Just before midnight on Friday, October 18, Canada's
Industry Minister announced his interim conclusion that
Petronas' proposed C$6 billion acquisition of Progress Energy
does not satisfy the "net benefit to Canada" test under
the Investment Canada Act. Petronas is a Malaysian state owned
enterprise (SOE). Progress is a Calgary-based natural gas
The Minister's decision immediately became the subject of
extensive coverage in major Canadian and international business
newspapers and websites, with numerous commentators offering
opinions and raising questions about whether the decision will
cause a chill in foreign investment, whether the "net
benefit" test is too vague, whether the review process
unnecessarily lacks transparency, and the implications of the
decision for proposed acquisitions by SOEs generally and for
CNOOC's proposed C$15.1 billion acquisition of Nexen, which is
currently under review, in particular.
Due to the largely confidential nature of the review process,
many important facts relating to the Minister's decision are
not public. However, based on our experience advising clients in
relation to the Act, including SOEs on high profile acquisitions,
and on information that is publicly available, we are able to offer
the following insights:
While we know the Minister's interim decision, we are not
aware of either the undertakings that were put on the table by
Petronas, or the Minister's particular concerns with the
package that was presented. There is a range of possible concerns
that could hold up approval, ranging from concerns about the
sufficiency of the benefits provided to concerns about the
transparency of the acquired business with the investor
post-acquisition. As discussed below, it is even possible that the
refusal could be solely related to timing – the government
was simply not able to complete its review within the 75 day period
and was not prepared to approve the transaction absent a completed
The Minister's decision is interim, not final. Petronas
still has 30 days to convince the Minister that its acquisition of
Progress is likely to be of net benefit to Canada, which Petronas
may seek to do by sweetening the undertakings it is prepared to
offer. We understand that the CEO of Progress remains optimistic
that the acquisition will ultimately be approved.
It is possible that the Minister's interim rejection had
more to do with process than with substantive objections to the
acquisition. Some media reports suggest that Petronas had refused
to consent to an extension of the review period mandated by the
Act, and that the Minister responded by issuing an interim
rejection minutes before the review period expired (if the Minister
needs more time to consider a proposed acquisition, this is
effectively his only option if the foreign investor does not
consent to an extension, as the Minister would otherwise be deemed
to approve the acquisition).
The Canadian government has been grappling for some time with
how best to deal with proposed acquisitions by foreign SOEs. Its
approach to foreign SOEs is driven by two primary goals: (i)
securing foreign investment that is vital to the Canadian economy,
of which SOEs have been an eager and abundant source; and (ii)
ensuring that acquired Canadian companies continue to be operated
on a commercial basis, with transparent governance processes, and
not to serve the geopolitical objectives of a foreign government.
The Canadian government has provided some guidance as to the
application of the net benefit test to acquisitions by SOEs, in the
form of SOE guidelines that were issued in late 2007 following the
acquisition of several iconic Canadian companies by SOEs. However,
in our experience, the Canadian government's approach to SOEs
is still evolving and has moved beyond its published position. We
expect that more definitive guidance will be forthcoming with or
shortly following the Petronas/Progress and CNOOC/Nexen
transactions. In this regard, on Monday, October 22, Canada's
Prime Minister stated that "The government does in the not too
distant future have an intention to put out a clear and new policy
framework regarding these sorts of transactions". In the
meantime, we continue to believe that, given sufficient planning
and patience, acquisitions of Canadian businesses by SOEs can
continue to proceed.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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