Canada: Foreign Investment Review - Developments in 2006

Most non-Canadian companies considering acquisitions in Canada are aware that their transactions may be subject to the notification and substantive review provisions of the Competition Act. However, foreign acquirors may also have to contend with a review under the Investment Canada Act ("ICA"), Canada's foreign investment legislation.

Where the relevant statutory thresholds are met, the ICA requires non-Canadians acquiring Canadian businesses to obtain pre-closing approval from Canada's Minister of Industry, or, if the transaction involves the acquisition of a "cultural" business, from the Minister of Canadian Heritage. Reviewable investments are assessed by the responsible Minister to determine if they are of "net benefit" to Canada. Although transactions caught by ICA review are usually allowed to proceed ultimately (based on providing undertakings to the Minister), the time required to complete the ICA process may become an issue.


This past year witnessed one of the most extensive ICA reviews undertaken to date, involving the proposed acquisition by Xstrata plc ("Xstrata") of Falconbridge Limited ("Falconbridge"). Xstrata is a global natural resources group based in Switzerland; Falconbridge was a Canadian-based mining company with worldwide operations in nickel, copper, zinc and aluminium production. Davies acted for Xstrata in this matter.

Apart from the sheer size of the transaction (the largest successful all-cash offer in Canadian history), and that it involved the always sensitive Canadian resource sector, the situation was complicated by the fact that Xstrata's bid for Falconbridge was both unsolicited and competing against an alternative "friendly" offer by Canadian-based Inco Limited ("Inco"). This created an unusual degree of political and public interest in the transaction, given that it pitted a potential foreign take-over against what was touted as a "made in Canada solution".

Because Inco was a Canadian company, its offer for Falconbridge did not have to secure ICA approval. However, Inco had become embroiled in a protracted and difficult review process of its own involving competition authorities in the EU and the United States. This led to calls in Canada for a "level regulatory playing field", i.e. that the Minister of Industry should - at the very least - withhold ICA approval for Xstrata's bid until Inco received its foreign antitrust approvals, so as not to give Xstrata an "unfair regulatory advantage" over Inco. Indeed, in an unprecedented step, the Standing Committee on Industry, Science and Technology of Canada's House of Commons convened a special meeting at which a unanimous motion to this effect was adopted.

Xstrata ultimately obtained its ICA approval in July 2006, following an extension of the initial 45-day review period (and also after Inco had received its EU and U.S. antitrust clearances). According to a press release issued by Xstrata at the time, the undertakings it provided to satisfy the "net benefit" test included the following commitments:

  • establishment of a new standalone global nickel business, headquartered in Toronto, Ontario, with the CEO and a majority of senior management consisting of Canadians;
  • establishment of a new technology research and development unit, based in Sudbury, Ontario;
  • establishment of new regional head offices for Xstrata's copper and zinc business units, to be located in Toronto, Ontario, with the COO and a majority of senior officers consisting of Canadians;
  • no layoffs of operating staff for three years at any of Falconbridge's operating facilities in Canada;
  • increased capital, R&D and exploration expenditures in Canada;
  • identification of a potential Canadian candidate for the position of non-executive director of Xstrata; and
  • funding for community and social initiatives in Canada, with a particular focus on supporting aboriginal communities.

Three days after Xstrata received ICA approval, Inco announced that it had allowed its bid for Falconbridge to expire. Xstrata subsequently acquired control of Falconbridge in mid-August 2006.

Although the Xstrata/Falconbridge acquisition also required competition clearances in Canada, the United States and Europe, it was the ICA approval process that proved to be the deal-critical regulatory issue from Xstrata's perspective. This underscores that foreign acquirors of significant Canadian businesses must be mindful of how an ICA review may impact deal timing, as well as result in significant commitments to the Canadian government.

The "Hollowing Out" of Corporate Canada - Myth or Reality?

One of the arguments raised by opponents of Xstrata's take-over of Falconbridge was that the acquisition would contribute to the "hollowing out" of the Canadian corporate sector. This is a long-standing objection to foreign acquisitions of Canadian businesses. Proponents of this view argue that foreign take-overs lead to the disappearance of Canadian head offices, resulting in a direct loss of head office employment - particularly senior management functions - as well as a reduction in demand for ancillary financial, legal and other services.

A study released by Statistics Canada in July 2006, however, found that there may be no basis for these concerns.1 Looking at the data for the years 1999 to 2005, the study reported that foreign take-overs have not had a negative impact on employment in Canadian head offices. Instead, more head offices were actually created than were closed as a result of foreign take-overs, and there was a net increase in levels of head office employment. By contrast, firms that went from foreign to Canadian control experienced a decline in head office employment.

Indeed, more generally, the report concluded that much of the dynamism in Canada's head office sector is generated by foreign-controlled firms. Thus, between 1999 and 2005, foreign firms accounted for all of the growth in the number of head offices in Canada and the majority of the gains in head office employment.

These findings have important implications for the debate surrounding foreign investment in Canada. The fact that foreign control does not necessarily lead to a reduction in head office employment, or senior management input, would tend to undercut at least one argument against restricting foreign investment in Canadian businesses.

Possible Amendments to the ICA?

Perhaps not surprisingly, it appears that the sympathies of the minority Conservative government currently in power in Canada tend towards encouraging rather than constraining foreign investment. This has led the government to announce that it will undertake a review of the ICA to ensure that it is in line with best practices in other jurisdictions and maximizes the benefits of foreign investment while retaining Canada's ability to protect its "national interests" on a principled basis.

The government's commitment to review the ICA is set out in a document entitled Advantage Canada, which was released by Canada's Department of Finance on November 23, 2006.2 Advantage Canada describes the government's long-term plan for making Canada a "true world economic leader". In that context, it comments on the benefits of foreign direct investment in Canada, including providing additional capital to fuel firms' growth and exposing domestic firms to new technologies, innovative ways of doing business and healthy competition.

According to Advantage Canada, a review of the ICA is appropriate because the statute has not been amended significantly since its adoption in 1985, notwithstanding "dramatic changes in the world economy" in the interim. The plan notes further that the ICA, like other restrictions on foreign ownership in Canada, may create the perception that "Canada is not fully open to foreign investment".

Based on the tenor of the comments in Advantage Canada, it would appear that the government's intention is to generally reduce the scope or application of the ICA except in certain circumstances. For example, the plan suggests that one (rare) instance in which government intervention may be justified is when a large state-owned enterprise with non-commercial objectives and unclear corporate governance and reporting procedures attempts to acquire a Canadian business.

This latter point is likely a reference to the concerns that were raised when state-owned China Minmetals Corporation sought to acquire Noranda Inc. in 2005. The Minmetals transaction did not proceed, but the former Liberal government introduced proposed amendments to the ICA to ensure that the Minister would be able to review (and block) transactions on national security grounds.3 The Liberals were defeated before these amendments could be passed, but it appears that the minority Conservative government now intends to consider similar provisions as part of its ICA review. If adopted, this would put Canada in line with other major trading partners, such as the United States, that also permit the screening of foreign investments for reasons of national security.

1 M. Brown and D. Beckstead, "Head Office Employment in Canada, 1999-2005", Canadian Economic Observer, July 2006, Statistics Canada, available at

2 The Department of Finance's press release, with a link to Advantage Canada, is available at

3 Bill C-59, An Act to amend the Investment Canada Act, 1st Session, 38th Parliament, 2005 (First Reading: June 20, 2005), available at:

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