Canada: Foreign Investment Review Of CNOOC/Nexen Extended A Second Time In Lead-Up To Government Guidance On Foreign Investments By State-Owned Enterprises

On November 2, 2012, Christian Paradis, federal Minister of Industry, announced that CNOOC Limited had agreed to a further extension of the Minister's review, under the Investment Canada Act ("ICA"), of CNOOC's proposed acquisition of Canadian energy company, Nexen Inc. CNOOC had filed its application for review under the ICA in late August, 2012, and the Minister had previously extended the initial 45-day review period for the proposed transaction by 30 days on October 11, 2012. Barring further extension, the Minister now has until December 10, 2012 to decide whether the proposed takeover of Nexen by CNOOC, a Chinese state-owned enterprise ("SOE"), is likely to be of "net benefit" to Canada, which is the test for approval of reviewable foreign investments under the ICA.

While it is not unusual for the Minister to seek a further extension of the review period beyond 75 days, the additional extension in the CNOOC/Nexen case is significant because:

• the proposed transaction has generated considerable media attention and political debate on a variety of issues, including the advisability of foreign state control over Canada's natural resources, concerns about how SOEs will operate Canadian businesses post-acquisition and the difficulty that Canadian firms have investing in China;
• significant public airing of these issues has raised expectations that the Government's ultimate decision on the proposed transaction will shed new light on its approach to future SOE investments that are reviewable under the ICA, and the Government has signaled that additional policy guidance on SOE investments will be forthcoming following or concurrently with its decision on the CNOOC/Nexen transaction;
• anticipation around the government's unfolding approach to SOE investments has been heightened by the Minister's recent interim decision, reached on October 19, 2012, that another SOE investment in Canada's oil patch, the proposed acquisition of Calgary energy firm, Progress Energy, by Petronas, a Malaysian SOE, was not likely to be of net benefit to Canada; and
• the extended review period for CNOOC/Nexen should provide the government with the scheduling flexibility, if desired, to announce decisions on the CNOOC/Nexen and Petronas/Progress transactions together with the issuance of a new policy framework on SOE investments under the ICA. If the Minister intends to use the full period of the extension agreed by CNOOC, a further extension of the Petronas/Progress review would be required to enable decisions on both proposed transactions to be announced together.

We will provide commentary following government decisions on CNOOC/Nexen, Petronas/Progress and any new policy guidelines on SOE investments generally.

The "net benefit" test and SOEs

A direct acquisition by a non-Canadian controlled entity of a Canadian business that surpasses a prescribed financial threshold (currently assets with a book value of more than C$330 million) cannot be completed until and unless the foreign investor satisfies the Minister that the transaction is likely to be of net benefit to Canada. Traditionally, foreign investors have satisfied the net benefit criteria by providing undertakings that address factors such as employment, capital expenditures, research and development and participation of Canadians in the management of the Canadian and global operations of the acquired business.

In the case of investments by SOEs, the Minister has also considered the corporate governance and reporting structure of the SOE to assess whether Canadian standards of transparency and independent board members and auditors, for example, are maintained. The Minister has also assessed whether post-acquisition the Canadian business will continue to operate on a commercial basis. Industry Canada guidelines issued in 2007 suggested that the listing of shares of the acquiring company, or the Canadian business being acquired, on a Canadian stock exchange is an example of how an SOE could enhance an ICA application in this regard.

CNOOC/Nexen and Petronas/Progress

On July 23, 2012, CNOOC Limited, a publicly traded corporation listed on the Hong Kong and New York Stock Exchanges, announced an agreement to acquire Nexen Inc. for approximately C$15 billion. China National Offshore Oil Corporation, which is wholly-owned by the Chinese State, holds approximately a 65% interest in CNOOC Limited. Nexen is reported to be Canada's sixth largest independent oil and gas company, with significant operations in the oil sands as well as shale gas properties in western Canada.

On June 28, 2012, Petronas, the Malaysian state-owned oil and gas company, announced a proposed acquisition of Progress Energy, a mid-sized energy company based in Calgary, Alberta, for approximately C$6 billion. Progress operates primarily in the exploration, development and production of natural gas and light oil resources in northeastern British Columbia and northwest Alberta.

The Minister's interim decision, on October 19, 2012, that the Petronas/Progress deal was not likely to be of net benefit to Canada, triggered a further 30 day period (subject to further extension by agreement) in which Petronas may make further submissions or further undertakings to demonstrate net benefit to Canada. It has been reported that the parties have extended the outside date under their merger agreement to November 30, 2012 and are in active discussions with the government in relation to the net benefit review.

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