During a September interview with Bloomberg Business, Canada's Prime Minister Stephen Harper provided additional insight into the role that the regulation of foreign investment will continue to play in Canada and, in particular, as to how the Investment Canada Act will be administered by his majority government.
This information is particularly important in the aftermath of the 2010 abandonment by BHP Billiton Plc of its bid for Potash Corp. following an interim decision by then Industry Minister Tony Clement that BHP's proposed acquisition did not, based on BHP's plans and undertakings, satisfy the "net benefit to Canada" test under the Investment Canada Act. The rejection of BHP's proposed acquisition raised questions in the minds of non-Canadian investors as to how welcoming the Harper government will be to future foreign investment.
Asked about the BHP decision, Mr. Harper offered, "if [the transaction] had been in Australia, to put the shoe on the other foot, I don't believe that takeover would have been approved. I think the objectives of BHP, in fairness, probably were beyond merely what we would consider good business in a market sense, but probably more an issue of strategic positioning, and that strategic positioning was obviously not in the interest of the Canadian economy." He then is reported by Bloomberg Business to have confirmed that Canada welcomes investment by China and other countries, as long as such acquisitions are "economic in nature and don't have other strategic or political objectives."
Continued Liberalization of Foreign Ownership Restrictions
Prior to the 2011 federal election, the ruling Conservative Party had expressed its intention to "...open Canada's doors further to ... foreign investment in key sectors, including the satellite and telecommunications industries"1 as a means of increasing competition and innovation in these industries. One of the notable changes implemented at that time was the exemption of satellite operators from Canadian ownership requirements.
The Industry Minister had also 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.
During his September interview, the Prime Minister stated that "our government is looking at ways of liberalizing investments in a number of sectors" and, accordingly, the previously announced liberalization process appears to be ongoing. But Mr. Harper did temper that comment with the further observation that "the challenge for a government is one would never want a situation where we liberalize the rules, and the immediate result was the loss of all Canadian presence in the sector, so we're obviously proceeding with some caution."
It seems clear that, while Canada continues to favour greater foreign presence in some industry sectors especially where such presence increases competition in the marketplace2, it intends to balance that liberalization by ensuring that such openness does not result in a "loss of all Canadian presence in the sector" affected by the changes. This suggests that, while foreign ownership restrictions in certain industry sectors may be removed or softened, the approval process under the Investment Canada Act will continue to play a role in helping ensure that Canadian participation in such sectors continues.
Transparency of Decision Process
After the interim disallowance of BHP's bid for Potash and BHP's subsequent abandonment of that bid, there was considerable pressure on the Harper government to add transparency to the review process pursuant to which "net benefit to Canada" is determined by the Industry Minister. Because 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, then Industry Minister Tony Clement was hampered in providing an explanation for his interim decision in that case.
After some debate in the House of Commons, the House of Commons Standing Committee on Industry, Science and Technology ("Industry Committee") undertook to review the Investment Canada Act in light of the concerns raised by the BHP deal. 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 ensuing Canadian election interrupted the Committee's review.
During his interview, Prime Minister confirmed that his government is continuing to review whether it can make changes to the law that would allow the government to communicate more freely without hurting companies attempting to buy Canadian assets by disclosing commercially sensitive information. He stated, "the government, at the same time, has to communicate with the public, and I think we should be in a position where we can communicate more. We do have to be able to have flexibility, and we do have to be able to be in a position where we can assure investors that we're not operating from a prejudicial viewpoint."
The need for more transparency in the review process was reinforced by a recent study issued by The School of Public Policy of the University of Calgary.3 The study's author, Lawrence Herman, states, "when a foreign acquisition is approved or rejected, the Industry Minister should be required to issue public reasons. Where investment approvals are given subject to undertakings, the general outlines should be made public."
There appears to be general support for the position that greater transparency and public disclosure will make foreign investors more confident that the Canadian foreign investment regulatory process is fair and objective and, as such, non-Canadians will be more willing to undertake investments in Canada.
Not mentioned in the reported interview was the timing for the introduction of the new regulations required to bring into force the 2009 amendments to the Investment Canada Act changing the method of calculating the monetary thresholds that determine which foreign investments will be subjected to its review and approval process.
Pursuant to those amendments, the monetary thresholds for Ministerial review of foreign direct acquisitions of Canadian businesses were, 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 remains at this date over 2 years later the current valuation method.
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. The absence of any comment concerning the current status of the new regulations may be telling in and of itself.
1. Her Excellency the Right Honourable Michaëlle Jean, "Speech from the Throne", (Parliament of Canada, 3 March 2010), online: www.sft-ddt.gc.ca/eng/media.asp?id=1388.
2. Arguably evidenced by the Conservative Government's over-turning of 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.
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