Amendments implementing new government policy provide Minister of Industry greater scope to review SOE investments
The Investment Canada Act (ICA) is playing an increasingly central role in transaction planning for acquisitions of Canadian businesses by non-Canadians. This trend is likely to intensify for investors that qualify as a foreign state-owned enterprise (SOE) under the government's recently proposed amendments to the ICA. These amendments are designed to implement the Canadian government's revised policy on investments by SOEs, which the Prime Minister announced on December 7, 2012.
Although not articulated in the government's policy announcement in December, the amendments also would create new powers for the Minister to make "control in fact" determinations in respect of SOEs, potentially bringing more transactions within the purview of an ICA review. As the amendments are contained within the government's budget implementation bill, they are expected to become law before Parliament recesses for the summer in mid-June. Also of significance, the adoption of a new and higher monetary threshold for non-SOE investments by non-Canadians, which was originally introduced in 2009, is expected to come into effect shortly. This change may lead to fewer investments being subject to a pre-closing review process and Ministerial approval requirement, which would be welcome news for foreign investors making investments in Canada.
As we reported in our December 2012 Blakes Bulletin, the Canadian government's revised policy was announced immediately following the approval of two investments by SOEs: China National Offshore Oil Company's (CNOOC) acquisition of Nexen Inc. (which represents the largest ever foreign acquisition by a Chinese SOE), and the acquisition by PETRONAS of Progress Energy Limited. The revised policy prohibits SOE acquisitions of control of Canadian oil sands businesses above certain financial thresholds, other than in exceptional circumstances. Blakes was 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.
In summary, the government's amendments:
- Allow the Minister to determine that an SOE has acquired "control in fact" of a Canadian business or that a Canadian business is "controlled in fact" by one or more SOEs notwithstanding the bright line control rules set out in the ICA, with the potential result that certain investments now may be subject to a Ministerial review and approval requirement where they otherwise would not have been;
- Expand the definition of an SOE;
- Do not extend to SOEs the higher monetary threshold that will come into force as soon as the government adopts regulations setting out how the new test, namely one based on "enterprise value", will be determined; and
- Permit the government to extend the timeline for national security reviews.
1. Implications for State-Owned Enterprise Investments
Ultimately, the Minister's new powers with respect to SOE investments may increase the number of SOE transactions that will be subject to Ministerial review and approval.
New Powers for Minister to Make Control in Fact Determinations Regarding SOEs. Although not articulated in the announcement of the government's revised SOE policy in December, the amendments include new powers for the Minister to make control in fact determinations regarding SOEs. In particular, the proposed amendments introduce a new power for the Minister to determine that an investor that would otherwise qualify as a Canadian-controlled entity is "controlled in fact" by one or more SOEs – the implication being that such an investment potentially could be reviewable under the ICA. Similarly, the amendments allow the Minister to determine that an SOE investor has "acquired control" in fact of a Canadian business. This means that, even in the case of minority investments by an SOE that would not otherwise constitute an acquisition of control under the ICA (i.e., acquisitions of less than one-third of the target's voting shares), the Minister may determine that the investment does constitute an acquisition of control, thereby bringing the transaction within the purview of an ICA review. Under the current law, such determinations of control by a foreign investor are made pursuant to more precise and predictable legal tests that are specified in the statute.
The Minister may request information that he considers necessary from an investor in order to make these determinations. These new provisions will be retroactive to April 29, 2013, and notably, the amendments do not specify an outside date by which the Minister must make such a determination. As such, an investment could be subject to a net benefit review for a substantial period of time following its implementation.
The issue of de facto control has been considered in Canada in other contexts, such as under the Canada Transportation Act and the Telecommunications Act. In these cases, the key factors in determining whether there is de facto control include: the investor's right to appoint board members; the extent of the investor's veto rights over corporate decisions; the investor's economic participation in the target (e.g., debt); and the investor's ability to determine strategic decision-making activities (and influence day-to-day operations) of an enterprise. The approach in other jurisdictions (e.g., Australia) as to whether de facto control is acquired takes similar factors into account and one can expect such factors to figure prominently in control in fact determinations under the ICA. Such determinations under the ICA would be subject to judicial review by the Federal Court.
Expanded Definition of SOE. In addition to capturing foreign governments and their agencies, the proposed definition of an SOE also captures any entity that is controlled or influenced, directly or indirectly, by such a government or agency. The definition also captures "an individual who is acting under the direction of" or "who is acting under the influence of" such a government or agency. Unlike the concept of "control", which is defined under the ICA, the concepts of "influence" and "direction" are potentially quite broad. No guidance is provided in the bill to illuminate these concepts.
