change clauses Review your agreement to consider if a change in law or government action could be considered a material adverse change that would allow you to terminate your contract. Often in M&A agree- ments, the material adverse change definition excludes a change that applies generally. It is unlikely that the blanket tariffs that have been announced would be a material adverse change. Furthermore, courts in Canada demonstrated during the COVID-19 pandemic a reluctance to terminate agreements based on the material
adverse change clause. Force majeure clauses
Force majeure clauses will be interpreted based on the language used. It would be unlikely to find a clause that provides for increased costs
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