Potash, once a relatively obscure commodity, became the unlikely
centre of a foreign investment review controversy in Canada in 2010
as the Canadian Government rejected BHP Billiton's bid for
Potash Corporation of Saskatchewan (PotashCorp.) under the
Investment Canada Act's "net benefit to
Canada" test. The decision raised concerns that Canada was
closing the door on foreign investment.
However, the circumstances surrounding the Potash decision
suggests that it will be "business as usual" for most
foreign investments, although high profile investments in
politically sensitive sectors may be more carefully scrutinized.
The Potash decision is widely regarded as the result of the
confluence of two factors:
the intense public relations campaign led by the Premier of
Saskatchewan (the province in which most of Potash
Corporation's mines are located) to characterize potash as a
"strategic asset". Premier Wall was successful in
galvanizing popular opposition to the deal not only in Saskatchewan
but also across Canada; and
the minority government status of the reigning Conservative
party in an election year (which made it more vulnerable to the
highly charged public opinion).
The Potash decision is only the second time in the history of
the Investment Canada Act (outside of the cultural sector) for a
deal to be rejected. The first was the 2008 proposed acquisition by
an American company, Alliant Techsytems, of the geospatial business
of MacDonald, Dettwiler and Associates Ltd. for national interest
reasons relating to the protection of Canadian sovereignty in the
Arctic and of Canadian‐funded technology.
The calculus as to what constitutes a "net benefit to
Canada" is an elastic one based generally on economic
considerations (such as the impact of the proposed investment on
employment, capital expenditures, head office location,
participation of Canadians in senior management) but also including
industrial and economic policy objectives of a province likely to
be significantly affected by the investment. As a result, the
Canadian Minister of Industry has broad discretion under the
Investment Canada Act.
The Potash decision has highlighted to foreign investors the
potential for Canadian stakeholders affected by a proposed foreign
takeover to lobby the Government to advance their own ends,
especially where the target is a Canadian icon or in a high profile
or politically sensitive sector. In particular, provinces are now
alert to the possibility of having a significant influence by
shaping public opinion. This underscores the importance for
investors to consult early on with legal counsel and
public/government relations specialists to pre‐empt
possible backlash against a transaction.
In addition, foreign investors may wish to address uncertainty
raised by the Potash decision by making minority investments and/or
entering supply agreements instead of acquiring ownership
interests. Minority investments of less than a third of a
corporation's voting shares may reduce the economic or
political risks of a full takeover because such acquisitions are
not subject to "net benefit" review under the
Investment Canada Act (unless they would be potentially
injurious to Canada's national security). In the resource
sector in particular, foreign businesses may also wish to negotiate
a right to receive a share of production or an
"off‐take agreement" as an alternative means of
securing long term access without triggering review under the
Investment Canada Act.
Shortly after BHP's transaction was rejected, Prime Minister
Harper announced that the ICA will be subject to review. This
review will likely cover the transparency of the review process,
the review criteria and holding investors accountable for their
commitments to the Government. In the meantime, foreign investors
would be well‐advised to monitor the Government's
review of proposed merger of the Toronto Stock Exchange and London
Stock Exchange. This merger will serve as a test of the
Government's avowed openness to foreign investment.
About Fraser Milner Casgrain LLP (FMC)
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