With soaring demand for commodities, Canada's resource‐rich economy was a focal point of significant foreign direct investment in 2010. However, it was Canada's foreign investment review process under the Investment Canada Act (the "ICA") that attracted the most headlines when the Government of Canada declined to approve the takeover of Potash Corporation of Saskatchewan ("PotashCorp") by BHP Billiton ("BHP"), the Australian mining giant (the "Potash" decision) in November 2010. Potash is a mineral and the key ingredient in fertilizer. With food shortages globally, it is expected to be in high demand for years to come. Moreover, PotashCorp is the largest global producer of potash with 20% of the world's potash capacity.1
The Potash decision has been the fodder of much public debate within Canada while many foreign investors have wondered whether Canada is as open to foreign investment as previously assumed. A close analysis of the Potash decision suggests that it will be "business as usual" for most foreign investments but that high profile investments in politically sensitive sectors may be scrutinized more carefully in 2011 ‐ especially if there is a Canadian federal election. (The recent proposed merger of the London Stock Exchange and Toronto Stock Exchange will be the latest test case for the ICA review process). This paper also highlights that in a technical statute such as the ICA, the structure and the size of the investment may be critical in determining its reviewability – a point that foreign investors may increasingly consider ‐ for example, by taking only a minority position in Canadian companies. It is also noteworthy that the national security regime introduced in 2009 has not proven to be a protectionist tool for the Canadian Government; based on the public record, national security has been invoked infrequently and only for reasons related to traditional defence concerns.
I. Potash De‐Constructed
The Canadian Government rejected BHP's bid for PotashCorp in November 2010 on the grounds that the transaction would not be of "net benefit to Canada" – the test for Ministerial approval under the ICA.2 The Ministerial assessment of what constitutes "net benefit to Canada" is a relatively subjective process involving generally economic considerations such as the impact of the proposed investment on employment, capital expenditures, head office location and participation of Canadians in senior management. Significantly, it also includes industrial and economic policy objectives of a province likely to be significantly affected by the investment. The broad latitude for decision‐making given to the Minister creates the possibility that the Investment Canada review process may become highly politicized in any given transaction. If this materializes, no matter how closely the investor's commitments appear to track the criteria in the ICA, Ministerial approval may, and in the Potash case did, become hostage to political concerns.
The Potash decision represented only the second time in the history of the ICA that a foreign investment (outside of the cultural sector) has been rejected.3 Moreover, it was widely regarded as a political response to a successful public relations campaign led by the Premier of Saskatchewan (the province in which most of PotashCorp's mines are located) that galvanized popular opposition to the deal not only within Saskatchewan but to a certain extent, across Canada. The Premier of Saskatchewan's objections included concerns over a significant reduction in tax revenues, potash industry jobs and foreign ownership of a "strategic" resource.4 Although BHP had 30 days to convince the Minister of the merits of the deal, it withdrew its application in mid‐November5, making it unnecessary under the ICA for Minister Clement to make a final decision and issue reasons.
In the aftermath of the Potash decision, there is continued confusion about the reasons behind the decision in the absence of a ministerial communication explaining it. Initially, potash was characterized as a "strategic resource" by at least one member of the federal Cabinet6, the implication being that Canada could not afford to lose control of such resources. Later this terminology was dropped (the notion of a "strategic resource" is not in the ICA list of considerations) and the Industry Minister's specific objections to the deal were highlighted in various statements reported in the press. Those objections included that he was not satisfied that BHP was prepared to make sufficient commitments in respect of capital expenditures or PotashCorp's membership in Canpotex.7 The Minister also reportedly questioned whether BHP had sufficient expertise in mining and marketing potash.8
As in most transactions exceeding the review threshold, BHP offered contractual commitments or "undertakings" in respect of many of the ICA factors. The proposed undertakings were very significant and in some respects, unparalleled.9 In the significant category was the commitment to establish Saskatoon as the global headquarters of BHP's potash business which would have meant moving senior management back from Chicago. In the category of likely unprecedented were proposals:
- to remain a member of the Canpotex potash export consortium for five years;
- to forego tax benefits to which BHP was entitled to allay Saskatchewan concerns (apparently tax revenue loss of $2 billion according to a Conference Board report);
- a US$250 million performance bond to the Government to backstop BHP's commitment to comply with its undertakings.
The performance bond was likely to require to allay criticism of the Government by opposition parties and the public that foreign investors have not been complying with the undertakings given to the federal Government to obtain Investment Canada approval.10
Despite these extensive commitments, the undertakings were not, in the Canadian Government's view, sufficient to establish "net benefit", especially in the face of heated opposition to the deal from the Province of Saskatchewan (where the governing Conservative Party has 13 of the 14 seats – of strategic importance in an election year), from certain highprofile members of the business community, several premiers and what appeared to be an upsurge of economic nationalism over the once obscure commodity.
