Trump tariffs: tools for Canadian companies to weather distress

A stated policy of President-elect Donald Trump is the imposition of a 25% tariff on all goods coming from Canada, to be implemented by way of executive order after his inauguration on January 20, 2025. Whether and precisely how this policy will be put into effect remains to be seen and much work will be done by Canadian governments and businesses to mitigate its impacts. Regardless of precisely how a tariff or similar regime is applied to Canadian goods, a likely result will be a decrease in the relative competitiveness of Canadian companies compared with their competitors located in the United States. Companies that sell into the United States will of course see the most obvious impacts of this policy but there will be secondary and tertiary impacts that will reverberate through supply chains.

Canadian companies who expect to experience financial distress should begin planning now while there is an opportunity to get in front of what may be coming. While tariffs cannot be attributed to steps taken or not taken by management, management will nevertheless be judged by markets and lenders based on how well they are able to deal with their potential impact. There will not necessarily be room for all companies within particular industries to do the restructuring that may be required, making first mover advantage important and creating an appropriate sense of urgency. Those Canadian businesses that are able to move faster and smarter than their competitors will be best positioned to withstand the impact of tariffs. This will require Canadian companies to assess their operations and to take steps to enhance competitiveness, which may include restructuring all or part of their businesses.

By design, Canadian businesses have been provided with the necessary tools to restructure, whether under corporate statutes such as the Canada Business Corporations Act or under restructuring statutes such as the Companies’ Creditors Arrangement Act. The balance of this bulletin highlights certain of these tools that can be used to effectively deal with competitiveness against the backdrop of a tariff or similar regime.

Contracts. Companies can repudiate unfavorable or uneconomic contracts if it will advance the viability of their restructurings, with some limitations. Companies may also be able to apply to have a counterparty be declared a “critical supplier” of goods and services, in which case the goods or services will have to be supplied on terms consistent with the supply relationship. Post-restructuring, contractual counterparties may be precluded from reliance on past defaults to terminate contracts.

Collective agreements. Companies may be authorized to serve notices to bargain on unions pursuant to relevant labour legislation, provided that if the bargaining fails, there is no ability to disclaim, terminate or revise the collective agreement. A restructuring may nevertheless provide the necessary conditions under which to achieve a deal with labour.

Share reorganizations. Companies may be able to fundamentally reorganize existing shares or issue new shares without existing shareholder approval.

Sales of business units. The sale of companies’ assets, free and clear of any security, charges or other restrictions may be approved after the completion of a sales process or in connection with a reorganization plan.

Financing. Interim financing is facilitated by the power to override contractual restrictions and to create “super-priority” liens for the new financing. Super-priority liens may be approved even in the face of opposition from incumbent secured creditors facing collateral deficiencies.

Stays of proceedings. Companies that restructure in Canada are typically subject to stays of proceedings that contain broad restrictions on adverse actions by creditors, contractual counterparties and others. These protections are also typically extended to directors and officers, and their purpose is to provide companies with sufficient breathing room to effectuate their restructurings.

Governance. Companies may apply for orders that provide for effective indemnities in favour of officers or directors against any liabilities that may be incurred during a reorganization.

Releases. Successful reorganization plans typically include the broad release of claims against companies, officers, directors and others, and may be extended to third parties.

Canadian businesses have the tools and wherewithal to deal with tariffs, if and however they may be implemented. We are available to discuss these tools and their potential application to your company’s particular circumstances.