Tariffs, M&A and Material Adverse Effect (MAE) Clauses

Overview and Key Takeaways

Can tariffs trigger a “material adverse effect” (MAE) in an M&A transaction and what components of a MAE clause will be pivotal in deciding the point?

This question is quickly becoming front of mind for Canadian dealmakers. History instructs that periods of abrupt macroeconomic uncertainty – see 9/11, the 2008 financial crisis, and the COVID-19 pandemic – increase the incidence of MAE disputes in M&A. The next chapter of similar turbulence may soon be upon us courtesy of threatened U.S. tariffs on imports from Canada and any larger trade war that could follow.

In this context, it is important that dealmakers appreciate the different parts of MAE clauses and the caselaw that informs their application. Our key practical takeaways include:

• Each of the three main parts of a typical MAE clause include aspects that warrant specific consideration in connection with tariffs and the risks they pose to a target.
• The fact that U.S. tariffs have been threatened (in some form) since late 2024 and thus are not “unknown” in that sense raises a key consideration. It also raises a key difference between Canadian and Delaware law (where most MAE caselaw has been issued) regarding MAE clauses and their scope.
• The interaction of the MAE clause’s “carve-outs” and any disproportionate effect “carve-back” may prove critical. Past MAE disputes provide guidance regarding potential “carve-back” pitfalls and the potential delineation of the target’s peer group.

This insight will be followed by a second article on the interaction of tariffs and “ordinary course of business” clauses in M&A. For more detailed discussion of both clauses, see Fasken’s Private M&A in Canada: Transactions and Litigation (LexisNexis, 2024). For other Fasken M&A thought leadership, visit our Capital Markets and M&A Knowledge Centre and subscribe.

MAE Clauses in Brief

MAE clauses allow the buyer to avoid closing where a significant deterioration in the target’s value occurs or is reasonably expected depending on the reason and context of the deterioration.

MAE clauses perform this function by allocating risks capable of having a material adverse effect on the target between the buyer and seller. In the typical MAE clause, systemic (i.e., external) risks and deal-specific risks are allocated to the buyer while target-specific (i.e., internal) risks are allocated to the seller. The rationale is that this risk allocation is economically efficient: the buyer accepts external and deal-specific risks in entering the transaction while the seller accepts internal risks as it continues to control the target.

This typical risk allocation is implemented via the standard three-part MAE clause:

• The first part defines a material adverse effect experienced by the target regardless of the nature of the risk that has manifested (i.e., whether external or internal).
• The second part, the “carve-outs”, return specified external risks and deal-specific risks to the buyer.
• The third part, the “carve-backs”, then return certain external risks to the seller to the extent the manifestation of those risks disproportionately impacts the target relative to a comparator group.

We examine the interaction of each of these MAE components with tariffs in turn. We conclude with brief comments on (1) MAE disputes generally, and (2) key divergences between Canadian and Delaware law regarding MAE clauses.

Part 1A: Express Definition of MAE

An example of the first part of a typical MAE clause, the MAE definition, is found in the American Bar Association’s latest^[1] Canadian Private Target M&A Deal Point Study (the Study) and reads:

"MAE" means any result, occurrence, fact, change, event or effect that has, or could reasonably be expected to have, a materially adverse effect on the business, assets, liabilities, capitalization, condition (financial or other), results of operations or prospects of the target or its ability to consummate the Transaction.

The essence of this definition is relatively standard and thus typically subject to minimal negotiation, save for three main components that are generally subject to negotiation (shown in underline above).

First, the Study indicates 68% of deals do not include reference to the target’s “prospects”.^[2] Second, the Study indicates 11% of deals do not include the “or could reasonably be expected to have” qualifier. Both of these components, when included, add a forward looking aspect to the definition, although in different ways.

Regarding the impact of tariffs in respect of the first two components, the question for deal parties is temporal in nature:

• Should an MAE include an adverse impact as relates to the target’s business prospects looking forward, as opposed to only its current business?
• In addition to including adverse impacts that have already occurred as a result of the MAE events, should an MAE also include an adverse effect reasonably anticipated to occur based on the MAE event?

