Tariffs: Implications for Irish M&A

Recent US trade policy creating global tariffs has caused significant international trade uncertainty which need to be considered in the context of Irish M&A transactions. 

Considering heightened unpredictability introduced by shifting US trade policy, M&A deals involving Irish targets (which have particular exposure to the US trade markets) require enhanced due diligence, strategic transaction structuring and tailored drafting for risk allocation in transaction documents.  

Due Diligence 

Tariffs from a risk management perspective are likely to become a bigger component of financial, tax and legal due diligence conducted by buyers. A target company’s exposure to tariff impacted industries and markets can create red flag for buyers and their advisors. Key areas to focus on in the context of US tariffs in due diligence would be supply chain exposure, financial exposure to US tariffs (including how EBITDA margins or revenue streams may be affected), commercial contract reviews to check which party is responsible for any tariff costs and for scope in renegotiation or termination clauses, and regulatory reviews to ensure compliance with Revenue, customs and/or trade legislation. 

Valuation and Deal Structuring 

Tariff related risks have a very real impact on valuations for Irish companies that are heavily reliant to trading to the US. Valuation models can incorporate discounting mechanisms, contingent pricing arrangements or adjustments to consideration which are linked with trade developments. Earn out mechanisms linked to post-completion financial performance or holdbacks for the period between signing and completion can be implemented to account for increased costs and decreased sales due to tariffs. Parties may also agree to contingency payments or deferred consideration based on successful mitigation in the face of tariffs. 

If there is a gap between signing and completion a seller may also attempt to negotiate greater flexibility in the list of restricted transactions between signing and completion in case new or increased tariffs are put in place during this period. Sellers will want to negotiate flexibility to take certain actions that deviate from the ordinary course of business in this context.

Warranties and Disclosures  

While general trading warranties in an Share Purchase Agreement (‘SPA’) may cover tariff related risks for a target company a buyer should include standalone warranties in a SPA in relation to tariffs. 

Conversely in the disclosure process, sellers should consider disclosure against any related warranties and representations especially regarding historical and forecasted tariff costs and required mitigation efforts, or compliance with customs and export/import controls. This is would also be applicable in a split signing/completion scenario where tariffs/trade policies have changed substantially in the interim and disclosure against warranties repeated at completion is required. 

In advance of sale, sellers may also wish to consider customs duty mitigation measures to minimise the impacts of tariff costs, including by carrying out a supply chain analysis to determine risks and identify any opportunities. This could impact valuation models and any earn out mechanism or deferred consideration. 

Additional tariffs may also have wider tax implications, including on transfer pricing models used by multi-national groups. 

Indemnities

Where a target company has known exposure to tariffs, specific indemnities may be negotiated to protect the buyer from existing liabilities or enforcement actions. Tariff related indemnities can also be included in the tax indemnities to address trade related risks. Tax deeds and tax covenants should be reviewed to ensure it effectively covers tariff and trade related tax risks (which may arise outside the target’s jurisdiction) as well as direct taxes. 

It is also important to note that the approach of W&I insurers is currently unclear in relation to Warranty and Indemnity (‘W&I’) cover for tariff exposure and will most likely be decided on a case-by-case basis until the US trade outlook stabilises. It is common for W&I insurers to exclude known risks which may include tariffs in place at the time of signing any transaction documents or even where a deal is signed in a known period of trade tension, such as is the case currently. 

Closing Condition and MAC Clauses

A buyer could look to include a specific precondition in the SPA based on the imposition of tariffs between signing and completion based on tariff percentage thresholds that the tariff rate cannot exceed prior to completion. Or a buyer may seek to expand the definition of Material Adverse Change ('MAC') to bring tariff related risks within that definition or specific carve outs.

Conversely a seller may seek to expressly exclude tariffs as a basis upon which to claim a material adverse effect on a target business, which would enable a buyer to terminate between signing and completion. 

It is important however that both sides should include language to minimise the risk of a court interpreting the clause differently to the parties’ intentions. The definition of a ‘material adverse change’ can provide for legal/regulatory changes, a change in market conditions, operational supply chain disruptions, an exclusion for events within the ordinary course of the business and cave outs for known risks. A seller should seek to insert a time limitation and a materiality threshold for any MAC clauses. Certain political or geopolitical risks can also be used as a trigger for MAC clauses should a buyer be concerned about trade policies. Exemptions for MAC clause can also be included to account for events which would not meet the threshold for a material adverse change in a MAC clause. 

A recent judgement of the English High Court (BM Brazil & Ors v Sibanye BM Brazil & Anor) which was delivered in October 2024 reiterated the significance of the precise wording of a MAC clause and that there is a particularly high threshold for a buyer to meet when attempting to prove a material adverse change. Between signing and completion of an acquisition of a mine in Brazil, a geopolitical event occurred causing the dislocation of a slope. The buyer failed to complete on the agreed closing date and claimed that this was justified as the geotechnical event constituted a material adverse change pursuant to the SPA. The judgement (which is only persuasive in an Irish context) focused largely on the interpretation of a material adverse clause and determined that the test of a material change was an objective one and that a “change, event of effect” between signing and closing needed to occur. Secondly there needs to be an impact on the business or a financial impact, operational impact or impacted assets/liabilities etc. Thirdly, the frequency of such a material event or change was deemed to be very relevant. In this case, it was noted that geotechnical events were extremely common at this mine and considering the impact to the business, it was not material. The court also gave consideration to a “revelatory event” meaning that the change or event lead to wider problems leaving the target in a materially inferior state than it existed at signing. The English High Court held in this case that the geotechnical event was not a material adverse change and that the buyer was obliged to complete the transaction. 

Force Majeure Clauses

Force Majeure clauses are clauses which absolve a party from liability for non-performance of a contract where a specific event has occurred. Traditionally increased costs arising from tariffs or volatile international trade policies would not be expressly mentioned in force majeure clauses, however buyers and sellers can allocate risks as they wish by calling out specific scenarios which would constitute force majeure. Courts will generally not reallocate risks which have been expressly agreed by parties to a contract, therefore in the current climate, careful consideration should be given to such circumstances which may prevent a party from fulfilling their obligations. 

Dispute Resolution and Governing Law 

Where M&A transactions have a cross border element, careful consideration should be given to dispute resolution and legal jurisdiction clauses to ensure that disputes arising from trade related claims are resolved in the most suitable legal jurisdiction for enforceability and any strategic advantage. 

Conclusion 

In the face of US tariffs, Irish M&A transactions require increased tax exposure analysis during due diligence, risk assessment and purchase price negotiations with buyers and sellers being required to adopt more sophisticated approaches to risk allocation and transaction structuring. The shifting landscape of US tariffs highlights the need for flexibility and proactive strategic planning in a dynamic M&A landscape. 

For further information please contact Jennifer McGuire (Partner and Head of M&A), Maebh Ni Ghallchobhair (Associate) and Lee Squires (Partner and Head of Indirect Taxes).