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On May 25, 2012, the Canadian government announced proposed
amendments to the foreign investment review process.
The proposed amendments are stated to be intended to:
provide the Minister and a foreign investor with an alternative
to litigation where the Minister believes that a foreign investor
has failed to comply with a written undertaking, and
narrow the scope of transactions subject to the net benefit
review process under the Investment Canada Act (the
"ICA") to those that are the "most
significant".
These proposals follow the announcement in late April of
proposed amendments to the ICA relating to enhanced transparency of
the review process under the ICA and improved enforcement tools for
contraventions of the ICA (for more information about those
proposed amendments, please see the Goodmans Update dated May 8,
2012 titled "Canada Proposes Amendments to the Investment Canada Act
for Greater Disclosure and Enhanced Enforcement" at
www.goodmans. ca).
Mediation as an Alternative to Litigation
Currently, where the Minister believes that a failure by a
foreign investor to comply with a written undertaking has occurred
and no consensual resolution can be reached, the Minister's
only effective remedy is to initiate court proceedings.
The Canadian government has now issued a guideline providing
that, where the Minister believes that the foreign investor has
failed to comply with a written undertaking, the parties may
commence a process with a third-party mediator to facilitate a
resolution rather than engage in litigation. This guideline is
presumably in response to the costly and protracted enforcement
measures taken against U.S. Steel by the Canadian government for
its failure to comply with its undertakings in connection with its
2007 acquisition of a Canadian steel company (for more information
about those proceedings, please see the Goodmans Update dated June
23, 2010 titled "U.S. Steel: Federal Court Upholds the Constitutionality of
Section 40 of the Investment Canada Act" at
www.goodmans.ca).
Increase in Review Threshold
The announcement also contemplates issuing amending regulations
under the ICA to increase the transaction review threshold
substantially from the current level of $330 million in asset value
(based on the value of the assets reflected in the financial
statements of the business) to $1 billion in enterprise
value1 over a fouryear period.2
For the first two years following the amendments, the
transaction review threshold would increase to $600 million. The
transaction review threshold would then increase to $800 million
for the subsequent two years, and $1 billion thereafter (indexed to
reflect changes in Canada's gross domestic product going
forward). In its announcement of the proposed amendments, the
Canadian government stated that the concept of enterprise value
better reflects the value of a business as a going concern and the
increasing importance of service and knowledge-based industries.
The Canadian government has provided a 30-day period for comments
to the draft regulations before final publication.
No Reference to "Net Benefit" Test
Following the controversial November 2010 decision by the
Canadian government that the proposed takeover of Potash Corp. by
BHP Billiton was not likely to be of net benefit to Canada, foreign
investors and Canadians alike have been anticipating clarification
from the Canadian government to the "net benefit" test
(which requires a foreign investor to provide the Minister with
justification as to why its investment would be of net benefit to
Canada). Notably, neither the proposals announced on May 25, 2012,
nor those announced in late-April, provide any clarification in
this regard.
Footnotes
1 The draft regulations first pre-published for public
comment in 2009 included a proposed "enterprise value"
based on the "market capitalization" of the entity, plus
its total liabilities minus its cash and cash equivalents. The May
25th announcement suggests that additional proposed changes to the
methodology for calculating "enterprise value" will be
contained in the proposed amendments to the regulations; however,
at the time of this update, the proposed amendments to the
regulations have not yet been published.
2 The proposed amendments give effect to prior amendments
to the ICA that were passed through the Budget Implementation Act,
2009. For more information about the 2009 amendments, please see
the Goodmans Updates dated February 11, 2009 and March 16, 2009
titled "Significant Changes Proposed to the Competition Act
and the Investment Canada Act" and "Amendments to the
Competition Act and the Investment Canada Act Granted Swift
Passage", respectively at
www.goodmans.ca .
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and should not be relied on in that way. Specific advice should be
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