Originally published in the 9 August 2005 issue of Competition Law Insight
Proposed new rules expand the existing assessment criteria In addition to making any obligatory notifications under Canada’s Competition Act, foreign companies acquiring businesses in Canada must also consider whether their proposed transactions are subject to the provisions of the federal Investment Canada Act (the Act), Canada’s foreign investment legislation.
The Act applies, among other things, to any acquisition by a non-Canadian of control of a business carried on in Canada. Depending upon whether the statutory thresholds are met, any such transaction may be subject to review by Canada’s minister of industry to determine if it is of "net benefit" to Canada (the minister of Canadian heritage is responsible for this review if the transaction involves the acquisition of a cultural business).
One of the factors that the responsible minister will examine under the Act’s net-benefit test is the effect of the acquisition "on competition within any industry or industries in Canada". As a practical matter, this aspect of the net-benefit review is generally delegated to Canada’s Competition Bureau (which is itself a unit of the industry ministry) and ministerial approval will not be granted unless and until the Bureau indicates that it has no objection to the transaction proceeding.
The criteria for the net-benefit test go beyond competition concerns, however, to include other matters. Recently, legislation was introduced in Canada’s House of Commons to expand these criteria to incorporate an assessment of whether a foreign acquisition might compromise Canada’s national security. The proposed amendments to the Act, contained in Bill C-59, were introduced in response to concerns in Canada about recent proposed acquisitions by entities related to the government of the Peoples’ Republic of China.
The Investment Canada Act
The thresholds for review under the Act largely depend on the value of the assets of the Canadian business being acquired and whether the acquiror (or the vendor) qualify as WTO investors under the Act (ie whether they are controlled by citizens of WTO member countries).
Currently, the direct acquisition of a Canadian business by or from a WTO investor is subject to review only if the assets of the Canadian business exceed C$250m in value. Indirect acquisitions (for example, where a Canadian business is acquired indirectly by virtue of the acquisition of a foreign corporation with a Canadian subsidiary) by or from a WTO investor are not reviewable. However, some types of Canadian businesses are specifically excluded from the WTO thresholds,– namely, businesses involved in uranium production, cultural industries and certain types of financial or transportation services. The asset value review thresholds for these types of businesses are much lower: $5m for direct investments and $50m for indirect investments. (In some circumstances, investments in cultural businesses can be reviewable even if they fall below these thresholds.)
Reviewable investments are assessed by the minister to determine if they are of net benefit to Canada. The Act sets out a series of criteria which the minister must consider in making this determination, including the effect of the investment on the level and nature of economic activity and employment in Canada; the degree and significance of participation by Canadians in the Canadian business; the compatibility of the investment with national industrial, economic and cultural policies; the contribution of the investment to Canada’s ability to compete in world markets; and the effect of the investment on competition (as noted above). In order to satisfy the netbenefit test, the investor is usually required to provide undertakings to the minister that will involve, among other things, commitments to maintain a certain level of employment in relation to the Canadian business, guarantee participation of Canadians as directors or in management and make capital expenditures in Canada. It has become fairly common practice for the minister to require undertakings of this nature.
Bill C-59 was tabled and received its first reading on 20 June 2005. Essentially, Bill C-59 proposes an additional review procedure that the minister of industry may invoke in any case where the minister believes on reasonable grounds that the investment "could be injurious to national security". The bill gives the minister special powers in relation to the review of investments involving national security issues, namely:
- the minister will be entitled to review an investment on national security grounds regardless of the dollar value of the assets of the Canadian business involved;
- the minister can also review the acquisition of part of a Canadian business, even if control is not acquired (thus, an acquisition of a minority position in a Canadian business could trigger a review);
- corporate reorganiations, which are generally exempt from the Act, could be subject to review on national security grounds;
- once the minister commences a review, the parties will not be permitted to close until the minister is satisfied that the transaction does not threaten national security;
- the minister will have broad powers to investigate and obtain information from the investor and third parties; and
- upon concluding a review, the government will be entitled to block closing or require undertakings or divestitures if satisfied that the investment would be injurious to national security.
In addition, the minister will be able to decide that an entity is non-Canadian, regardless of ownership structure, provided that it is controlled in fact by non-Canadians.
Bill C-59 is designed to address criticisms about the Act raised in the fall of 2004 following the ultimately unsuccessful attempt by Minmetals (a corporation largely controlled by the government of China) to acquire Noranda, a major Canadian mining company. Concerns were raised at the time, for example, that the minister was not required to take into account China’s record on human rights when reviewing this proposed transaction.
According to the press release issued by the minister, Bill C-59 is not intended to discourage foreign investment in Canada, only to update Canada’s security system. The press release also notes that Bill C-59 is consistent with legislation adopted by several of Canada’s major trading partners, such as the United States, Germany and Japan, which permit the screening of foreign investments for reasons of national security. For example, members of the US Congress have called for a review on national security grounds of the recent bid by CNOOC Ltd (a Chinese petroleum company) for Unocal Corp.
However that may be, a significant problem with Bill C-59 is that it does not provide any guidance as to what could be considered a "national security" concern. For example, it is not even clear that concerns about a country’s human rights record, as was apparently the case with the Minmetals transaction, would qualify as a national security issue under the legislation.
It is believed that the government’s current intention is to limit Bill C-59’s application to defence or military concerns, and not economic security, for example. Certainly, transactions involving Canada’s defence industry or suppliers to that industry could be subjected to the new review process if the bill is passed, but it remains to be seen how broadly the minister will interpret the proposed review power.
The minister has said that he suspects that reviews on national security grounds will be rare. That is probably true and most transactions are not likely to be affected if Bill C-59 is enacted. Nonetheless, it would be helpful to investors if Bill C-59 defined more carefully the circumstances in which this type of review will be applicable. That clarification may be provided once the House of Commons industry committee has an opportunity to consider the draft legislation in the fall of this year.
Failing that, and if Bill C-59 is passed in its current form, non-Canadian investors should confirm whether potential acquisition targets in Canada carry on any activities that could reasonably relate to Canada’s national security. In some cases, it may be prudent for investors to approach the minister, either for assurance that the national review procedure will not be applied or to discuss what will be required for approval if it is.
Bill C-59, An Act to amend the Investment Canada Act, http://www.parl.gc.ca/38/parlbus/chambers/house/bills/government/C-59/C-59_1/C-59_cover-E.html.
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