Canada: Canada v US Steel: Recent Developments Under the Investment Canada Act

Last Updated: October 20 2010

* Article by Sue-Anne Fox

Originally published in IBA's North American Regional Forum News, vol. 1, no. 1 | October 2010

For the first time in the 25-year history of the Investment Canada Act, Canada's foreign investment review legislation, the Canadian Government is suing a foreign investor for failing to honour commitments it made when it acquired a Canadian business. In July 2009, the Minister of Industry filed a Notice of Application with the Federal Court of Canada seeking an order to require United States Steel Corporation to fulfill undertakings it made to the Canadian Government when it acquired Canadian steelmaker Stelco Inc in 2007.1 The Minister requested that the Court order US Steel to: (i) increase steel production in Canada and maintain employment levels; and (ii) pay an 'administrative monetary penalty' ('AMP') of C$10,000 per day for breach of the undertakings.

When US Steel acquired Stelco, it undertook, among other commitments, to increase steel production in Canada by at least ten per cent and maintain Canadian employment levels. Instead, it closed most of Stelco's Canadian operations and laid off over 1,500 employees. According to court filings, US Steel has taken the position that it has not breached its undertakings because they require compliance to be measured at the end of their three-year term as opposed to a point in time within the three-year period. The company has also asserted that investors should not be held accountable for breaches due to factors beyond their control. For this, the company relies on guidelines issued by the Investment Review Division ('IRD') of Industry Canada stating that an investor will not be held accountable for breaching a commitment 'where inability to fulfill an undertaking is clearly the result of factors beyond the control of the investor.' US Steel also claims that the enforcement proceedings violate its rights under the Canadian Charter of Rights and Freedoms and the Canadian Bill of Rights.

US Steel's production undertaking provides that it 'will increase the annual level of production at the facilities of the Canadian Business by at least ten per cent over the Term.' Similarly, its employment undertaking provides that 'over the Term, [it] will maintain an average aggregate employment level at the Canadian Business of not less than 3,105 employees on a full time equivalent basis.' The undertakings define 'term' as three years from the date of the completion of the investment. Whether US Steel has breached the these undertakings will depend in part on whether compliance is required throughout the term or only at its end. It is also unclear how the Court will react to US Steel's suggestion that any inability to fulfill its undertakings is due to factors beyond its control.2 The IRD's guidelines were likely not intended to allow investors to breach multiple undertakings that formed the basis upon which the Minister concluded that the investment would be of 'net benefit' to Canada. Some media reports in 2009 suggested that US Steel was increasing production at facilities in the United States. That may raise questions about the extent to which the Canadian plant closures were truly 'the result of factors beyond the control of the investor' as opposed to a business decision to concentrate production in the United States.

In June 2010, the Federal Court of Canada released its decision on US Steel's claim that the proceedings were unconstitutional. The Court upheld the constitutional validity of the process and penalties for enforcing the Investment Canada Act.3 On 23 July 2010, the Federal Court of Appeal rejected US Steel's request to stay the enforcement proceedings pending its appeal of the Court's decision on the constitutional challenge.4

This case is an important reminder that the Canadian Government considers Canada's foreign investment review regime to be important and will enforce undertakings in cases involving material non-compliance. However, the Minister of Industry has also said that he has no intention of discouraging foreign investment and that '[w]e welcome foreign investors who can create jobs and opportunities for Canadians, who want to pursue research and development in Canada.' The government also amended the Investment Canada Act in 2009 to reduce the number of acquisitions subject to review. Shortly before the amendments were enacted, the Minister said, 'We are reducing the challenges currently facing international investors who want to invest here. This is critical, because international investment is vital to our country. It spurs innovation and enhances productivity. It makes our economy more dynamic and better able to compete in world markets. It provides greater access to capital and ideas, enabling Canadian companies to expand and improve. And it creates more jobs for Canadians.'

The US Steel case also serves as a reminder that investors should carefully assess business plans before entering into commitments with the government because future economic conditions are impossible to predict with certainty.

Investors should also expect the IRD to be more concerned about its ability to enforce undertakings in the future. More stringent drafting of undertakings (especially with respect to performance measurements) and more frequent compliance reporting (to increase the detection of possible violations) are likely to be the norm. However, absent similarly extreme circumstances, investors should expect enforcement actions to be the exception, rather than the rule.

The case is far from over. US Steel plans to appeal the constitutional issue and is expected to file a motion for an expedited hearing. The enforcement proceedings will now go ahead. Although no hearing date has yet been set, US Steel has requested an extension of time for it to deliver its responding material. Canadian lawyers can be expected to continue to watch this case closely given that the decision may have important implications for both the manner in which undertakings are drafted and enforced.

* Sue-Anne Fox is an associate in the Competition and Internationa 14 l Bar Asso ciation Le gal Pra cti ce Division Business immigration in Mexico Antitrust, and Foreign Investment Review Groups of Torys LLP in Toronto, Ontario. She would like to thank Omar Wakil for his comments on an earlier version of this article.

Footnotes

1 Under the Investment Canada Act, foreign investors must establish that their investment is 'likely to be of net benefit to Canada.' The Minister's approval is usually conditional upon investors entering into binding three to five-year undertakings with the government in which investors make commitments with respect to Canadian operations, production levels, employment levels, R&D expenditures and capital expenditures.

2 In practice, it is often possible to negotiate new or revised undertakings when an original commitment cannot be fulfilled. It is widely believed that a number of investors were released from commitments or negotiated revised undertakings because recent market conditions made it difficult to comply with undertakings entered into two or three years ago.

3 See Canada (Attorney General) v United States Steel Corporation, 2010 FC 642.

4 United States Steel Corporation v Canada (Attorney General), 2010 FCA 200.

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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