The May 2, 2011 Canadian federal election resulted in the Conservative Party forming its long sought majority government (now with 167 seats in the House of Commons, up from 143 seats). The New Democratic Party ("NDP") now forms Her Majesty's Loyal Opposition (with 102 seats, up from 36 seats), which was the role the Liberal Party held prior to the election. This bulletin discusses the implications of the election on the administration and enforcement of Canadian foreign investment regulation under the Investment Canada Act, the Telecommunications Act, and the Radiocommunication Regulations, and implications for the Competition Act, including the possibility of changes to such legislation.
1. Investment Canada Act
The shift in power in the House of Commons will create a new dynamic in the debate about the relevance and application of the Investment Canada Act. Among the federal parties, the Conservative Party has arguably been the strongest proponent of liberalizing foreign investment rules in Canada. For example, it was the Conservatives that appointed the Competition Policy Review Panel (known as the " Wilson Panel") in 20071 and, based on the recommendations of the Wilson Panel, amended the Investment Canada Act in March 2009 to (i) raise the monetary threshold for review for direct investments by WTO investors (notwithstanding that, as discussed below, such new thresholds are not yet in force)2, and (ii) remove a monetary threshold for review that was lower than the WTO investor threshold, that was applicable to investments involving transportation services, uranium mining or production, or financial services.3 The Conservatives also (i) removed foreign ownership restrictions in respect of Canadian telecommunications satellite service providers; (ii) overturned a Canadian Radio-television and Telecommunications Commission ("CRTC") decision against Wind Mobile (which held that Globalive Communications Corporation ("Wind Mobile") did not satisfy applicable Canadian ownership requirements), thereby enabling Wind Mobile to remain in Canada and compete with the larger telecommunications service providers, and (iii) did not oppose Amazon's opening of a Canadian fulfillment centre warehouse in Canada in 2010, despite vocal opposition by some Canadian stakeholders.
At the same time, however, Conservative support for foreign investment has not been unqualified. After all, the only formal rejection of an investment (not involving a cultural business) under the Investment Canada Act was made by a Conservative Government in 2008, namely, Alliant Techsystems Inc.'s proposed takeover of MacDonald Dettwiler and Associates Ltd.;4 then, there was the abandonment by BHP Billiton Plc ("BHP") of its bid for Potash Corp. last year, which followed an interim decision by the Minister of Industry (the "Minister") that BHP's proposed acquisition did not, based on the plans and undertakings submitted by BHP, satisfy the "net benefit to Canada" test under the Investment Canada Act.5 There is also ongoing litigation – the first of its kind – between the Government of Canada (the "Government") and United States Steel Corporation ("US Steel") over the enforcement of undertakings given by US Steel to secure approval under the Investment Canada Act in connection with its acquisition of Stelco Inc. in 2007. As part of the March 2009 amendments referred to above, the Conservatives also introduced a national security review process into the Investment Canada Act.6
By contrast, the NDP, the official opposition in the House of Commons, is arguably the most vocal critic of foreign investment in Canada and the manner in which the Investment Canada Act has been administered. In particular, the NDP was ardently opposed to the proposed acquisition of Potash Corp. by BHP and remains highly critical of the review process under the Investment Canada Act. For example, in November 2010, in response to the BHP bid, the NDP brought a motion in the House of Commons that asked Parliament to take immediate steps to amend the Investment Canada Act by, among other things: requiring public hearings as part of the foreign investment review process; ensuring that such hearings are open to all parties directly affected by the investment; and ensuring that all conditions attached to approval of a takeover as well as commitments made to satisfy those conditions be made public.7 The NDP's position was repeated in its platform for the 2011 federal election, which also called for the threshold for investment review to be lowered to $100 million (down from the current $312 million), and also clarified its position that public hearings should be required for both assessing "net benefit to Canada" and the imposition of conditions on the investment.8 Although the Conservative majority ensures that the Government will not (in theory) be compelled to amend the Act to accommodate the NDP, the Act will almost certainly continue to be a topic of debate in Parliament and opposition to the Act's current structure will likely be more vocal given the NDP's new status in the House.