To include both components as relates to tariff risk is to significantly expand an MAE’s scope beyond an interpretation based solely on existing circumstances to include potential future developments and, in the event of a dispute, speculation regarding those developments. To include one or the other but not both is to send mixed signals and thus increase the potential for dispute. Courts have in other contexts wrestled with the implications of including the “or could reasonably be expected to have” qualifier, and the guidance provided is complex and not entirely consistent, e.g. how far into the future the court should look.^[3] Far fewer courts have tackled the implications of including reference to the target’s “prospects” such that little to no authoritative guidance exists as to this term’s import.^[4]

The third component of the MAE definition that is often subject to negotiation is whether an MAE includes an adverse impact on the target’s ability to consummate the transaction, which component the Study indicates appears in 38% of deals. Based on precedent,^[5] we would not expect this component to be triggered by tariffs of general application (i.e., that are not specifically directed at the transaction, the target or its business).

Part 1B: MAE Definition – “Unknown” Events

In addition to the acquisition agreement’s express definition of an MAE (see Part 1A above), Canadian caselaw imposes additional considerations. In particular, in a dispute arising during the pandemic and in the most comprehensive MAE ruling issued in Canada to date, the court defined an MAE as:

the occurrence of unknown events that substantially threaten the overall earnings potential of the target in a durationally-significant manner.^[6]

This imposition of an unknown event requirement, although absent in the transaction’s MAE definition, raised a complicated question. When the agreement in question was signed in mid-February 2020, the “novel coronavirus was already daily news in North America”, but the official World Health Organization declaration of the pandemic and the issuance of sweeping “stay at home” orders by governments and businesses, which occurred in mid-March 2020, were still a month away. Most importantly, the exact “effect” on the target the pandemic would go on to have was not yet foreseeable. The court therefore decided to give the buyer the “benefit of the doubt” on the point and ruled that COVID-19 satisfied the “unknown” event requirement.^[7]

There are parallels with the U.S. tariffs currently being threatened. They have been threatened (in some form) since late 2024 and therefore are not “unknown” in that sense. However, the exact “effect” they will have on the Canadian economy and any particular Canadian target remains debatable. The exact mix and substance of U.S. tariffs is also subject to change over time amid any prolonged trade war, should that eventuate. Retaliatory tariffs by Canada on U.S. exports are also capable of adversely impacting domestic business. The “unknown” event requirement imposed by Canadian courts^[8] is therefore capable of raising very complex interpretive issues vis-à-vis tariffs depending on the circumstances. However, should an M&A buyer wish to avoid these uncertainties, a potential solution is available: attempt to negotiate for a clarifying qualifier in the MAE definition to include unknown or unforeseeable events.

Part 2: MAE Carve-Outs

As mentioned, “carve-outs” included in the second part of a typical MAE clause generally function to return specified external risks and deal-specific risks to the buyer. The Study tracks the prevalence of eight such carve-outs,^[9] being:

• changes in general local, domestic, foreign, or international economic conditions;
• changes affecting generally the industries or markets in which the target operates;
• any changes in applicable laws or accounting rules or principles, including changes in Generally Accepted Accounting Principles (GAAP);
• a downturn in national or international financial markets;
• acts of war, sabotage or terrorism, military actions or the escalation thereof;
• any other action required by the acquisition agreement; and
• the announcement of the transaction.

Based on their plain wording, U.S. tariffs on imports from Canada, as well as retaliatory tariffs on U.S. exports by Canada, could be reasonably argued to fall within the scope of each of the first three (and potentially the fourth) of these carve-outs. Alternatively, it could be reasonably argued that, given the specificity of these carve-outs, the absence of explicit reference to tariffs (particularly once on the radar of the contracting parties) indicates an objective intention to exclude tariffs from their purview. 

