BHP Billiton's bid for Potash Corporation in November 2010 which was blocked by the Canadian government made financial headlines worldwide. This article argues that the current federal government remains keen to attract foreign investment to Canada, and reviews the BHP case for insights on how to avoid potential pitfalls and make the most of opportunities available to potential bidders of strategic assets in Canada going forward.
On November 3, 2010, the federal government of Canada refused to approve the proposed $38.6 billion hostile takeover by Australia's BHP Billiton ("BHP") of Potash Corporation of Saskatchewan ("Potash")1 pursuant to the Investment Canada Act (the "ICA"). It has been more than a year since this decision but some Asian investors still have concerns regarding Canada's overall position in foreign takeovers of significant Canadian assets, and whether Canada's natural resources and agricultural sectors should be considered off-limits.
Our position is that such cause for concerns are overstated. Since the introduction of the ICA in 1985, the government has approved approximately 18,700 transactions and blocked only two – the first was the proposed purchase of MacDonald, Dettwiler & Associates in 2008 by Alliant Techsystems Inc. ("ATK") of the US, and the second was the BHP bid for Potash.
Although both ATK and BHP occurred during the tenor of the current Conservative government, Canadian Prime Minister Stephen Harper during his recent visit to Beijing in February 2012 announced to a gathering of Chinese and Canadian business leaders (including Vice-Premier Li Keqiang) that Canada is open for business and its natural resources are for sale. In fact, a number of high profile Chinese state-owned investments were approved in 2011 under the ICA including Sinopec's proposed acquisition of Daylight Energy and CNOOC's acquisition of OPTI Canada.
Ostensibly, the purpose of the ICA is to encourage foreign investment in Canada while ensuring any such investments contribute positively to the economic growth of Canada and create opportunities for Canadians. Foreign investment proposals that are subject to ICA review2 will be tested based on the following factors to assess whether the transaction would be of "net benefit" to Canada:
- Effect on the level and nature of economic activity in Canada;
- Degree and significance of participation by Canadians in the Canadian business in particular, and in the relevant industry in Canada in general;
- Effect on productivity, industrial efficiency, technological development, product innovation and product variety in Canada;
- Effect on competition in the relevant industry in Canada;
- Compatibility with Canadian industrial, economic and cultural policies, taking into account the policy objectives of affected provinces; and
- Effect on Canada's ability to compete in world markets.
Some potential investors may be concerned that if BHP's substantial undertakings in the Potash case, including the creation of jobs and additional investments in Saskatchewan, were deemed inadequate, what would be required under the "net benefit" test in their particular circumstance? Although the federal government did not issue any formal reasons for their decision in asking BHP to reconsider their bid, there are some useful clues as to what foreign investors should focus on when seeking to acquire a Canadian business with potential ICA ramifications.
It is interesting to note that during the course of BHP's proposed bid for Potash, the Government of Saskatchewan was projecting some $2 billion in lost revenue over ten years. The Premier of Saskatchewan, Brad Wall was also displeased at the suggestion by the CEO of BHP that his company was not prepared to continue to support Canpotex. Canpotex is the marketing and logistics platform that exports potash throughout the world and is an important revenue source for the province, and therefore backed by the Saskatchewan government. In essence, BHP had failed to appreciate that potash is a strategically important resource and its acquisition by a private company (whether foreign or domestic) needed the concomitant assurance that it would be developed in a way that brought growth and returns to the province's tax base. Further, BHP had initially focused all of its attention on lobbying the federal government and only met with Premier Wall about a month after the takeover was made public. This was a fatal government relations miscalculation that contributed to the intense opposition from the provincial government. It would be fair to say that BHP had not been fully advised of a nuanced but significant shift in how the Harper Government interprets its constitutional relationship with the provinces, which tends to give more weight to the position a province takes on an area of shared constitutional jurisdiction3 than previous federal governments.
Despite BHP's failed bid, foreign investment remains in the best interest of Canada as an important player in the global economy. The fact that BHP could have re-submitted their proposal suggests that the government was willing to be convinced. The recent forays by Prime Minister Harper in pursuing trade discussions with foreign leaders, including his clear message to the incoming Chinese leadership during his last visit to Beijing that "Canada is open for business", strongly indicates the current federal government's focus to increase foreign investment and improve trade relations. However, the BHP case also shows that it may take more than pure economic incentives to obtain approval as it applies to a strategically important asset. Investors should take into consideration potential effects on the future competitiveness of Canada in world markets. A mechanism to keep not only jobs but also the development of core technology and R&D capabilities in Canada would be crucial.
To maximize the chances of a successful acquisition, foreign investors would benefit from good government relations and a thorough understanding of the Canadian regulatory regime. Investors would require sound legal advice as well as establishing effective channels of communication to progress the transaction with all levels of government. Effective advisors should be able to provide insights into the attitudes of key persons in the government decision-making process and identify, early on, issues that matter to them the most. Foreign investors would then be able to anticipate any potential problems and formulate creative solutions. Failure to do so may not only result in costly delays, but may cause the deal to ultimately unravel.
Many commentators have urged that the ICA review process be made more transparent. Clearer interpretation guidelines of the "net-benefit" test would help to reduce the significant transactional risks faced by foreign investors attempting an outright acquisition and control of a significant Canadian asset. Further clarity may soon come if the iconic Research in Motion Ltd. (makers of the Blackberry smart phones) becomes the target of a foreign takeover. The Canadian Minister of Finance Jim Flaherty has said that, "RIM (Research in Motion) is a private company that trades and has shareholders...they will be the masters of their own destiny4." And with Glencore's acquisition of Viterra (a dominant Canadian grain company) moving ahead, confidence in Canada's willingness to open up to foreign investment should be further enhanced.
1. Potash is the largest potash producer in the world and controls approximately 20% of the world's production capacity.
2. In 2012, if the book value of the assets of the Canadian business to be acquired exceeds $330 million, a pre-acquisition application for review must be filed. The $330 million threshold is expected to continue to trend significantly upwards.
3. Legal jurisdiction in Canada is divided between provincial (or territorial) governments and the federal government. Generally speaking, provincial governments have the power to enact laws governing local matters, while the federal government has jurisdiction over matters which are national in scope such as national defense. In certain areas of overlap, provincial and federal governments share jurisdiction. For example, provincial governments have primary responsibility over education and non-renewable natural resources, whereas agriculture and immigration are matters of shared jurisdiction.
The foregoing provides only an overview. Readers are cautioned against making any decisions based on this material alone. Rather, a qualified lawyer should be consulted.
© Copyright 2012 McMillan LLP