The following is a summary of some of the challenges and issues that the new Conservative government must address in connection with the Investment Canada Act :
(a) TMX-LSE Merger
The merging parties recently announced that they had made a filing under the Investment Canada Act.9 Pursuant to the Act, the Minister will need to determine whether the proposed merger is of "net benefit to Canada". A special committee of the Ontario Legislature (the "TMX/LSE Committee") has developed a menu of issues and open-ended recommendations (set out in a report released in April 201110) that, if satisfactorily addressed by the merging parties, would presumably satisfy any concerns of the Ontario Liberal Government (which has a majority of members on the TMX/LSE Committee). However, it is not certain that the merging parties will in fact address these issues to Ontario's satisfaction. Minister Tony Clement will, in evaluating the proposed transaction and undertakings offered in support of it, consider among other things, the issues and recommendations raised in the TMX/LSE Committee's report and concerns raised by other affected provinces and other stakeholders.
In making his decision, the Minister will be sensitive to concerns that a rejection may feed misconceptions that Canada is less friendly to foreign investment than it has been, especially having regard to BHP's abandonment of its bid for Potash Corp. last year. On the other hand, if the proposed merger is rejected, the Minister could point to the fact that Canada is not alone in its concerns about foreign ownership of domestic stock exchanges – in April 2011, the Australian Foreign Investment Review Board rejected the proposed acquisition of ASX Limited (i.e. Australia's primary stock exchange) by Singapore Exchange Limited.11
(b) Investment Canada Regulations
Pursuant to amendments to the Investment Canada Act on March 12, 2009,12 the monetary thresholds for Ministerial review of foreign direct acquisitions of Canadian businesses was, subject to implementing amendments to the Investment Canada Regulations, increased substantially and changed to use "enterprise value" (i.e. essentially, market value) of the proposed investment, rather than the gross book value of assets of the Canadian business, which is the current valuation method. Even though two years have passed since the amendments to the Investment Canada Act, amendments to the Investment Canada Regulations have not yet been made and, as such, the change in monetary thresholds is still not in effect. It may be that the Government is re-evaluating whether a substantial increase in the relevant monetary threshold and the proposed enterprise value test continue to correspond with the Government's objectives or the types of investments that it has recently seen. Again, while the Conservatives are supporters of foreign investment, their support is not unqualified.
(c) Review of the Investment Canada Act in the wake of BHP-Potash Corp.
After the interim disallowance of BHP's bid for Potash Corp. and BHP's subsequent abandonment of the bid, there was pressure on the Government to disclose details about the disallowance and add transparency to the review process pursuant to which "net benefit to Canada" is determined by the Minister. In response, Minister Tony Clement has noted that the Investment Canada Act limits the government's ability to disclose details of negotiations with proposed investors and the undertakings they may give to secure approval.13 The Minister has also stated that he wishes to "make absolutely sure that no one is saying there is not clarity in how we review these kinds of investments."14
After some debate in the House of Commons, the House of Commons Standing Committee on Industry, Science and Technology (the "Industry Committee") undertook to review the Investment Canada Act in light of the concerns raised by the review of the BHP bid for Potash Corp. Matters discussed at the Industry Committee included, among other things, whether transparency in the Minister's decision-making process should be enhanced; whether some or all of the undertakings given to the Government by an investor should be publicly disclosed; and, the efficacy of the "net benefit to Canada" standard and related enforcement. The election curtailed the Industry Committee's review of the Act and it remains to be seen whether the reconstituted Industry Committee will continue a review of the Act. In any event, it is likely that only modest revisions to the Act may be required to enable the Minister to provide more information about reviewed transactions; nevertheless, the issues about confidentiality for investors (and other stakeholders that may provide input into the review process) will need to be carefully considered.
If the Government decides to elaborate on the considerations for "net benefit to Canada", it remains to be seen whether it will distinguish investments that involve so-called "strategic" resources or assets from other investments, and if such distinction were made, how such investments might be treated differently. The reference to "strategic" resources or assets was used by the Premier of Saskatchewan, Brad Wall, and some members of the federal opposition parties to describe Potash Corp.'s business during the review of BHP's bid.15 Following the Minister's announcement of the interim disapproval of BHP's bid for Potash Corp. under the Investment Canada Act, the federal Agriculture Minister, Gerry Ritz, characterized potash as a "strategic" resource for Canada in the global food supply, and suggested that this consideration may have played a part in the Minister's decision under the Investment Canada Act.16 In our view, it is unlikely that the Government will establish a category of "strategic" investments.