As the point of an MAE clause is the allocation of risk, a prudent approach would therefore be for the M&A parties to specifically agree whether an MAE arising from tariffs is or is not carved-out from the MAE clause and to expressly draft toward that end (e.g., a tariff-specific carve-out). The prudence of this approach is reinforced by caselaw and professional commentary on MAE carve-outs, which confirm that carve-out disputes are capable of raising exceedingly complex issues of fact, causal connection, and contractual construction.^[10] For example, U.S. commentary (Harvard) and caselaw (Delaware) highlight that the drafting which ties the carve-out to the MAE definition can be narrower (i.e., “arising from”) and thus buyer-friendly or broader (i.e., “related to”) and thus seller-friendly.^[11] English caselaw highlights that conceptual overlap among carve-outs can be highly problematic where one but not another carve-out is subject to a disproportionate effect carve-back (see Part 3 below) but the risk that has manifested arguably engages both.

Part 3: Disproportionate Effect Carve-Backs

As mentioned, “carve-backs” included in the third part of a typical MAE clause return certain external risks that have been transferred to the buyer by the carve-outs back to the seller to the extent the manifestation of those risks disproportionately impacts the target relative to a comparator group. For example, it could be specified that the carve-outs for (1) changes in general economic conditions, (2) changes generally affecting the target’s industries or markets, and (3) changes in law, do not apply to the extent the adverse effect experienced by the target is disproportionately larger than that experienced by the target’s peers.

The Study indicates 68% of Canadian private M&A deals with carve-outs include at least one carve-back. By contrast, 93% of U.S. private M&A deals with carve-outs include at least one carve-back.^[12]

Regarding tariffs, the parties should specifically consider whether the carve-outs are intended to capture tariffs (see Part 2 above) and, if so, whether the intent is for the applicable carve-out(s) to be subject to a disproportionate effect carve-back. If the answer to both questions is “yes”, two key drafting issues arise. First, ensuring that each carve-out relevant to tariffs is subject to the carve-back so as to avoid conceptual conflict (see Part 2 above). Second, the delineation of the applicable comparator group.

Regarding the latter, MAE caselaw has considered three different comparator group formulations within carve-backs,^[13] being:

• “comparable entities operating in the industry in which the [target companies] operate”
• “similarly situated companies operating in the same industries or locations [as the target], as applicable”
• “participants in the industries in which [the targets] or their subsidiaries operate”

A Delaware court held in 2021 that the iteration in the second bullet is narrower than the iteration in the first bullet because of its inclusion of the “similarly situated” qualifier. An English court held in 2020 that the term “industries” is a broader term than several potential alternatives such as “markets”, “sectors” or “competitors”. The English court was also hostile to the suggestion that carve-backs, by their nature, should be interpreted in a “tight” manner, preferring to focus on the particular drafting and factual matrix. Both rulings illustrate the challenges a court can face in deciding which companies qualify as comparators, e.g., where the target is a start-up with a single, not yet commercialized product.

Comparator group drafting considerations related to tariffs therefore include: (1) the particular tariffs (or potential tariffs) and impacted industries at issue, (2) the target’s particular circumstances and vulnerability to those specific tariffs, (3) the range of other companies that could potentially qualify as the target’s peer(s), and (4) the apparent vulnerability of candidate comparators to the tariffs (or potential tariffs) at issue.

Concluding Comments

As we discuss in Private M&A in Canada: Transactions and Litigation (LexisNexis, 2024),^[14] MAE clauses have been the subject of more judicial scrutiny and professional commentary than any other M&A provision. This is unsurprising. Both the clauses themselves and the issues they raise are highly complex. And where MAE disputes have been litigated, the rulings are typically very lengthy and complicated. Familiarity with this caselaw and commentary is important as they inform MAE drafting strategy and who may have the stronger position should an MAE dispute arise.

