Canadian Government blocks U.S. firm's offer to buy Canada's leading space business
A recent decision under Canada's foreign investment law, which involves as the target a space technology firm, raises questions about whether the ruling marks a shift in the way in which our federal government is going to look at foreign investments in Canada and whether this development will put a chill on foreign takeovers.
The Canadian government refused to give its approval to the proposed acquisition of the space technology division of MacDonald, Dettwiler and Associates ("MDA"), a Vancouver, B.C. - based company, by Alliant Techsystems Inc. ("Alliant"), a Minnesota-based arms manufacturer and U.S. defence contractor. The proposed acquisition includes the space-based radar systems, space robotics, satellite systems and intelligence, surveillance and reconnaissance capabilities of MDA, for a purchase price of $1.3 billion.
Canada's Minister of Industry, Jim Prentice, confirmed last week that he sent a letter to Alliant stating that he is not satisfied that its proposed investment would likely be of "net benefit to Canada". Under the regulatory framework established for the review of foreign investments in Canada, Alliant now has thirty days within which to make representations and submit further undertakings to the government, with a view to obtaining approval of its proposed investment in MDA.
It remains possible for Alliant to restructure its proposed acquisition or offer up further concessions or undertakings in relation to how it will run the space division of MDA. Indeed, the Minister of Industry has publicly stated that the deal is not dead and that discussions are ongoing between Alliant representatives and the government. However, it may be impossible – politically – for the government to reverse itself in light of the overwhelming support of the Canadian public, based largely on nationalist sentiment, for the decision to block the transaction.
By way of background, the regulatory framework whereby large-scale investments in Canada can be reviewed by the federal government is contained in the Investment Canada Act ("ICA"). Foreign investments that exceed a designated financial threshold are subject to review. The threshold for review for a foreign investment from a World Trade Organization ("WTO") country is currently $295 million. For non-WTO countries, it is $5 million. For certain sensitive sectors, specifically financial services, transportation services (including pipelines), uranium and cultural businesses (such as book publishing and distribution, or film production and distribution), the threshold for review of investments currently stands at $5 million for a direct investment and $50 million for an indirect investment.
In order to obtain approval, a prospective investor has an obligation under the ICA to demonstrate that the investment is likely to be of "net benefit to Canada". The ICA enumerates six factors to be considered in assessing a proposed investment, specifically:
- The effect of the investment on the level and nature of economic activity in Canada
- The degree and participation by Canadians
- The factors of productivity, efficiency, technological development, product innovation and variety
- Competition in Canada
- The compatibility with national industrial, economic and cultural policies
- Canada's ability to compete in world markets
The review mechanism under the ICA does not spell out how the net benefit test will be applied or what combination of factors is required to be met. Reasons for decisions are not published, hence there is little guidance to investors as to how the discretion of the Minister of Industry is exercised under the net benefit test.
Decision is unprecedented
The decision in the Alliant transaction - if not reversed - will be unprecedented, inasmuch as every other review that has been undertaken by the government since the enactment of the ICA in 1985 has been approved. Notably, not reflected in this are investment proposals that were withdrawn before a potentially adverse decision was rendered.
Arguably, the government's decision to block Alliant's investment may be limited to the unique circumstances of the proposed transaction. MDA's space division created and developed the iconic Canadarm – a source of national pride for Canadians. More recently, MDA developed and owns Radarsat–2, a unique and sophisticated surveillance satellite-technology that is capable of piercing through darkness and cloud cover to detect and create images of objects at resolutions of up to three metres. Canadian taxpayers effectively financed eighty percent of the cost of development of the Radarsat-2 technology, since the federal government made a commitment to buy – and prepaid -- $445 million in satellite data from MDA.
The Radarsat-2 technology is considered an essential tool in protecting Canada's sovereignty, particularly over the vast Arctic waters (and the rich resources that lie beneath those waterways). Jurisdictional questions over the transfer of Radarsat-2 technology and uncertainty as to whether foreign ownership of Radarsat-2 could result in the U.S. government preventing Alliant from delivering critical satellite data to the Canadian government were factors in the decision to block the transaction.
Protecting National Security
Unlike other jurisdictions, Canada's foreign investment law does not contain an explicit national security test for foreign investments. The U.S. increased the scrutiny required before the federal government may approve certain acquisitions of U.S. assets by foreign nationals following the attempt by Dubai Ports World to acquire an interest in six U.S. ports. The Exon-Florio statute, as amended by the Foreign Investment and National Security Act of 2007, ensures that foreign investment transactions do not jeopardize U.S. national security, critical infrastructure and key technology.
In another jurisdiction, the New Zealand government recently rejected the Canada Pension Plan Investment Board's offer to take a 39.2 per cent interest in Aukland International Airport Ltd., stating that the proposed investment would not be of benefit to the country. Uncertainty as to whether the proposed Canadian investment met the requirement that control of key strategic assets and important infrastructure must remain in New Zealand hands was a factor in the decision.
In Canada, protecting national security and critical infrastructure has certainly been on the federal government's radar screen for some time. Perhaps the Alliant transaction has crystallized the issues that are critical to a national security test and the government will finally articulate one to guide prospective foreign investors.
Implications of the Decision
Does the government's decision to block Alliant's investment in MDA mark the beginning of a change in the political climate in relation to foreign investment in Canada? It may, given the significant concerns expressed by business leaders and the public about the extent of foreign takeovers of Canadian firms and the "hollowing out" of Canadian corporate Canada in recent years. Recent high-profile foreign take-overs of such Canadian icons as Inco (nickel), Stelco and Dofasco (steel) have added to the unease of the Canadian public on this issue.
Of particular interest are comments made by the Minister of Industry in a speech to the Canadian Space Agency on 11 April 2008 (after Alliant was notified of the Minister's decision). The Minister expressed the need, in a knowledge-based economy, to own our technology and the intellectual property that comes with it. He stated that "When it comes to decisions on whether foreign purchases represent a net benefit to Canada, my bottom line is this: Canada must retain jurisdiction and control of technologies that are vital to the future of our industry and the pursuit of our public policy objectives. We will not accept loss of jurisdictional control to another party". He said that we must "retain the ownership of the technology and the know-how that goes with it". Whether this was intended to provide a roadmap for Alliant, as it negotiates with and seeks the government's approval of the acquisition in the next thirty days, remains to be seen.
Of greater interest is whether these principles – never before articulated by the federal government – establish a new approach to assessing the net benefit to Canada in the case of every high-tech industry acquisition or whether their application is limited to takeovers of Canadian firms in the space industry.
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