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.
ARTICLE
20 October 2010
Canada v US Steel: Recent Developments Under the Investment Canada Act
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.