Weakened economies threaten cross-border transactions

As the COVID-19 pandemic shut borders, forced businesses to close and upended global supply chains, many Canadian companies were forced to reassess cross-border trade and investments with their U.S. neighbours. Together with political uncertainty south of the border, the pandemic has created a more complex environment for cross-border transactions than ever before.

While we await a vaccine to restore normality, experts warn that the volatile cross-border landscape could be with us for the long term. Businesses should not assume that a switch will be flicked as soon as we have a viable vaccine.

“We don’t know when the pandemic will end, but even if it ends in the spring, the effects of the pandemic will carry on for a long time and they will impact our trading relationship because both countries will be absorbed internally and domestically in improving their own economies,” says Darrel Pearson, senior partner and head of international trade and investment at Bennett Jones LLP. 

While the recently ratified Canada-United States-Mexico Agreement has not had a significant impact on the substantial trading relationship between Canada and the U.S., in Pearson’s opinion, it did introduce new rules of origin in the auto sector that will be challenging to monitor and apply well. Pearson says he anticipates that the auto industry will be less reliant on those rules in terms of assessing whether goods meet the rules of origin. 

While China and the U.S. are engaged in an economic and political war, in-house counsel should be prepared to be nimble during the months ahead, says Pearson.  

“It’s going to be very important for Canadian businesses to diversify their destinations of goods and services,” says Pearson. “It’s important for companies that are looking to diversify and find opportunities that they really prepare themselves for new export destinations if they want to do business in technology.” 

The market for cross-border investments has also been upended in recent months. Governments have become more active in the regulatory space, creating further difficulties for investors. Evaluating a potential target is more challenging, according to Kathleen Orysiuk, assistant general counsel, corporate, at Siemens Canada Ltd. 

“When evaluating the performance of a potential target, how do you adjust 2020 results to reflect the impact of COVID?” asks Orysiuk. “How do you analyze revenue projections? There is a lot of uncertainty. Where projects have been awarded, will they be delayed?”  

With restrictions on travel and meetings, Orysiuk says, good communication can be a significant challenge. Remote communication makes it harder to establish trust between buyer and seller. 

“Communication isn’t all verbal,” she says. “Nothing can replace face-to-face interaction, eye contact and a handshake. Parties for the transaction should find the communication tools that work best for both parties. For confidential M&A topics, it is important that you don’t forgo secure platforms for convenience.” Digital signatures are not acceptable in some jurisdictions, making closings far more complicated, says Orysiuk. 

The legal team at Siemens continues to follow its standard processes in navigating cross-border transactions, with the help of many tools provided by the company’s IT team to make remote work more efficient. Multiple communication options are used to accommodate team members from varied jurisdictions, as some platforms work better than others in different locations. 

Government announcements are reviewed daily by the legal team, in order to understand the legal impacts of a rapidly changing pandemic environment. A pandemic task force, comprised of the businesses and departments across Siemens, meets regularly to make rapid and thoughtful decisions. 

“We work with our global colleagues to understand the impact of COVID in other jurisdictions and to develop best practices,” says Orysiuk. 

When contemplating a cross-border investment, in-house counsel should pay close attention to the investment vehicle and whether it will be a Canadian corporation or just an affiliate.

“If agreements are in place, you might want to get advice on whether you can structure the investment in such a way that you don’t lose the benefit of any such agreements. You don’t want to inadvertently waive the rights to arbitration, for example,” says Iris Antonios, a partner at Blake Cassels & Graydon LLP.

“When you go beneath the surface, there are perhaps protectionist measures as opposed to truly regulatory measures that are aimed at alleviating the effects of the pandemic or getting the economy back on track,” says Antonios. She recommends that in-house counsel structure cross-border investment contracts to include a strong resolution clause. 

“Parties need to give appropriate consideration to the dispute resolution clause prior to the dispute. It’s sometimes overlooked when an agreement is being negotiated,” she says. “When a dispute arises, you can generally assume that there’s going to be less co-operation among the parties.”

Antonios is closely watching what the future of investor state dispute resolution is going to look like, particularly as the new CUSMA no longer has a dispute resolution mechanism between Canadian and U.S. investors.