Canada: Foreign Investors Must Live up to Commitments – Sanctions Upheld Under Investment Canada Act

Copyright 2010, Blake, Cassels & Graydon LLP

Originally published in Blakes Bulletin on Competition, Antitrust & Foreign Investment, June 2010

On June 14, 2010, the Federal Court (Trial Division) released a decision in Canada (A.G.) v. United States Steel Corporation and U.S. Steel Canada Inc., 2010 FC 642 (US Steel Case) upholding the constitutionality of the remedies, including monetary penalties, available under section 40 of the Investment Canada Act (the decision is still subject to possible appeal). The decision confirms the enforceability of the undertakings that investors typically enter into with the responsible Minister under the Investment Canada Act (ICA) when the investment is subject to review.

1. Overview of Relevant Provisions of ICA

Under the ICA, and subject to certain limited exceptions, the direct acquisition of control of a Canadian business by a non-Canadian that meets a prescribed financial threshold cannot be implemented until the non-Canadian has filed its application for review and the responsible Minister under the ICA has, or is deemed to have, declared that he is satisfied that the investment is "likely to be of net benefit to Canada". In making this determination, the ICA provides that the Minister may take into account any undertakings offered by the investor.

The undertakings that an investor provides to the Minister represent binding commitments. The terms of undertakings are set out within the undertakings, and vary by investment. Because circumstances can, and sometimes do, change, the Minister's Administrative Guidelines state that:

... plans and undertakings are based to some extent on projected circumstances and the monitoring of an investor's performance will recognize this factor. Where inability to fulfill a commitment is clearly the result of factors beyond the control of the investor, the investor will not be held accountable. Investors are expected to provide a progress report within 18 months after the implementation of the investment. The Investment Review Division of Industry Canada will assess whether any further monitoring is required thereafter.

If an investor has failed to live up to its undertakings, the Minister may send a demand to the investor requiring the investor to cease the contravention, remedy the default, show cause why there is no contravention of the ICA or justify any non-compliance. If the investor is unable to satisfy the demand, the Minister has at least three alternatives. First, following amendments to the ICA in March 2009, the Minister and investor can agree to a new undertaking, presumably one that takes into account any changed circumstances. Second, the Minister can bring an application to a superior court for a range of remedies, including divestiture, an order requiring compliance with undertakings and a penalty not exceeding C$10,000 per day for each breach of an undertaking.

2. The US Steel Case and Decision

In August 2007, United States Steel Corporation (U.S. Steel) announced that it had reached a definitive agreement with Stelco Inc. (Stelco), a Canadian steel manufacturer, under which U.S. Steel would acquire all of Stelco's shares. As the transaction was subject to review under the ICA, U.S. Steel could not complete the acquisition until the Minister had decided that the transaction was likely to be of net benefit to Canada. In September 2007, U.S. Steel proposed 31 undertakings to the Minister, including two related to employment and production. On October 28, 2007, the Minister approved the acquisition, in part on the basis of the undertakings provided.

On May 5, 2009, the Minister sent a show cause demand to U.S. Steel, notifying U.S. Steel that it was in contravention of two of its undertakings and requiring that U.S. Steel cease the contraventions, remedy the default or show cause why there were no contraventions or justify any non-compliance. Following U.S. Steel's response to the Minister's request, the Attorney General filed an application under section 40 of the ICA with the court, seeking an order directing U.S. Steel to comply with the two undertakings in question, and a penalty of C$10,000 per day, per breach of the undertakings, calculated from November 1, 2008. U.S. Steel subsequently filed a motion alleging that section 40 is unconstitutional.

In its motion, U.S. Steel argued that section 40 of the ICA violates section 11(d) of the Canadian Charter of Rights and Freedoms (Charter), which provides that any person charged with an offence must be presumed innocent until proven guilty in accordance with that paragraph of the Charter, and section 2(e) of the Bill of Rights, which provides that every person shall be provided a right to a fair hearing in accordance with the principles of fundamental justice. Among other things, U.S. Steel argued that:

  • the Charter is engaged by section 40 because application of the section involves the imposition of true penal consequences and is, by its nature, a criminal proceeding;
  • the Minister's application under section 40 causes U.S. Steel to be "a person charged with an offence", as required in order for section 11(d) of the Charter to apply, because: i) the purpose of the legislation is public and not private; ii) the magnitude of the monetary penalty is significant; iii) the failure to pay the monetary penalty leads to contempt proceedings and exposure to a term of imprisonment; iv) the penalty goes to the Consolidated Revenue Fund and not to an internal body to maintain or regulate an internal or private sphere of activity; and v) the penalties are imposed by a court and not a regulator; and
  • the procedure under section 40 does not accord investors the right to a fair hearing in accordance with principles of fundamental justice.

Madame Justice Hansen ruled that section 40 neither breaches the Charter nor the Bill of Rights, and therefore upheld the section. At the end of the day, Justice Hansen held that the purpose of the monetary penalty under the ICA is to "... encourage and promote timely compliance and to enforce compliance with any undertakings and provisions of the legislation" and is "not concerned with a public sphere of activity", as such a proceeding "... arises in the context of a private transaction involving the acquisition of interests in Canadian businesses by private investors." Madame Justice Hansen did not accept that section 40 constitutes an offence for purposes of the application of section 11(d) of the Charter. She also was satisfied that section 40 does not offend the right to a fair hearing in accordance with the principles of fundamental justice, and therefore did not accept that the section violates the Bill of Rights.

3. Implications

A number of implications arise from this decision. First, the decision likely will provide greater comfort to the Minister in respect of his constitutional authority to seek fines against, or seek other remedies from, non-Canadian investors under section 40 of the ICA. Prior to the U.S. Steel decision, there had been no judicial determination of the constitutional validity of a court-ordered penalty under this provision. Investors will need to give careful consideration to agreeing to replacement undertakings under the new section 39.1 of the ICA, or otherwise face possible proceedings. This said, we do not expect that the decision will result in the Minister routinely bringing enforcement actions under the ICA. The US Steel Case is the first such action, notwithstanding that the Minister has accepted hundreds of undertakings since the ICA came into force in 1985. It is unlikely that this case will open the floodgates. On the other hand, it does show that the Minister will use the enforcement tools at his disposal where he believes it is appropriate to do so.

Second, the decision suggests that parties engaged in merger discussions with a foreign buyer will need to seriously consider and "value" possible undertakings into their deal arrangements, including negotiated appropriate conditions of closing and relevant covenants, much in the way that antitrust covenants have come to be negotiated over the past decade in Canada.

Third, the decision may be relevant to other statutes that provide for administrative monetary penalties (AMPs). One such statute is the Competition Act, which provides that the Competition Tribunal may order AMPs in respect of certain deceptive marketing practices and, as of March 2009, for abuse of dominance. While the decision in the US Steel Case and the penalties under the ICA can clearly be distinguished from the Competition Act, it nonetheless represents a case that will be considered closely by any court that may review the constitutionality of AMPs under the Competition Act in the future.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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