While the Canadian government approved significant investments by Chinese and Malaysian State-Owned Enterprises (SOEs) late last week, it also sent a strong message to SOEs that future transactions will have to meet even higher standards. In characterizing Canada's policy position on SOE investments, Prime Minister Harper stated that "Canada is open for business, but not for sale". In making this policy statement and releasing more stringent SOE investment guidelines, the Canadian government delivered a clear message that Canada has upped the ante for SOEs seeking to acquire control of Canadian businesses. Some of the key changes introduced by the guidelines include:
1. Clarifying the rules for reviewing SOE investments;
2. SOE investments in the oil sands will only be permitted in "exceptional circumstances";
3. Implementing a lower monetary threshold for review of SOE investments; and
4. Ability to extend the timeline for national security reviews.
As stated above, these guidelines were increased at the same
time Canada announced the approval of CNOOC's (a Chinese SOE)
$15.1 billion acquisition of Nexen, and Petronas' (a Malaysian
SOE) $6 billion acquisition of Progress Energy Resources
Clarifying Rules to Review Investments by SOEs
The new SOE guidelines were prompted by increasing public
concerns about SOE investments generally - in particular that SOE
investments may present certain risks for Canada's long-term
economic welfare. Among the primary concerns are that SOE
behaviour may be influenced by the strategic imperatives of foreign
governments (as opposed to market factors) that may be inconsistent
with Canadian policies or economic objectives.
The SOE guidelines expand the definition of what constitutes an SOE and state that, in addition to entities that are "owned or controlled, directly or indirectly" by a foreign government, the SOE guidelines apply to entities that are "influenced, directly or indirectly" by a foreign government. Practically, this means that SOEs cannot assume that the application of the new guidelines do not apply simply because they own less than 50% of the voting shares of the entity seeking to acquire control of a Canadian business.
The government has reiterated that the burden of satisfying the Minister of Industry (the Minister) that a particular investment is likely to be of "net benefit" to Canada remains with the foreign investor. In assessing whether an investment by an SOE is of net benefit, the Minister will closely examine the degree of control or influence the SOE would likely exert over the Canadian business and on the industry, and the extent to which a foreign state is likely to exercise control or influence over the SOE acquiring the Canadian business.
While each investment will be reviewed on a case-by-case basis, the government has made it clear that the acquisition of control of a Canadian oil sands business by a foreign SOE will be of net benefit to Canada only in "exceptional circumstances". The Minister will also scrutinize investments by SOEs outside of the oil sands and may have concerns where, due to a high concentration of ownership, a small number of acquisitions of control by SOEs could undermine the private sector orientation of an industry (i.e., where a transaction may lead to a disproportionate level of foreign state influence in a given industry).
Lower Review Threshold for SOEs
The government has reiterated its intention to progressively
increase the monetary review threshold under the Investment Canada
Act (ICA) for non-SOE investors from WTO member states to C$1
billion in enterprise value, as announced in 2009. However,
investments by SOEs will continue to be subject to the existing
review threshold of C$330 million in asset value, adjusted annually
to reflect the change in nominal gross domestic product in the
Extending the Timeline for National Security Review
While details were not provided, the government has indicated
that it intends to provide the Minister with the flexibility to
extend the timelines for national security reviews so as to give
the Canadian government the necessary time to conduct a careful and
thorough review of investments that could potentially be injurious
to national security. While not on its face a major shift, the
ability to unilaterally further extend reviews adds a level of
timing uncertainty to transactions that may raise national security
1. The government has clearly indicated that investments by foreign SOEs in the Canadian oil sands will be of "net benefit" only in "exceptional circumstances" (there is no guidance as to what may constitute an "exceptional" circumstance) thereby by potentially limiting foreign investments in this industry.
2. Retaining the current C$330 million asset value review threshold for SOE investments (while progressively increasing the general review threshold to C$1 billion enterprise value) will result in more SOE investments being subject to ICA reviews.
3. The broader definition of an SOE creates some uncertainty regarding the application of the SOE guidelines to situations where an SOE holds a significant interest in the firm seeking to acquire a Canadian business.
4. Acquisitions by SOEs of less than controlling interest
in a Canadian business in the oil sands will likely not raise the
same level of concern and scrutiny, even if they are reviewable
under the ICA. However, under the ICA, "control"
means control in fact and can be presumed at ownership levels well
It is important to note that the new guidelines apply only to investments by SOEs that are (i) subject to review under the ICA; (ii) relate to the acquisitions of control of a Canadian business; (ii) where the book value of the Canadian target is less than C$330 million; or (iii) the establishment of a new Canadian business.
While the new guidelines apply only to transactions involving SOEs, the considerable public and political scrutiny generated by the CNOOC and Petronas transactions will likely have some spill over effect on reviews of non-SOE transactions under the ICA (in particular, longer reviews and more stringent conditions required to satisfy the of "net benefit" test). In this regard, foreign investors should both assess potential concerns at an early stage so they can ensure they can develop and implement a sound strategy for successfully navigating the ICA review process.
Accordingly, foreign SOEs planning to invest in Canada should carefully consider their approach so as to ensure that they structure their investment in a manner that is clearly of "net benefit" to Canada. Additionally, SOEs seeking to make Canadian investments (in particular in the oil sands sector) should consider how to structure transactions in a manner that avoids the application of the SOE guidelines - for example, by acquiring minority interests, alternatives to equity investments, as well as the use of off take arrangements where access to output is desired.
For a copy of Industry Canada's Guidelines for Investments by State-Owned Enterprises, please click here.
For a copy of Industry Canada's Statement Regarding Investment by Foreign State-Owned Enterprises, please click here.
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