(d) Review of Investment Policy in Book Publishing
In July 2010, following recommendations of the Wilson Panel that called for a review of cultural industry polices every five years, the Department of Canadian Heritage announced that it would review the Government's foreign investment policy for the book industry (the "Book Policy"), and in connection with this review, issued a discussion paper17 that included a solicitation of views from stakeholders.18 The Book Policy works in tandem with the Investment Canada Act, and sets outs conditions for foreign investment in the Canadian book industry. The review will consider whether the Book Policy should remain unchanged or be revised in the interest of promoting competition in the book publishing, distribution and retail sectors of the industry, and to contribute to the broader objective of ensuring that Canadian cultural content is created and accessible in Canada and abroad. The election having returned the Conservatives to power, we expect that this review will continue as planned.
2. Foreign Investment in the Telecommunications Sector
The Conservatives have expressed their intention to "...open Canada's doors further to ... foreign investment in key sectors, including the satellite and telecommunications industries"19 as a means of increasing competition and innovation in these industries, and have already exempted satellite operators from Canadian ownership requirements. In its term prior to the 2011 election, the Conservative Government also over-turned a decision of the CRTC that Wind Mobile did not satisfy the Canadian ownership requirements under the Telecommunications Act, thereby permitting Wind Mobile to continue to operate in Canada as a new entrant wireless provider.20 In June 2010, the Minister announced a consultation to consider three options for reforming the existing restrictions on foreign investment in telecommunications carriers; namely (1) to increase the cap on foreign direct investment in telecommunications carriers to 49%; (2) to exempt telecommunications carriers with less than a 10% share of Canadian telecommunications revenues from foreign ownership restrictions; and (3) to eliminate the foreign ownership restrictions for all telecommunications carriers.21 Announcement of the Minister's determinations based on the consultation was originally expected in the Fall of 2010 but was deferred at that time to coincide more closely with the release of the rules for the 700 MHz spectrum auction. Those rules are expected to be released later this year. With a majority government, the Conservatives may move more quickly and decisively to liberalize foreign ownership restrictions in the telecommunications industry.
3. Competition Act
We do not anticipate any amendments to the Competition Act or changes in competition law enforcement policies that can be attributed to the achievement of a majority government by the Conservatives, as the previous Conservative Government enacted most of the changes recommended in the Final Report of the Wilson Panel.
Nor do we expect that the change from a minority to a majority Conservative government will affect the enforcement policy of the Competition Bureau. First, the Bureau considers itself to be, and for most purposes is, an independent law enforcement agency. Second, in general, competition law enforcement policy in Canada has not been influenced by differences in the political ideology of the ruling political parties.
1 For further information about the Wilson Panel and the legislative amendments that followed the Wilson Panel's Final Report, see our previous bulletins: "Competition Policy Review Panel Proposes National Competitiveness Agenda", online: http://www.fasken.com/competition_policy_review/; "Prime Minister's First Response to the Report of the Competition Policy Review Panel", online: http://www.fasken.com/competition_policy_response_sept2008/; "Re-election of Conservative Government Brings Proposed Changes to Canadian Competition and Foreign Investment Laws Closer to Reality", online: http://www.fasken.com/en/november_2008_acm_bulletin/; "Dramatic Changes to Canada's Competition and Foreign Investment Review Laws Proposed in Bill C-10", online: http://www.fasken.com/en/acm_bulletin_february2009/; and, "Substantial Changes to the Competition Act and Investment Canada Act Enacted – Businesses Must React", online: http://www.fasken.com/en/acm_march2009/.
2 The amendments (subject to the promulgation of amended regulations) raise the review threshold for WTO investors under the Investment Canada Act from $312 million based on book value of assets to $600 million based on "enterprise value". Over an approximately four-year period, the $600 million threshold would be increased to $1 billion.
3 Bill C-10, An Act to implement certain provisions of the budget tabled in Parliament on January 27, 2009 and related fiscal measures, 2d Sess., 40th Parl., 2009 (assented to 12 March 2009).
4 See our previous bulletin "Investment Canada's First Disallowance – Perfect Storm or a Change in Wind Direction?", online:http://www.fasken.com/en/antitrust_competition_and_marketing_bulletin_may2008/.
