The Government of Canada's decision this week to block the
takeover of Allstream by Accelero Capital S.a.r.l. Group compounds
the current uncertainty about when national security considerations
might prevent foreign acquisitions. The decision was made under the
"national security provisions" of the Investment
Canada Act ("ICA").
The Regulatory Framework
Under the ICA, a non-Canadian investor seeking to acquire
control of a Canadian business over certain financial thresholds
must demonstrate that the transaction will result in a "net
benefit to Canada." The ICA also gives the Government
significant latitude to block a transaction that it determines may
be "injurious to national security."
In 2012, the Government changed sector-specific regulations to
permit non-Canadians to acquire control over small telecom carriers
like Allstream with up to 10% share of the national market for
telecom services. Acquisitions of these carriers over applicable
thresholds by foreign investors need approval under the ICA. In
addition, acquisitions of all wireless providers continue to
require a separate approval from Industry Canada under the terms of
most spectrum licences.
The Accelero Deal
On May 24, 2013, Accelero announced a binding agreement with
Manitoba Telecom Services Inc. ("MTS")
to purchase Allstream, the business services division of MTS. The
transaction valued Allstream at C$520 million. The Government
determined, after a five-month review, that the transaction should
not proceed but did not specify its national security concerns.
In a brief statement, Industry Minister James Moore alluded to
the fact that Allstream operates a national fibre optic network
providing critical telecommunications services to businesses and
governments, including the Government. However, no rationale for
the decision was provided that might enable an assessment of the
nature of the security risk represented by this particular investor
As noted by MTS in a press release, the controlling shareholder
of Accelero, Naguib Sawiris, an Egyptian telecommunications
entrepreneur, is familiar to the Government. Mr. Sawiris'
Orascom was a significant shareholder in Wind Mobile, licensed by
the Government less than 5 years ago. Press reports also suggest
that Accelero offered to forgo Government contracts as a condition
Consequences of the Decision
The rejection of the Allstream transaction adds to recent
uncertainty regarding the Investment Canada regime, and national
security reviews in particular. The ICA does not define national
security risk, or give any guidance on which targets or investors
pose particular concern. The unavailability of reasons, perhaps
understandable given national security considerations, raises more
questions about how the national security review powers will be
exercised. This uncertainty, the apparent lack of transparency in
the process suggested by MTS in its press release, and the length
of the process could have a chilling effect on foreign direct
The rejection of this transaction appears to be at odds with the
Government's recent policy decisions in the telecommunications
sector. These include its recent liberalization of the investment
regime referred to above, and its stated intention to introduce
more competition through greater foreign investment, including by
welcoming the U.S. wireless giant Verizon as a potential acquiror
of Canadian new entrants WIND and Mobilicity earlier this year.
The net results are: (i) mixed messages regarding the
Government's position on foreign investment in the
telecommunications sector, and (ii) greater uncertainty for
potential investors and market participants about investment
reviews and the treatment of national security issues in mergers
and acquisitions generally.
The content of this article does not constitute legal advice
and should not be relied on in that way. Specific advice should be
sought about your specific circumstances.
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