II. Potash After‐Effects
Political Opportunism of Stakeholders
One of the consequences of the Potash decision is that potential stakeholders in the foreign investment review process have learned that political agitation may produce concrete results, at least where the foreign investment is in a significant and politically sensitive industry. In particular, the provinces are now alert to the prospect not only of having a significant influence through the statutory requirement that provincial policies be taken into account but also through their ability to influence public opinion and potentially champion a populist cause. Nevertheless, the Potash case may be singular in that the potash industry plays a very significant role in Saskatchewan's economy and for that province, was viewed as strategically important. By contrast, most provinces have multiple, conflicting stakeholders such that taking an antiinvestment approach may involve a complex and difficult political calculus.
The Potash decision highlighted that early persuasion of stakeholders is key in managing the government and public relations aspects of a foreign investments in high profile transactions. The fact that PotashCorp itself opposed the transaction, at least, at the bid price, made the task of winning support for the deal much more difficult; in a friendly deal, by contrast, the target can play a significant supporting role in advocacy with the federal and provincial governments, among others.
Bolstering Canada's Image as a Welcome Destination for Foreign Investment
The Canadian Government is sensitive to the criticism that its decision in Potash may discourage foreign investment into Canada. As a result, it is quite likely that counterbalancing the increased politicization of the ICA process will be efforts by the Government to show that Canada does indeed welcome foreign investment. One can expect that the Government will be at pains to demonstrate that the Potash case was exceptional and that it will not be held hostage to narrow political interests. For its part, international investors will be monitoring Canada attentively, especially as to prospects for future investments in resource sectors such as oil and gas and perhaps as well in Canadian icons (e.g., the Toronto Stock Exchange).
Undertakings à la Potash
While the Potash decision is almost certainly exceptional, the one undertaking that may reappear in future significant deals is the performance bond. This would allay criticism that the Government too readily countenances non‐compliance with undertakings. It should be noted that this criticism is likely unfounded as in many instances, the Government is simply recognizing (as it does in its Guidelines ‐ Administrative Procedures11) that, if there has been a change in circumstances that makes a commitment to spend certain funds or to achieve a certain level of production uneconomic, forcing an investor to implement such commitments may undercut the viability of the company and therefore, may not be in Canada's long term best interests. Nevertheless, popular outrage at non‐compliance has made this a sensitive political issue and performance bonds in more high profile transactions may be demanded. The terms of such a bond would still, in all likelihood, need to include some type of "escape" or "force majeure" clause that would provide a means of assessing whether the investor was at fault and the extent of any penalty.
Review of the Investment Canada Act
The day after BHP's transaction was rejected, Prime Minister Harper announced that the ICA would be subject to review, but offered no detail on the focus of the review. The Industry Minister has subsequently commented that the transparency of the review process would be scrutinized12 and as noted above, the accountability of foreign investors is also likely to be at the forefront.13 A Parliamentary committee is holding hearings on the ICA in March (2011) to assess the need for amendments to the ICA.
III. New Deal Structures?
The announcement by Cargill in January that it is spinning off its 64% stake in Mosaic Inc., the operator of three large potash mines in Saskatchewan, to its shareholders has raised the possibility of a takeover of Mosaic. Such a transaction may not, however, result in the same kind of political spectacle as BHP's bid for PotashCorp. The main distinctions are that Mosaic is not currently Canadian‐owned and if the deal is structured as a share acquisition of a foreign corporation, the deal would not be reviewable under the "net benefit" test.14 As a result, the Canadian Government would only be able to review the transaction if it could be characterized as "injurious to Canada's national security" – what appears to be a far‐fetched proposition (at least to date).
This possibility highlights the fact that the structure of a foreign investment is critical in determining whether a transaction is reviewable. Apart from indirect acquisitions of a Canadian business (which are not in general reviewable), minority investments of less than a third of a corporation's voting shares may also reduce the economic or political risks of a full takeover because such acquisitions are not subject to "net benefit" review and are therefore not subject to the ICA (unless potentially injurious to Canada's national security). While such an investment may not give a foreign investor de jure control (although it might confer control in fact), the investor may negotiate other benefits such as the right to receive a share of production. These "off‐take agreements" which may be of significant duration are increasingly being used in the resource sector as an alternative means for foreign investors to secure long term access to Canada's natural resources and do not trigger a requirement for foreign investment review.
IV. National Security
Canada's new national security regime has not proven to be the protectionist tool feared by some foreign investors, there being no public evidence that it has been used to prohibit or conditionally authorize a foreign investment in the two years since it was introduced.
Nevertheless, recent Wikileaks disclosure has brought to light why the Canadian Government intervened briefly in a proposed takeover of Forsys Metals by a Belgian company, George Forrest International ("GFI") in August 2009.15 In particular, it appears that both the US and Canadian governments were anxious that GFI, as owner of Forsys' uranium deposit in Nambia, could supply Iran with nuclear fuel and as a result, the Canadian Government issued a notice that would have prevented the parties from closing the deal. While GFI's bid ultimately collapsed for other reasons, this transaction is an interesting example of how the ICA can be used to stop international transactions even where the connection to Canada is tenuous. For example, Forsys has minimal operations in Canada with its only potential revenue‐producing assets being outside of Canada.
