On December 12, 2011, Canada's federal Minister of Industry,
the Honourable Christian Paradis, announced that the Canadian
government will discontinue its application for an order requiring
U.S. Steel to abide by certain undertakings provided under the
Investment Canada Act (the "ICA") in connection
with U.S. Steel's acquisition of Stelco in 2007. The Canadian
government agreed to discontinue proceedings in exchange for U.S.
Steel's commitment to what the government describes as
"significant new and enhanced undertakings" in respect of
its Canadian business.
The government brought an application after U.S. Steel shut down
most of its Canadian operations in 2009. U.S. Steel argued that it
was justified in doing so under ICA guidelines which provide that
foreign investors will not be held accountable for non-compliance
with undertakings where the "inability to fulfil a commitment
is clearly the result of factors beyond the control of the
investor". The Canadian government took a different view and
commenced proceedings in Federal Court for an order requiring U.S.
Steel to comply with its undertakings and pay $10,000 in penalties
for each day that it was in breach of these commitments. This
marked the first time that the Canadian government had applied to a
court to enforce ICA undertakings.
As part of its defence to the Canadian government's
application, U.S. Steel challenged the constitutionality of the
ICA's enforcement provisions. U.S. Steel alleged that the ICA
enforcement process violated the right to be presumed innocent and
the right to have a fair hearing, as enshrined in the Canadian
Charter of Rights and Freedoms, as well as the right to a fair
hearing provided for in the Canadian Bill of Rights. Both
the Federal Court, Trial Division and the Federal Court of Appeal
dismissed U.S. Steel's constitutional arguments. In particular,
the Courts held that the ICA is not the type of "penal"
statute to which these constitutional protections apply,
notwithstanding that the ICA contemplates the potential imposition
of significant monetary penalties on parties found to be in breach.
On November 24, 2011, the Supreme Court of Canada denied U.S.
Steel's application for leave to appeal. This appears to have
precipitated settlement discussions with the Canadian government,
the results of which have now been made public.
According to Minister Paradis's announcement, U.S. Steel has
agreed to operate its Lake Erie and Hamilton plants until at least
2015 and to make at least $50 million in additional capital
investments to maintain its Canadian facilities by December 2015
(over and above its original undertaking to invest $200 million by
October 31, 2012). The plants were re-opened by U.S. Steel during
the dispute, but are operating at reduced employment levels. The
company has also agreed to contribute $3 million towards community
and educational programs in Hamilton and Nanticoke, with $1 million
of this contribution due by early February 2012.
The U.S. Steel settlement allows the Canadian government to avoid
protracted litigation while underscoring its intended message,
namely that foreign investors must take their ICA undertakings
seriously. It also comes against the backdrop of recent statements
by the Prime Minister and Minister Paradis that while the Canadian
government continues to welcome foreign investment, it will also
insist on commitments that promote economic activity and employment
in Canada, where appropriate.
This resolution also brings the U.S. Steel case into line with the
more usual practice of foreign investors negotiating new
replacement undertakings if they are subsequently unable to meet
commitments negotiated at the time of acquisition. Since 2009, the
ICA has expressly authorized the Minister to accept a new
undertaking from an investor which has failed to comply with prior
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