5 See BHP Billiton, News Release, "BHP Billiton Withdraws Its Offer To Acquire PotashCorp and Reactivates Its Buy-back Program" (15 November 2010), online: BHP Billiton http://www.bhpbilliton.com/bb/investorsMedia/news/2010/bhpBillitonWithdrawsItsOfferToAcquirePotashcorpAndReactivatesItsBuybackProgram.jsp.
6 A national security review mechanism for foreign investments in Canada had been debated for a number of years and was also recommended by the Wilson Panel. When the national security review regime was enacted, it was generally supported or not specifically opposed by other federal parties. The Conservative Government also declined to adopt certain recommendations of the Wilson Panel that would have favoured foreign investors, such as (1) changing the current "net benefit to Canada" standard of review (and reversing its onus) to "not contrary to Canada's national interest", and (2) creating a de minimus cultural business exemption (based on a revenue threshold) so that businesses whose core business is not cultural would not be subject to review on the basis of that non-core cultural business.
7 House of Commons Debates, No. 94 (4 November 2010) (Hon. Jack Layton), online: Parliament of Canada http://www.parl.gc.ca/HousePublications/Publication.aspx?Language=E&Mode=1&Parl=40&Ses=3&DocId=4763457#Int-3470948.
8 See NDP 2011 party platform, "Giving your Family a Break – Practical First Steps", online: NDP http://xfer.ndp.ca/2011/2011-Platform/NDP-2011-Platform-En.pdf. at 9.
9 The proposed merger is also subject to pre-merger notification under the Competition Act.
10 Ontario, Legislative Assembly, Select Committee on the Proposed Transaction of the TMX Group and the London Stock Exchange Group, "Final Report" (19 April 2011), online: Ontario Legislature, http://www.ontla.on.ca/committee-proceedings/committee-reports/files_pdf/Final-Select-Report-TMX-LSEG-(English).pdf.
11 Australian Foreign Investment Review Board, Media Release, no. 030, "Foreign Investment Decision" (8 April 2011), online: FIRB, http://ministers.treasury.gov.au/DisplayDocs.aspx?doc=pressreleases/2011/030.htm&pageID=003&min=wms&Year=&DocType.
12 Bill C-10, An Act to implement certain provisions of the budget tabled in Parliament on January 27, 2009 and related fiscal measures, 2d Sess., 40th Parl., 2009 (assented to 12 March 2009).
13 See E. Rocha, "Canada to delay changes on foreign investment rules", Reuters (15 December 2010), online: Reuters http://www.reuters.com/article/2010/12/15/canada-investmentact-idUSN1516009120101215.
14 B. Bouw, T. Kiladze and S. Chase, "BHP withdraws Potash bid", The Globe and Mail (14 November 2010), online: The Globe and Mail http://www.theglobeandmail.com/globe-investor/potash/bhp-withdraws-potash-bid/article1798568/.
15 See, e.g., B. Wall, Premier of Saskatchewan, (Speech to the Saskatchewan Chamber of Commerce, Conexus Arts Centre, Regina, Saskatchewan, 21 October 2010), online: The Globe and Mail http://www.theglobeandmail.com/globe-investor/potash/premier-walls-speech-on-proposed-takeover-of-potash-corp/article1768003/.
16 House of Commons Debates, supra, note 7.
17 Canada, Department of Canadian Heritage, Investing in the Future of Canadian Books – Review of the Revised Foreign Investment Policy in Book Publishing and Distribution – Discussion Paper – July 2010, (Ottawa; Her Majesty the Queen in Right of Canada, 2010), online: Canadian Heritage http://www.pch.gc.ca/eng/1278337305994/1272487307376.
18 The consultation process in now closed.
19 Her Excellency the Right Honourable Michaëlle Jean, "Speech from the Throne", (Parliament of Canada, 3 March 2010), online: http://www.sft-ddt.gc.ca/eng/index.asp.
20 The Government's decision was overturned by the Federal Court of Canada. An appeal of the Federal Court decision is scheduled to be heard in May 2011.
21 Canada, Industry Canada, Opening Canada's Doors to Foreign Investment in Telecommunications: Options for Reform – Consultation Paper – June 2010, (Ottawa: Communications and Marketing Branch, Industry Canada, 2010), online: Industry Canada http://www.ic.gc.ca/eic/site/smt-gst.nsf/eng/sf09919.html. Option 1, as set out in the Consultation Paper, would also apply to broadcasting undertakings. In the case of option 2, the market share would be measured at the time of the investment.
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