On December 7, 2012, Industry Minister Christian Paradis approved the proposed $15.1 billion acquisition of Nexen Inc. by Chinese state-owned enterprise, CNOOC Ltd. under the Investment Canada Act. While the approval of the CNOOC transaction (and the concurrent approval of Petronas' proposed acquisition of Progress Energy) demonstrates that Canada continues to welcome foreign investment, the Canadian government also indicated that future major oil sand acquisitions by state-owned enterprises (SOEs) would likely be subject to far more stringent review.
As part of this announcement, the Government of Canada also clarified the criteria that will be applied when judging whether the acquisition of control of a Canadian business by an SOE will be approved. Among other things, SOEs will have to demonstrate that the investment is commercially oriented, consistent with principles of free enterprise.
CNOOC had applied for the Minister's approval pursuant to the Investment Canada Act. The Investment Canada Act provides that where a non-Canadian (such as CNOOC) proposes to acquire control of a substantial Canadian business (such as Nexen), the non-Canadian must file an Application for Review with the Minister of Industry. Such investments can be consummated only if the Minister concludes that it will likely be of net benefit to Canada. In his statement, Minister Paradis said CNOOC demonstrated that its acquisition of Nexen is likely to be of net benefit by making "significant commitments to Canada in the areas of: governance, including commitments on transparency and disclosure; commercial orientation, including an adherence to Canadian laws and practices as well as free market principles; and employment and capital investments, which demonstrate a long-term commitment to the development of the Canadian economy."
Reason for the Approval
The Investment Canada Act enumerates a number of factors that are to be taken into account, where relevant, for purposes of making the "net benefit" determination. These are:
- the effect of the investment on the level and nature of economic activity in Canada, including, without limiting the generality of the foregoing, the effect on employment, resource processing, the utilization of parts, components and services produced in Canada and exports from Canada;
- the degree and significance of participation by Canadians in the Canadian business or new Canadian business, and in any industry or industries in Canada of which the Canadian business or new Canadian business forms or would form a part;
- the effect of the investment on productivity, industrial efficiency, technological development, product innovation and product variety in Canada;
- the effect of the investment on competition within any industry or industries in Canada;
- the compatibility of the investment with national industrial, economic and cultural policies, taking into consideration industrial, economic and cultural policy objectives enunciated by the government or legislature of any province likely to be significantly affected by the investment; and
- the contribution of the investment to Canada's ability to compete in world markets.
Changes to Future Review of Investments by State-Owned Enterprises
In statements by Prime Minister Stephen Harper following approval of CNOOC's proposed acquisition of Nexen and PETRONAS Carigali Canada Ltd.'s proposed acquisition of Progress Energy Resources Corp., it was made clear that any approvals of future acquisitions of oil sands development by SOEs would be the exception. Emphasizing that investments by SOEs are not the same as other investments, Prime Minister Harper referred to proposed amendments to the Investment Canada Act and newly revised guidelines for the review of SOE investments, which include the following:
- Acquisitions of control by SOEs of a Canadian oil sands business will, going forward, be found to be of net benefit on an "exceptional" basis only.
- SOE transactions throughout the Canadian economy will continue to be closely monitored, particularly in respect of the degree/influence a SOE would likely exert on the Canadian business being acquired (including the industry in which it operates) and the extent to which a foreign state is likely to exercise control/influence over the SOE acquiring the Canadian business.
- Where a foreign state owns, controls or influences (directly or indirectly) an investor, free enterprise principles and industrial efficiency will be considered in the review.
- The review threshold under the Investment Canada Act for investments by SOEs will be amended and, as a result, will not increase in the same way that non-SOE investments will.1 Instead, the existing net benefit threshold of $330 million in asset value will remain in place and will be adjusted annually to reflect the change in nominal gross domestic product in the previous year.
- Amendments to the Investment Canada Act to give the Minister of Industry the ability to extend the time to conduct national security reviews of proposed foreign investments. The extensions are only to be used in exceptional circumstances.
These developments are, overall, very positive and confirm that foreign investment is welcome in Canada. While SOEs will likely not be acquiring control of oil sand projects in the immediate future, they can nonetheless invest in such projects on a minority basis or possibly as part of a joint venture. Of course, non-SOE investors are not precluded from any forms of oil sand investment. Furthermore, SOEs, that carefully review and respect the clarified rules applicable to SOEs, should be confident that investments in other sectors of Canada's economy will be permitted.
In short, Canada remains open for business, with some important strings attached if the investor is an SOE.
1 On a date still to be fixed, new regulations under the Investment Canada Act will come into force, progressively increasing the review threshold to $1 billion.
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