An Opportunity for Foreign Investors to Consider Investments in the Canadian Book Industry
In 1992, the Minister of Canadian Heritage and Official Languages (the "Heritage Minister") issued the Revised Foreign Investment Policy in Book Publishing and Distribution (the "Book Policy") under the Investment Canada Act ("ICA"), Canada's foreign investment legislation, whereby controlling investments by non-Canadians in Canadian book publishing, distribution or retail businesses were generally prohibited, subject to a limited number of specific exceptions.
In recent years, there have been a number of developments which suggest that there is more openness by the Heritage Minister and the Department of Canadian Heritage ("Heritage Canada"), which is responsible for administering and enforcing the ICA in the cultural sector, to consider and allow controlling investments in the book industry by non- Canadian investors.
In particular, without any changes being made to the Book Policy, the Heritage Minister has approved investments that on their face would appear to be offside the Book Policy.
This briefing discusses (i) the Book Policy framework, (ii) recent decisions allowing cultural investments, and (iii) potential opportunities for book industry investments in Canada and adjustments to existing undertakings given by non-Canadian investors to Heritage Canada.
The Book Policy provides that:
- Direct acquisitions of an existing Canadian-controlled book publishing and distribution business by a non-Canadian will not be permitted except under extraordinary circumstances where the business is in clear financial distress and Canadians have had a full and fair opportunity to purchase the business.
- Indirect acquisitions of an existing Canadian-controlled book
publishing and distribution business will be reviewed to determine
whether they are likely to be of net benefit to Canada and
commitments (known under the ICA as "undertakings") will
typically be required including:
- a commitment to the development of Canadian authors;
- a commitment to support the infrastructure of the Canadian book distribution system; and
- a commitment to education and research through financial and professional assistance to Canadian institutions offering programs in publishing studies.
- Foreign investment in new book publishing and distribution business enterprises will be limited to Canadian-controlled joint ventures.
The new approach to investments in the book industry began during the years that The Honourable James Moore was the Heritage Minister. Minister Moore was appointed Heritage Minister on October 30, 2008 and continued in that position for almost five years, until July 15, 2013 when The Honourable Shelly Glover was appointed Heritage Minister.
Minister Moore's tenure saw a significant number of approvals that appeared to reflect a new outlook. It is understood that during this time Heritage Canada bureaucrats were deeply engaged in considering both proposed investments and the overall policy direction, in the context of a rapidly (and somewhat unpredictably) developing global cultural products industry. These years featured a number of important industry developments: the dramatic expansion of the volume of books sold through e-commerce, the breadth of the library of offerings available through e-commerce sites and the emergence and growth of e-books. It is clear that within this context of rapid innovation and evolution, Heritage Canada's views of the role of foreign capital in the Canadian book industry changed greatly and became much more pragmatic and, some would say, more realistic and less protectionist.
A chronology of significant developments since the start of Minister Moore's tenure as Heritage Minister is as follows:
The Canadian government announced a review of the Book Policy and issued a Discussion Paper.
- Four years later there have been no announced changes to the Book Policy (but significant approvals of "offside" investments as discussed in this briefing).
Minister Moore approved the establishment of an Amazon fulfillment centre warehouse in Canada, despite opposition from Canadian booksellers.
- Prior to the Heritage Minister's approval, Amazon had operated its .ca business (established in 2002) using a third party to provide order fulfillment (warehousing, packaging and delivery) such that Amazon did not have employees or a place of business in Canada and was not subject to the ICA as it had not established a "Canadian business" for ICA purposes;
- Amazon reportedly made the following commitments to the
- new jobs for Canadians and improved service for Canadian consumers;
- increased visibility for Canadian books on the Amazon.ca web page;
- an investment of over $20M, including $1.5M in cultural events and awards in Canada and the promotion of Canadian-authored books internationally;
- increased availability of French-language Canadian cultural products;
- the establishment of dedicated staff to assist Canadian publishers and other suppliers of cultural products;
- making more Canadian content available on the Kindle e-reader;
- and creating a summer internship program for Canadian post-secondary students.
Minister Moore approved the establishment of Apple's iBookstore in Canada. Minister Moore was satisfied that Apple had demonstrated how iBookstore represents new opportunities for Canadian authors and publishers. Apple reportedly made commitments to:
- Promote Canadian-authored books (both French- and English-language titles) in iBookstore in Canada and other iBookstores internationally;
- Increase opportunities for Canadian publishers and authors, including new and independent writers;
- Increase access to titles from aboriginal authors and publishers;
- Assist Canadian publishers in streamlining processes of e-book creation and enhancement;
- Support jobs for Canadians; and
- Improve services for Canadian consumers, including an iBookstore tailored to Canadian readers.
Minister Moore approved the acquisition of control of the iconic Canadian-controlled McClelland & Stewart publishing house by Random House of Canada (Random House, which is owned by Germany's Bertelsmann, had a 25% interest in M&S before this transaction). M&S was believed to be in financial distress which may have been part of the basis upon which the Minister determined that a departure from the Book Policy and an approval of the transaction were appropriate. Random House reportedly gave commitments to:
- Maintain the separate identity of the M&S imprint;
- Continue its poetry program; and
- Establish an annual McClelland & Stewart Lecture at the University of Toronto.
Minister Moore approved Canadian-controlled bookseller Indigo's sale of its Kobo e-book business to Rakuten of Japan.
- It is unknown whether Rakuten gave undertakings to secure the Heritage Minister's approval, although we expect that this was likely the case.
- It was reported that it was argued that the sale of Kobo would strengthen Indigo at a time when the book industry in general was experiencing difficulties, as demonstrated by the liquidation of Borders Group. This may have influenced the Minister to not strictly apply the Book Policy.
