Mergers and acquisitions activity in British Columbia remains in a state of fitful growth, marked by a number of offsetting market forces and uneven levels of activity. This stands in sharp contrast to the lofty expectations held at the start of the year, when the stage appeared set for a significant resurgence in M&A, driven by a confluence of favourable market conditions, including a stabilization in inflation, lower interest rates, narrowing valuation gaps between buyers and sellers, significant and growing dry powder among private investor groups, and an expected wave of succession-driven sales by entrepreneur-founders. But so far this year, these forces have been meaningfully offset by unexpected headwinds, including adverse and unpredictable trade policy and increasing geopolitical uncertainty.
While market turbulence has sidelined many transactions — particularly those facing valuation uncertainty due to potential tariff exposure — dealmakers have adjusted to pursue emerging opportunities in this new context. This has included a focus on domestic transactions, supported in part by a withdrawal of U.S. private equity investors that has prompted greater engagement by Canadian PE groups, and increased investment by Canadian pension funds and other domestic public investor groups. There also has been greater interest in sectors with limited trade exposure or that represent growth opportunities, including technology and artificial intelligence, energy and infrastructure, mining and critical minerals, health care and financial services.
Companies and investors are also adopting several mitigation strategies to navigate the current trade environment. These include defensive investments to reconfigure supply chains or reduce the impact of tariffs, as well as a focus on businesses with strong domestic sales, service-based business models or sufficient pricing power to withstand tariff impacts.
Key legal trends shaping M&A in 2025
Four key legal trends have been shaping deal practice in 2025: A more challenging regulatory environment, including for mid-market deals; more creative deal structuring in response to market uncertainty; continued growth in the use of representation and warranty insurance across a broadening range of transactions; and a heightened focus on due diligence.
Recent substantial updates to Canada’s competition and foreign investment laws are resulting in greater transaction scrutiny, requiring more up-front planning, potentially longer timelines and careful negotiation. While it is typically only larger deals that trigger mandatory notification thresholds, it is important to note that these laws apply to all transactions regardless of the size of the deal or of the parties involved.
Changes to the Competition Act, for example, will subject more transactions to approval requirements and mandatory filings, and will extend the “look-back” period during which the Competition Bureau can retroactively challenge unreported transactions from one year to three years.
Similarly, recent amendments to the Investment Canada Act include an expansion of ministerial powers to review and take action in relation to transactions raising national security concerns. Now more than ever, key considerations for any proposed cross-border transaction include the identity of the acquiror in relation to its jurisdiction of origin and its ultimate owners, as well as any related political or reputational issues, and the nature of the target company’s business, including whether it operates in any sector deemed sensitive by the Canadian government. This can include critical goods and services, minerals and infrastructure as well as sensitive technologies.
In response to recent actions taken by the U.S. administration, the Canadian government has expressly included “economic security” as a component of national security reviews. In assessing whether an investment has the potential to undermine Canada’s economic security, the government will consider, among other things, the size of the Canadian target business, its place in the innovation ecosystem, and the impact of the transaction on Canadian supply chains. And, while not yet in effect, foreign investments in to-be prescribed business sectors will be subject to a mandatory pre-closing notification to head off any national security inquiry. In this new environment, dealmakers must take into account the fact that “national security” is an evolving and highly politicized concept, and accordingly the regulatory landscape can shift quickly.
For those transactions going ahead notwithstanding current market challenges, dealmakers have engaged in more creative deal structuring to address key stumbling blocks. Approaches to bridge valuation gaps include earn-outs tied to future financial performance and/or the achievement of specified business milestones as well as equity roll-overs and other deferred compensation arrangements to reduce the upfront purchase price and align incentives for future performance.
Similarly, buyers and sellers are more carefully allocating specified risks between themselves (and to third-party insurers) through the tailoring of representations and warranties, and an increased focus on what does or does not constitute a “material adverse effect.” For transactions that have a delay between signing and closing due to the need to obtain shareholder approval or third-party consents, parties have made efforts to enhance deal certainty by specifying the level of effort each party must use in seeking required approvals and consents, including specific closing conditions, and imposing termination or reverse termination fees or expense reimbursement obligations in the event that a transaction fails to close.
The use of representation and warranty insurance (RWI) continues to grow across an increasingly broad array of transaction sizes, industries and models. By one estimate, 75 per cent of private equity transactions and 64 per cent of larger strategic acquirers now use transactional insurance. RWI derives much of its appeal by enabling sellers to make a “clean exit” while providing buyers with meaningful, creditworthy recourse. The use of RWI also allows parties to avoid lengthy indemnity negotiations and the potential for conflict where the sellers include a continuing management team.
Together, the three trends described above are driving a fourth one: An increased focus on the due diligence process. This includes: Preliminary investigations around threshold issues such as regulatory risk; traditional due diligence in relation to financial, operational and legal matters; and a new focus on emerging categories of risk driven by technological developments, increased regulation and other market developments.
Despite a number of unpredictable headwinds, the medium-term outlook for M&A remains favourable given a confluence of longer-term forces that are strongly supportive of dealmaking on both the buy-side and the sell-side. However, a significant, broad-based resurgence in M&A will depend in large part on achieving a more stable and predictable geopolitical and trade policy environment. In the meantime, expect to see more targeted M&A continue, with dealmakers exhibiting creativity and resilience as they pivot toward the narrower set of opportunities that remain despite, or that have arisen due to, the current market uncertainty.
Sven Milelli and Glynnis Morgan are both partners in the Business Law group at McCarthy Tétrault LLP in Vancouver.