In this context it is commonplace for Canadian dealmakers and courts to look to the U.S. for guidance, including as far more MAE disputes have been litigated south of the border than north of it. Caveats are required, however. Canadian and Delaware law are more similar than dissimilar regarding MAE clauses, but key divergences remain. One is that, while Delaware law previously imposed a “unknown” event requirement on MAE clauses similar to as has been imposed in Canada (see Part 1B above), the Delaware courts definitively reversed course on the point in 2018.^[15] Another key difference is that, while Delaware law is clear that, in seeking to rely on an alleged MAE, the buyer faces a “heavy burden”, Canadian courts have not adopted a similar position.^[16] By contrast, they have indicated, somewhat ambiguously, that MAE clauses are to be interpreted “from the buyer’s perspective.”^[17] These potentially significant discrepancies should be borne in mind when consulting MAE precedent and commentary (whether Canadian or U.S.), not just in relation to tariffs but MAE clauses and MAE disputes generally.

^[1] See the 2025 American Bar Association (ABA) Canadian Private Target M&A Deal Points Study (including transactions from 2020, 2021 & 2022), soon to be released. As five Fasken partners were closely involved in the Study’s preparation, they have access to the final version prior to publication.

^[2] By contrast, in the U.S. 90% of deals do not include reference to the target’s “prospects”. See the ABA’s 2023 Private Target M&A Deal Point Study.

^[3] See Fasken’s Private M&A in Canada: Transactions and Litigation (LexisNexis, 2024) at §4.03[10].

^[4] See Fasken’s Private M&A in Canada: Transactions and Litigation (LexisNexis, 2024) at Chapter 4 generally.

^[5] See Fasken’s Private M&A in Canada: Transactions and Litigation (LexisNexis, 2024) at Chapter 4 generally.

^[6] Fairstone Financial Holdings Inc. v. Duo Bank of Canada, 2020 ONSC 7397 (CanLII) at para. 64 (emphasis added). See also Cineplex v. Cineworld, 2021 ONSC 8016 (CanLII) at paras. 105-106.

^[7] Fairstone Financial Holdings Inc. v. Duo Bank of Canada, 2020 ONSC 7397 (CanLII) at paras. 66-72.

^[8] For another Canadian ruling imposing an “unknown” event requirement in an MAE dispute, see Inmet Mining Corp. v. Homestake Canada Inc., 2002 BCSC 61 (CanLII) at para. 128. See also Inmet Mining Corp. v. Homestake Canada Inc., 2003 BCCA 610 (CanLII) where the appellate court, in affirming the lower court’s ruling, also stressed the relevance of the buyer’s “knowledge”.

^[9] By contrast, the ABA’s 2023 Private Target M&A Deal Point Study tracks the prevalence of 13 carve-outs.

^[10] See Fasken’s Private M&A in Canada: Transactions and Litigation (LexisNexis, 2024) at §4.03[12]. 

^[11] See also the ABA 2023 Private Target M&A Deal Point Study at page 36. 

^[12] See the ABA 2023 Private Target M&A Deal Point Study. 

^[13] See Fasken’s Private M&A in Canada: Transactions and Litigation (LexisNexis, 2024) at §4.03[13].

^[14] See Fasken’s Private M&A in Canada: Transactions and Litigation (LexisNexis, 2024) at Chapter 4 generally. 

^[15] For a detailed discussion, see P. Blyschak, “Material Adverse Effect (MAE) Clauses in Canada: What U.S. Counsel Needs to Know” 16(2) Virginia Law & Business Review 327 (2022) and Fasken’s Private M&A in Canada: Transactions and Litigation (LexisNexis, 2024) at §4.03[9] and §4.04.

^[16] For a detailed discussion, see P. Blyschak, “Material Adverse Effect (MAE) Clauses in Canada: What U.S. Counsel Needs to Know” 16(2) Virginia Law & Business Review 327 (2022) and Fasken’s Private M&A in Canada: Transactions and Litigation (LexisNexis, 2024) at §4.03[9] and §4.04.

^[17] See Fairstone Financial Holdings Inc. v. Duo Bank of Canada, 2020 ONSC 7397 (CanLII) at paras. 26, 72 and 86. See also paras. 162 and 166.