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Tariffs, CFIUS and Brexit bring uncertainty to M&A transactions

May 3, 2019

Stricter regulations on foreign investments coupled with the imposition of tariffs on imported goods and the continuing drama surrounding the United Kingdom’s struggle to leave the European Union are creating new hurdles and headaches for attorneys helping client businesses through a merger or acquisition.  

Ben Gibbons, national private equity industry leader of RSM Canada, summarized the situation as “uncertainty, uncertainty, uncertainty.” 

Gibbons was among the panelists in a discussion on cross-border transactions at Faegre Baker Daniels’ 2019 M&A Conference in downtown Indianapolis April 30. The half-day event featured a series of discussions examining different aspects of merger and acquisition transactions.

The final panel of the day focused on tariffs, the expanded jurisdiction and stricter rules from the Committee on Foreign Investment in the United States (CFIUS), and the decoupling of the U.K. and E.U., dubbed Brexit.

“I think the takeaway is that until we get greater certainty with respect to this new trade regime then we’re going to continue to see the impact on the M&A process and we’re going to have to think about how to structure around those impacts,” Gibbons said.

Frank Swain, a principal in Faegre’s Washington office, sees the implementation of tariffs and a beefed-up CFIUS as reflections of a political shift on international trade from one advocating for free markets to taking a more cautious approach. The new CFIUS regulations come from a concern about American technology falling into the wrong hands, while tariffs arise from the belief that other countries have not been treating the United States fairly.

“Traditionally the business Republican was in favor of free trade and the union-oriented Democrat was worried about it because it was anti-American worker,” Swain said. “To a little degree that’s still true, but the politics are all over the place.”

Indiana companies are not immune to the uncertainty. Supply chains often include businesses in other countries, which makes the product coming from overseas vulnerable to a tariff the Trump administration has either imposed or threatened to impose.

Tech companies and startups could get a look by CFIUS. In November 2018, Congress expanded the jurisdiction of CFIUS so U.S. business that involves critical technology or critical infrastructure, or is gathering sensitive personal information, could be subjected to a review if the company is being acquired a foreign investor.

Ultimately, the transaction could be blocked or modified by the U.S. Government. Also, if the company fails to make a mandatory filing, it could get slapped with a financial penalty that can equal the transaction value itself.   

David McAvoy, general counsel and chief compliance officer with Endcoyte, Inc., explained the review process and the length of time it can take, noting Endcoyte acquisition by Novartis triggered CFIUS scrutiny.

“We treated it as an advocacy opportunity to go in and explain why we felt like our business is not a threat to national security,” McAvoy said during the panel discussion.

Even as the Brexit struggles do not appear to be abating, M&A activity is “holding up pretty well in the U.K.,” said Melanie Wadsworth, partner in the London office of Faegre Baker Daniels. In 2018, the U.K. was the second largest EU market for M&A transactions. 

However, she advised attorneys to factor Brexit into their due diligence if the merger or acquisition involves a U.K. company. “I would encourage people to give a little bit of thought to Brexit,” Wadsworth said, adding that even though eyes can glaze over when talking about the topic, it is better to be more proactive. “I think despite the uncertainty there are some things we can be doing now.”

For M&A lawyers, continued uncertainty may be the only certainty.

The EU has again extended the deadline, this time to Oct. 31, 2019, for the U.K.’s departure. Opposing factions within the British Parliament have, so far, been unable to reach an agreement on the details of the exit.

Since the changes to CFIUS were enacted by Congress, only Capitol Hill can alter or tweak the new regulations. But, Swain said, tariffs fall purely under the purview of the U.S. President, and while Congress can do very little to rollback or adjust the extra duty being put on some goods, a new occupant of the White House could reverse course.

“The next president can with a quick stroke of a pen take away a lot of these tariffs that are with us now,” Swain said.

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