On April 27, 2012, the federal government announced it would amend the Investment Canada Act to allow the minister of
industry greater flexibility in explaining why a proposed foreign
takeover of a Canadian business raises preliminary concerns. The amendments, contained in the government's
annual budget bill, will also empower the minister to accept offers
of security as a performance guarantee.
Canada's foreign investment regime requires that any
acquisition of control of a Canadian business by a non-Canadian,
where the book value of the assets of the Canadian business exceeds
a prescribed threshold (currently C$330 million), be reviewed and
approved by the minister of industry before closing. The minister
must determine the transaction is likely to result in a "net
benefit" to Canada, based on a number of factors contained in
the Act. In the 26-year history of the Act, governments have used
it only twice to block transactions: once in 2008 when Alliant
Techsystems tried to buy MacDonald Dettwiler and Associates
Ltd.'s aerospace business, and then in 2010 when BHP Billiton
sought to acquire Potash Corporation.
The changes are in part designed to address concerns about the
perceived lack of transparency in the review process, a complaint
that came up in the BHP Billiton review process. However, the
criticism was largely aimed at the vagueness of certain of the net
benefit criteria, not what the minister could or could not say in
providing reasons for his preliminary decision that the proposed
transaction was not likely to be of net benefit to Canada. Indeed,
in making that announcement, the minister spoke in some detail
about the proposal before revealing his decision. The Act contains
restrictions on what information the minister and his staff can
make public, restrictions designed to safeguard the commercially
sensitive and confidential information provided during the course
of a review. As such, it will be interesting to see in practice how
the minister will provide greater transparency while still
respecting those confidentiality obligations.
The performance guarantee is intended to address the public
perception that some foreign investors are not honouring the
obligations they have under the Act. This issue was highlighted by
the government's case against U.S. Steel for alleged
non-compliance with the Act, in particular that the company had
failed to honour its commitments regarding the amount of steel it
would produce in Canada. The
case settled before there was a judicial determination that
U.S. Steel had, in fact, violated its commitments. The prospects
for conviction were uncertain, as U.S. Steel intended to rely on an
administrative guideline issued by the minister that excuses
non-performance where such non-performance is for reasons outside
the investor's control. The company had argued the global
economic downturn led to a reduction in global demand for steel,
thereby necessitating decreased production in Canada. Although the
amendment is drafted to "permit" the minister to accept
an offer of security, rather than requiring an offer of security,
it is likely prospective investors will feel compelled to make such
an offer in high-profile cases.
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