Canada: Federal Court Of Appeal Affirms Sanctions Under Investment Canada Act

Copyright 2011, Blake, Cassels & Graydon LLP

Originally published in Blakes Bulletin on Competition, Antitrust & Foreign Investment, May 2011

On May 25, 2011, the Federal Court of Appeal released a decision in United States Steel Corporation and U.S. Steel Canada Inc. v. The Attorney General of Canada (US Steel Case) affirming the Federal Court (Trial Division) decision and upholding the constitutionality of remedies, including monetary penalties, available under sections 39 and 40 of the Investment Canada Act (the ICA). The decision further confirms the enforceability of the undertakings that investors typically enter into with the responsible Minister under the ICA when the investment is subject to review.

1. Overview of Relevant Provisions of ICA

As indicated in our June 2010 Blakes Bulletin, 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. Any such undertaking represents a binding commitment. Because circumstances can, and sometimes do, change, the Minister's Administrative Guidelines state that:

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. Regardless, 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 Decisions

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 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. 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 challenging the validity of sections 39 and 40 of the ICA.

In its motion, U.S. Steel argued that sections 39 and 40 infringed 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 Canadian Bill of Rights (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:

• sections 39 and 40 of the ICA create a "punitive regime" which engages the Charter because application of these sections 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.

As reported in the June 2010 bulletin, U.S. Steel's motion was (first) dismissed by Madame Justice Hansen at the Federal Court. On May 25, 2011, U.S. Steel's appeal was dismissed by Justice Nadon in a unanimous judgment at the Federal Court of Appeal affirming Justice Hansen's ruling. Justice Nadon ruled that sections 39 and 40 neither breach the Charter nor the Bill of Rights therefore upholding the sections. Justice Nadon agreed with Justice Hansen's judgment that the purpose of the sanction is "to maintain compliance with the Act and with undertakings made under it". Section 40 proceedings brought by the Minister were found to "lack the indicia of penal proceedings" with the result that they are "not criminal by their very nature" and "do not lead to true penal consequences." Thus, section 40 proceedings under the ICA were found to be consistent with section 11(d) of the Charter. Justice Nadon further ruled in agreement with Justice Hansen that section 40 proceedings under the ICA do not infringe the right to a fair hearing in accordance with the principles of fundamental justice and are therefore consistent with the Bill of Rights.

3. Implications

The Federal Court of Appeal's decision affirms the Minister of Industry's power to seek fines against, or seek other remedies from, non-Canadian investors under section 40 of the ICA, including the constitutional validity of these orders. This said, we do not expect that the decision will result in the Minister routinely bringing enforcement actions under the ICA. This case is the first such action, notwithstanding that the Minister has accepted hundreds of undertakings since the ICA came into force in 1985.

As indicated in the June 2010 bulletin, 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.

The decision opens the possibility that section 40 proceedings under the ICA may attract Charter protection when national security is used by the Minister to assess a non-Canadian application. Although national security was not at issue in this case, Justice Nadon's judgment suggests that a section 40 proceeding with a purpose that relates to national security (i.e., beyond mere compliance with the ICA) could be characterized as criminal or penal and subsequently attract Charter protection. To date, this has not been considered by any court in Canada and therefore, non-Canadian investors should nonetheless carefully consider undertakings made under the ICA.

As indicated in the June 2010 bulletin, the decision – as an appellate decision – will be relied upon in support of the constitutional validity of other statutes that provide for administrative monetary penalties (AMPs), such as the Competition Act. Indeed, the Competition Act's AMP provisions seem – in their specificity of direction to the Tribunal or Courts – to be equally if not more likely to be upheld as constitutionally valid following the reasoning of the Federal Court of Appeal in this case.

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