Recently, the Government of Canada issued a flurry of announcements relating to the Investment Canada Act. Here are some highlights that we thought would be of interest to our M&A Blog followers:
The government is proposing a legislative change that would require the Minister of Industry to give reasons for any rejection under the Investment Canada Act, whether initial or final. Presently, the Minister is only obliged to give written reasons in the event of a final rejection. As we saw in 2010, the Minister issued an initial rejection of BHP Billiton Ltd.'s bid for Potash Corp. and BHP then withdrew its bid. The Minister was not required in that case to issue a final rejection and therefore no reasons were ever given.
The government is proposing a further legislative change that would allow the Minister to accept security for the payment of penalties in order to secure an investor's obligations under written undertakings. Written undertakings are typically required to get a transaction approved.
In the wake of the government's lengthy enforcement action against U.S. Steel for breach of undertakings – which was ultimately settled out of court – the government announced that in the future it would be willing to enter into mediation to resolve issues that arise when an investor is unable to fulfill undertakings.
Finally, at long last the government is moving forward with implementing regulations to increase the financial threshold that triggers Investment Canada Act review and approval. The current threshold is triggered if the gross book value of the Canadian target's assets on its balance sheet exceeds C$330 million. This threshold will be changed to a threshold based on "enterprise value," a concept yet to be defined. Further, the threshold will be pegged at $600 million, rising to $800 million two years later, and $1 billion two years after that.
The government should be issuing draft regulations that define "enterprise value" shortly, although it will probably be a number of months before a final version comes into force. We expect that enterprise value will key off of market capitalization for public companies and a formula to determine market value for private companies. And although the financial threshold will rise, because enterprise value seeks to determine the market value of a business, there may not be a significant resultant decrease in the number of filings as we might otherwise expect.
Overall, these changes reflect the importance that is being placed on monitoring, yet attracting, foreign investment into Canada. It will be interesting to see how these changes and proposed amendments pan out.
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