Minister Moore approved U.S.-based Cengage Learning's acquisition of Nelson Education and Groupe Modulo.
- It appears that until this time, the Canadian business had been majority owned by a Canadian pension fund.
- It was not publicly reported whether Cengage gave undertakings to secure the Heritage Minister's approval, although we expect that this was likely the case.
Minister Moore approved the establishment of Target Canada (for numerous retail locations that were to include the sale of books and magazines) with the following commitments:
- Employ 100 to 200 people at each store, which means the creation of 20,000 to 25,000 jobs in Canada by 2015;
- Ensure the availability and promotion of Canadian cultural products;
- Continue the participation of Canadians in the business; and
- Support Canadian cultural events and organizations.
Minister Moore approved the merger of the Penguin Group (owned by UK-based Pearson) and Bertelsmann' Random House publishing houses without condition.
- Bertelsmann owns 53% of the merged business; Pearson owns 47%.
Minister Moore approved the establishment by Simon and Schuster Canada (Simon and Schuster is a division of CBS Corporation of the United States) of a Canadian book publishing business (Simon and Schuster Canada had formerly been restricted to book distribution).
- It was not publicly reported whether undertakings were provided although we expect that this was likely the case.
Minister Glover approved the acquisition of textbook publisher and distributor McGraw-Hill Ryerson Limited and McGraw-Hill Education (Canada) Corp as part of the sale by McGraw-Hill of its Education business to MHE Acquisition LLC of the United States (related to the Apollo Group of investment funds).
- It was not publicly reported whether undertakings were provided although we expect that this was likely the case.
- The acquisition was "indirect" meaning that control
of the Canadian business was obtained as a result of acquiring a
non-Canadian corporation which owned Canadian corporations that
directly owned the Canadian business.
- The review of the transaction therefore occurred after closing as is permitted for indirect transactions (the transaction closed in May of 2013).
- The transaction was therefore also not on its face contrary to the Book Policy (indirect acquisitions are not prohibited by the Book Policy, but are nevertheless subject to review by the Minister).
Minister Glover approved U.S.-based HarperCollins Publishers L.L.C.'s acquisition of Harlequin Enterprises Limited, the leading publisher of romance fiction.
- Until this time, the Canadian business had been majority owned by Torstar Corporation, a Canadian-controlled media company.
- Harlequin will operate as a division of HarperCollins and remain headquartered in Toronto.
These decisions of the Heritage Minister have occurred in the context of a rapidly evolving world for creative content. E-books are one example of this (and an example of where significant capital investments are required). Internet sale of books is another example. Heritage Canada takes a keen interest in the evolution of the book industry and is focused on understanding the practical implications for their policy objectives. They are very interested in hearing from businesses on these points and have demonstrated that they will consider all information provided on a good faith basis. It is evident from the history of Heritage Canada reviews over the last five years that some of the approvals that have been issued were contrary to the Book Policy. It is important to note that the approvals were made in the unique circumstances of each case, sometimes in the context of a struggling firm and in many cases only after undertakings were likely given regarding the ongoing operations of the Canadian business.
It is also important to note that almost all of these decisions were made by Minister Moore. Minister Glover has approved only two transactions to date. However, after the approval of HarperCollins' acquisition of Harlequin, we have no reason to expect that Minister Glover will turn the page back to a stricter enforcement of the Book Policy, particularly given the significant changes experienced by the book industry in recent years.
Based on the events of the last five years, it is clear that the Canadian government will consider controlling investments by non-Canadians in the book industry on their merits, without blindly following its Book Policy. For potential investors and acquirors, this signals that the establishment of Canadian book industry businesses or the acquisition of existing Canadian book publishing, distribution or retail businesses are possible with the right facts and, in most if not all cases, undertakings to ensure that the Canadian government's overall policy objectives are met. For owners of existing Canadian book businesses, who in many cases have struggled with the inability to attract sufficient capital and achieve sufficient scale, investment or exit transactions may now be possible. In all cases, Heritage Canada will want to confirm that the investment will be beneficial to Canadian content creators and the consumers of Canadian content. However, unlike in earlier times, it appears that the Canadian government will not view Canadian control of book businesses as essential to ensure that its policy objectives are achieved.
Another point of note relates to current non-Canadian owners of Canadian book businesses who may be restricted by undertakings given to the Canadian government at the time they entered into the Canadian market. It is reasonable to expect that Heritage Canada would be willing to consider proposed amendments to such undertakings on the basis that they are not necessary or effective in advancing the Canadian government's policy objectives. For example, a number of non-Canadian investors in businesses where there was some limited sale of cultural content gave undertakings to not expand that part of the business (with the objective of protecting Canadian booksellers). Given the evolution of both the book retailing business and the Canadian government's willingness to focus on the central question of the impact on Canadian authors and consumers, it is possible that modifications to a non-Canadian investor's existing undertakings could be agreed upon.
Historically, Canadian book businesses had limited options when their owners wanted to monetize their investment or attract additional capital because they could not sell a controlling interest in their business to a non-Canadian. Heritage Canada has in recent years shown a pragmatic and more flexible approach and will carefully consider the circumstances before them on any proposed transaction. Transactions contrary to the Book Policy may still be approved given the right facts and, usually, with undertakings to support a determination by the Heritage Minister that the transaction will be of net benefit to Canada, particularly with regard to Canadian authors and Canadian consumers. We anticipate that these recent developments will result in renewed interest of non-Canadian strategic and financial investors in exploring the possibilities of entering the Canadian marketplace by acquiring an existing book business or by setting up a greenfield operation. Canadian businesses that may be facing funding or other challenges also have more alternatives than was previously the case.
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