Increased Threshold for Review of Non-SOE Investments. Currently, the 2013 threshold for reviewable investments (by WTO investors) is C$344-million (book value). This threshold will increase to C$600-million in "enterprise value" (a concept that generally is expected to track market capitalization, but for which the formula has not yet been finalized by the government) once the implementing regulations are finalized and in force. The C$600-million threshold will increase to C$800-million within two years, and will increase again to C$1-billion two years thereafter.
2. Importance of Strategic Planning
The amendments highlight the importance of carefully considering the application of the ICA to a transaction where the investor has linkages to a foreign state. In particular, such parties should consider the following at an early stage of any deal process:
- Risk assessment. Parties will need to carefully assess the risk that, at a later date, there may be a determination that the investor falls within the broad definition of an SOE and/or the risk that a minority investment could constitute an acquisition of de facto control. Parties also may consider employing representations and covenants in their transaction agreement that allocate this risk.
- Transaction Structure and Shareholder Agreements. The SOE rules will only be triggered where there is an acquisition of control by an SOE investor. As such, parties may want to consider transactional provisions that make it clear that the SOE investor would not be acquiring control in fact.
- Timing. Whether an investor is an SOE could impact whether the transaction is reviewable under the ICA and, if so, the nature and length of the review. In addition, given that the amendments do not prescribe the time period within which the Minister must determine that an investor is an SOE, there is at least some residual risk that the parties may close a transaction only to find out at a later date that the Minister is considering a review of the transaction. As such, parties will want to consider how to allocate this regulatory risk, for example, through the inclusion of appropriate representations or indemnity provisions in the transaction agreement.
- ICA undertakings. For SOE investments that are reviewable, the government generally will require additional undertakings compared to what would be required from non-SOE investors (e.g., pertaining to corporate governance, commercial operations, adherence to free market principles and industrial efficiency). As such, parties will also need to consider how to allocate this regulatory risk, for example, through the use of covenants that specify the SOE's obligations to obtain Ministerial approval.
- Canadian Oil Sands Businesses. In light of the government's revised SOE policy, under which SOE acquisitions of control of Canadian oil sands businesses would only satisfy the net benefit test in "exceptional circumstances", whether an investor is an SOE and whether the SOE is acquiring control will be gating items for potential deals in the Canadian oil sands that exceed the relevant financial threshold.
3. Extension of Timelines for National Security Reviews
Bill C-60 also extends the time period during which the Minister must make a net benefit determination in connection with an investment undergoing a national security review by 25 days, and introduces additional flexibility for the Minister and an investor to agree to an even longer timeline for concurrent reviews. According to the government's policy announcement in December, the government will only use the new flexibility under the national security review timelines in "exceptional circumstances".
Acquisition of control of a "Canadian business" (which is a defined term) by a non-Canadian is either:
Monetary Thresholds. Monetary threshold for non-SOE investors from WTO member countries is C$344-million in book value of assets. This threshold will increase to C$600-million in enterprise value once the implementing regulations are finalized and in force. The C$600-million threshold will increase to C$800-million within two years, and will increase again to C$1-billion two years thereafter.
SOE investments will be subject to two monetary thresholds: the C$344-million (book value) threshold and the C$600-million (enterprise value) threshold which will increase over time to C$1-billion, as described above. An SOE meeting either of these two monetary thresholds will trigger a net benefit review requirement where the SOE acquires control of a Canadian business.
Net Benefit Review Timing. Initial review period of up to 45 days. This period can be extended unilaterally by the Minister for up to 30 days, and the Minister and investor can agree to one or more further extensions of this waiting period.
The Minister can either approve the transaction or make a preliminary determination that the investment is not likely to be of net benefit to Canada. In the case of a preliminary "no", the investor has an additional 30 days (or any other time period agreed to between the Minister and the investor) to make representations or submit undertakings with a view to obtaining a positive net benefit determination, and the Minister must provide a final decision within a reasonable period of time thereafter.
Awakening of the ICA: Timeline of Major Developments
1985 – 2007: Limited Activity
Enforcement activity focused on cultural businesses (e.g., revised Book Publishing and Distribution Policy; Canadian Heritage)
2007 – Present: Greater Enforcement Activity
SOE Guidelines (2007)
Alliant/MDA (first non-cultural transaction terminated due to ICA) (2008)
Compete to Win Report/Competition Policy Review Panel (Red Wilson Report) (2008)
National Security amendments (2009)
Removal of lower thresholds for sensitive sectors (uranium, financial services, transportation) (2009)
Ericsson/Nortel; GFI/Forsys (2009)
US Steel enforcement (2010)
BHP Billiton/Potash Corporation (2010)
Amendments to increase transparency (2012)
Revised SOE Policy (2012)
Proposed Amendments to Implement Revised SOE Policy (2013)
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.