Investment Canada – The Year of the State-Owned Enterprise
2012 proved to be a highly eventful year for foreign investment law in Canada. Although numerous foreign investments by SOEs in the Canadian energy sector had received foreign investment approvals in recent years1, the summer of 2012 saw the announcement of two multi-billion dollar energy transactions involving SOEs that collectively posed an unprecedented test for the Investment Canada Act and for Canadian policymakers. In June, Petronas (the Malaysian state-owned oil company) announced its $6 billion acquisition of Progress Energy. At the time, this was the largest-ever proposed acquisition of a Canadian company by a state-owned enterprise. But that record did not stand for long: just a month later, in July, CNOOC Limited (a majority Chinese state-owned oil company) announced its $15 billion acquisition of Nexen.
These proposed acquisitions became the subject of intense scrutiny in the national media throughout the summer and fall, and indeed attracted attention in the business press globally, particularly in Asia. With few exceptions, large-scale M&A activity in the Canadian oil patch ground to a halt in the fall of 2012 as market participants stood still and held their collective breath pending the outcome of the government reviews of these proposed foreign investments. Tension was only heightened in October when the Minister of Industry rejected the Petronas transaction on a preliminary basis, immediately recalling the rejection of BHP Billiton's hostile bid for Potash Corporation of Saskatchewan less than two years earlier.
The review process concluded on December 7, 2012, when the federal government announced its approval of both the Progress and Nexen transactions. But at the same time it detailed a new approach and revised guidelines applicable to investments by state-owned enterprises, particularly in the oil sands. As a consequence, continued acquisitions by SOEs of controlling interests in the oil sands industry have been largely constrained and, going forward, will be found to pass the critical "net benefit to Canada" test only on an exceptional basis. However, the acquisition by SOEs of non-controlling interests, including by means of joint ventures, will continue to be welcome (indeed, acquisitions of non-controlling interests are, generally speaking, not subject to the Investment Canada Act). While the "exceptional basis" test does not apply to sectors other than the oil sands, the government has noted that it will continue to monitor investment by SOEs throughout the Canadian economy, and in this regard has adopted a somewhat more measured tone in relation to investment by such entities, across all industries.
We further expect to see long-awaited regulations that would alter the primary review threshold under the Investment Canada Act from a C$330 million "book value" test (indexed to inflation) to a C$600 million "enterprise value" test implemented in 2013, which threshold will then be increased to C$1 billion over a four-year period. However, the government has stated that, for state-owned enterprises, the review threshold will remain C$330 million in book value (indexed to inflation).
Competition Act – The Changing of the Guard
With respect to competition matters, 2012 saw the departure of Canada's Commissioner of Competition, who had established herself as an active and assertive competition law enforcer bringing cases against Air Canada (since settled), VISA/MasterCard (ongoing), the real estate brokerage industry (ongoing), Rogers (ongoing), Bell (settled) and the retail gasoline industry (numerous convictions obtained). The most prominent developments in 2012 were likely the clearance issued in respect of the Maple Group/ TMX transaction (following a very lengthy review), the settling of litigation in respect of certain cooperation arrangements between Air Canada and United Continental, and the Commissioner's victory in successfully challenging a completed, non-notifiable transaction in the industrial waste industry, which serves as a cautionary reminder that the Commissioner has the jurisdiction to review and obtain divestitures in respect of closed transactions, even where such transactions fall below the mandatory reporting thresholds. Vigorous merger reviews are expected to continue under the new Acting Commissioner, John Pecman.
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