Going forward, investors into Canada can be comforted that in most cases Investment Canada review of acquisitions of Canadian companies will not constitute a roadblock to completion. However, in those few deals that may be susceptible to hijacking by political forces, foreign investors need to be aware that the stakeholders in the Investment Canada process are more savvy and more numerous. As a result, foreign investors would be well advised to consult early on with legal counsel, as well as communication specialists in public and governmental relations to formulate strategies to pre‐empt criticism of the transaction.
2 The first proposed transaction to be rejected was the 2008 proposed acquisition by an American company, Alliant Techsystems, of the geospatial business of MacDonald, Dettwiler and Associates Ltd. for (broadly speaking) "national interest" reasons (including the protection of Canadian sovereignty in the Arctic) under the "net benefit" test. Note that the national security screening mechanism was not in place at that time.
3 Technically, the Potash deal was not rejected because BHP withdrew its application prior to the Minister's final decision. However, the reason for BHP's withdrawal, as set out in its press release, was that "BHP Billiton has determined that the condition of its offer relating to receipt of a net benefit determination by the Minister of Industry under the Investment Canada Act cannot be satisfied, and accordingly, the offer has been withdrawn." See http://www.bhpbilliton.com/bb/investorsMedia/news/2010/bhpBillitonWithdrawsItsOfferToAcquirePotashcorpAndReactivatesItsBuybackProgram.jsp .
4 There was also political sensitivity to the sale of a company that many Saskatchewan people thought was still publicly owned. In fact, 51% of PotashCorp was reportedly already foreign‐owned at the time of BHP's bid. See http://www.leaderpost.com/news/Premier+Brad+Wall+ruling+legal+fight+with+feds+over+potash/3761076/story.html .
5 In its press release, BHP stated that any further commitments would have been "counter to creating shareholder value". See footnote 3.
6 Eric Reguly, Andy Hoffman and Brenda Bouw, "BHP's hopes fade as Ottawa calls potash 'strategic'", The Globe and Mail, November 5, 2010, page B1. The federal Minister of Agriculture noted that Potash was a "strategic resource". He added that the Government rejected BHP's bid in part because it decided that the mineral is a "strategic resource" in the global food supply and that Saskatchewan's world‐leading potash reserves give Canada an influential position in the marketing of a key agricultural commodity.
7 See Cassandra Kyle, "BHP Billiton withdraws potash bid, citing 'net‐benefit' bar", Postmedia News, Nov. 15, 2010 at www.canada.com/news/Billiton+withdraws+potash+citing+benefit/3827505/story.html .
8 See Jeffrey, Hodgson, "BHP potash inexperience weighed against bid‐Canada", Reuters, at http://www.reuters.com/article/idUSN1421378920101115.
9 The relatively routine undertakings included commitments to spend $450 million on exploration and development over the next 5 years beyond expenditures on BHP's Jansen project (which BHP already owned), an additional $370 million on infrastructure funds in Saskatchewan and New Brunswick, a listing of BHP on the TSX and increased employment.
10 Government concern over non‐compliance with undertakings was highlighted when it chose to sue US Steel in 2009 for an alleged failure to comply with commitments it made when it acquired Canadian steel‐maker, Stelco, in 2007.
12 Paul Vieira and Jonathan Ratner, Financial Post, November 4, 2010 at http://www.financialpost.com/Harper+says+investment+rules+need+review/3778324/story.html .
13 Interestingly, it was only recently – in 2008 – that the Government received the report of the blueribbon Competition Policy Review Panel (led by businessman Lynton Wilson) that had been commissioned to consider the implications of the ICA for Canada's competitiveness. The Panel recommended numerous changes to the ICA to streamline the foreign investment review process. In particular, the Panel strongly supported greater transparency, predictability and timeliness of decision‐making in the review process.13 It also recommended requiring the Minister to report publicly on the disallowance of a transaction and the reasons for such rejection and requiring the responsible bureaucrat under the ICA to report annually on the administration of the ICA, including an overview of transactions subject to the ICA. In addition, the Panel recommended improving the administration of the ICA by increasing the use of guidelines and other advisory materials to explain the basis of making decisions and clarifying interpretations by Industry Canada on the application of the ICA. In response to the Panel's recommendation, the ICA was amended in March 2009 to include a requirement for publication of an annual report to Parliament on the ICA and for the Government to issue reasons for its decision in the case of a rejection and permitting (but not requiring) the Minister to do so in the case of an approval. There have not been any new guidelines on the administration of the ICA since the Panel's report.
14 Such indirect acquisitions are only subject to review where the target is in the cultural sector or where neither the target nor the seller is ultimately controlled by nationals of World Trade Organization (WTO) member countries. Even if subject to review, Ministerial approval can be delayed until after closing which tends to diminish the Government's leverage.
15 See Campbell Clark, "Nuclear Worries Behind Failed Forsys Deal: WikiLeaks", Globe and Mail at http://m.theglobeandmail.com/report‐on‐business/industry‐news/energy‐and‐resources/nuclearworries‐behind‐failed‐forsys‐deal‐wikileaks/article1872429/?service=mobile ,
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