Executive Order 14257, presented by the President of the United States of America during a press conference in the Rose Garden on 2 April 2025, and the subsequent developments, have injected uncertainty into global trade policy. Unsurprisingly, it appears to have halted various pending deals. One can adopt a wait-and-see approach to weather the storm, assuming the clouds will eventually part. However, halting or terminating transactions altogether may not always be suitable, for example, if the business is in distress. Hence, practitioners need to find approaches to deal with the current situation.
The Buyer's and the Seller's Perspective
Despite the obvious challenge being very visible, the first
question is whether to address it in the transaction at all.
A buyer may argue for a specific consideration of U.S. tariffs in
the transaction because:
- New tariffs can significantly increase the target's costs and reduce its international competitiveness. Therefore, a transaction signed under current conditions should account for evolving tariff policies to protect the buyer from an erosion of the target's value.
- During the due diligence phase, the buyer bases its valuation, forecasts, and risk assessments on specific assumptions. A material change disrupting these assumptions before closing should justify a reconsideration of the transaction terms.
On the contrary, a seller may argue against specific rules addressing tariffs:
- It is an established concept that the seller should generally not be penalized for external regulatory shifts beyond its control (post-signing or closing, depending on the transaction structure). Opening such debate is a slippery slope to addressing all kinds of later regulatory and policy shifts in the transaction documentation.
- Tariff changes, while disruptive, are often temporary, as recent developments show. They reflect broader global trade policy fluctuations, which are part of the general market risk any buyer must be willing to accept when acquiring a business.
- The target may be able to mitigate the impact of changing tariffs (e.g., through supply chain diversification or passing costs). Hence, it is unclear whether and to what extent tariffs will indeed harm the target's business. The buyer can also mitigate such impact through proper management.
Transaction Tools to Manage Tariff Risk
While there is no silver bullet, it is also unnecessary to reinvent the wheel. A combination of tools from the common M&A toolbox may suffice in many cases.
- Consideration: A simple fixed purchase price based on historical accounts (locked box) may not provide the required flexibility. The parties may instead consider closing accounts. Additional pricing mechanisms to bridge a potential value gap are earnouts, holdbacks, specific indemnities, and purchase price adjustments relating to tariffs. There is no one-size-fits-all fix. Primarily, the parties must define the scope and duration of any pricing adjustments linked to tariff changes. While a general earn-out depending on the target's overall commercial success in the coming months may be suitable for some cases, other transactions may warrant a specific purchase price adjustment depending on changes to certain tariffs on certain products from certain countries.
- Due Diligence: The parties will need to understand specific tariff risks and potential mitigants as part of the due diligence. The business will assess the target's ability to pass on tariffs to customers and/or to push a tariff burden to its suppliers. The legal due diligence will specifically scan material agreements for hardship and force majeure clauses, as well as any withholding or gross-up provisions that may be relevant for tariffs.
- Warranties: A buyer will require specific warranties about the target's supply chain, including the origin of certain goods sourced, manufacturing locations, and their capabilities and distribution channels. A buyer will also focus on the target's compliance with evolving global tariff regulations. In this context, the complex issue of determining applicable law across jurisdictions in times of daily policy shifts should not be underestimated. Finally, the definition of "taxes" will become a new center of attention. Are tax-related warranties or indemnities already addressing tariffs – and if so, is the outcome desired?
- Interim Covenants: How to operate a business in the ordinary course given the current turmoil? While sellers will be keen to stay flexible in their responses to tariffs (or the threat thereof), buyers will want to have a say in case the target considers changing its supply chains, manufacturing processes, reshoring decisions, or distribution models. Striking the balance will likely depend on the anticipated time until closing. Past practice will offer limited guidance, so the parties should expect to define new standards, taking into consideration gun-jumping prohibitions.
- Closing Conditions: The tariff-related closing conditions should depend on whether the parties have already addressed the tariff topic, for example, in the consideration. In any event, a closing condition requiring the absence of material adverse tariffs (MAT), enacted or threatened, may not be sustainable. If the transaction includes a material adverse change (MAC) closing condition, sophisticated parties will certainly negotiate whether tariffs or the threat of tariffs constitute a MAC and include specific language to that effect in the relevant definition.
Successfully navigating tariff-related uncertainty requires clear contractual risk allocation, careful diligence, and pragmatic structuring. While challenging, these conditions may create opportunities for buyers and sellers who are prepared to engage constructively and adapt deal terms accordingly.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
