The Canadian government released its Policy Statement and Revised Guidelines for Investments by State-Owned Enterprises on Friday, December 7, 2012, clarifying the foreign investment review process in Canada and signalling a shift in how investments by foreign state-owned enterprises (SOEs) will be reviewed under the Investment Canada Act (ICA). The changes announced by the government include the following:
- Clarification to the rules pertaining to reviewable investments by SOEs;
- Lower threshold to trigger Ministerial review of acquisitions of control of Canadian businesses by SOEs;
- Expanding the definition of SOE; and
- Permitting the government to extend the timeline for national security reviews.
Importantly, the clarifications did not address non-SOE investments. The government indicated that changes relating to such investments would be forthcoming following BHP's proposed acquisition of PotashCorp in 2010. The clarifications put forward today coincide with the Minister of Industry's approval of two significant acquisitions of Canadian businesses by SOEs: China National Offshore Oil Company's (CNOOC) proposed acquisition of Nexen Inc. (which represents the largest ever foreign acquisition by a Chinese SOE) and the proposed acquisition by PETRONAS of Progress Energy Ltd. Blakes is counsel to Nexen, including with respect to the representation of Nexen before the Investment Review Division (IRD) of Industry Canada, in relation to the CNOOC transaction.
1. Clarification to the rules pertaining to reviewable investments by SOEs
The government revised its Guidelines on State-Owned Enterprises (the SOE Guidelines) to underscore that free market principles and industrial efficiency will be considered in reviews of investments by SOEs. In particular, the government will closely examine the following when assessing an investment by an SOE: the degree of control or influence the SOE would likely exert over the Canadian business and on the industry and, most importantly, the extent to which the foreign state is likely to exercise control or influence over the SOE.
The government stressed that the burden continues to be on foreign investors to satisfy the Minister that the investment is of "net benefit" to Canada, which in the case of SOEs, involves the making of commitments including governance, transparency and commercial orientation.
In a televised speech that followed the Minister of Industry's approval of the two above-noted SOE transactions, the Prime Minister stated with respect to oil sands investments in particular that "... foreign state control of oil sands development has reached the point at which further such foreign state control would not be of net benefit to Canada" and going forward, acquisitions of control of Canadian oil sands businesses by SOEs will satisfy the "net benefit" test only under "exceptional circumstances". The government did not provide any detail as to what might constitute an "exceptional circumstance", potentially leaving open the possibility that even an acquisition of control of a Canadian oil sands business could be approved if exceptional circumstances warrant.
Outside of the oil sands, all reviewable investments by SOEs will be scrutinized closely. Importantly, however, there is no change to how minority investments, joint ventures, or greenfield investments by or involving SOEs – in the oil sands or otherwise – will be treated under the ICA.
2. Lower threshold to trigger review of investments by SOEs
The government reaffirmed its commitment to fostering foreign investment in Canada by once again stating its intention to increase the monetary review threshold for non-SOE investors from WTO member states. The threshold for acquisitions of control of Canadian businesses will change from C$330-million in "asset value" to C$1-billion in "enterprise value" over a four-year period, such that reviews under the ICA will be limited to only the most significant transactions. The government did not state when it will adopt the new regulations (the government first amended the applicable law to facilitate the new threshold in March 2009). For acquisitions of control of Canadian businesses by SOEs, the current C$330-million threshold (which is subject to an annual adjustment) based on the book value of assets of the Canadian business will continue to apply.
3. Broadening the definition of SOE
Among the various amendments to the SOE Guidelines, the government broadened the definition of what may constitute an SOE. In particular, the amended Guidelines now provide that an SOE will include an enterprise that is not only "owned or controlled, directly or indirectly" by a foreign government but also one that is "influenced, directly or indirectly" by a foreign government. This new definition introduces a potentially wide expansion to what may constitute an SOE.
4. Permitting the government to extend the timeline for national security reviews
While no specifics were provided, the government plans to introduce amendments to the ICA that will give the Minister the flexibility to extend the time available for a national security review when necessary. The government noted that these extensions will be used only in "exceptional circumstances".
The Policy Statement and revised SOE Guidelines signal the government's approach to investment in Canada by foreign SOEs. While it appears that the government intends to place certain investments by foreign SOEs under closer scrutiny, the government continues to welcome and encourage foreign investment in Canada. Indeed, in his televised speech, the Prime Minister stated "... we will maintain an open, market-based approach to foreign investment in Canada."
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