On April 10, 2008 the Federal Minister of Industry, Jim Prentice, publicly confirmed that he has rejected the planned CDN$1.325 billion sale of MacDonald, Dettwiler and Associates Ltd.'s (MDA) Information Systems and Geospatial Service Operations division to U.S-based Alliant Techsystems Inc. (ATK). The Minister's rejection may signal a more rigorous enforcement approach to proposed acquisitions.
The basis for the Minister's rejection of the sale is that he is not satisfied that the investment is "likely to be of net benefit to Canada" as required under the Investment Canada Act (ICA). Media reports have indicated that, while there may have been other factors at play, national security concerns relating to Arctic sovereignty and the feared loss of control over the Radarsat-2 satellite operated by MDA have played an important role in the Minister's decision.
Approval of the transaction is still possible under the ICA. ATK has 30 days to appeal the decision and make new arguments to the Minister. If Mr. Prentice confirms his rejection of the transaction, it will be the first time in the 23-year history of the ICA that a transaction outside of the cultural sphere has been blocked as a result of a failure to meet the "net benefit" test under the ICA.
National Security Concerns
The Minister has not publicly released reasons for his decision, and the review process is confidential. The full significance of Mr. Prentice's decision for investors considering controlling investments in Canadian businesses remains to be seen. However, based on public sources, several observations can be made at this time:
- Mr. Prentice's decision makes clear that even though national security is not an explicit factor in the net benefit determination, concerns about Canada's national security will indeed play a significant role in the Government's review of proposed investments.
- Concerns about national security may be sufficient to block a transaction, regardless of the undertakings a potential investor may be prepared to offer.
- This case demonstrates that serious national security concerns may arise in circumstances where the investor is not a state-owned enterprise (SOE) and/or is not based in a country which would typically be expected to raise concerns about Canadian security. While further clarity on the scope of the national security test will hopefully be provided in the Guidelines on this matter that are expected to be issued by Industry Canada in the next several months, this case confirms that the government believes that it has the authority to oppose transactions on national security grounds under the existing legislative and policy framework.
- Related to the issue of national security, Mr. Prentice's willingness to take a tough stand in this case (and apparent public support for his position) also increases the likelihood that he will be prepared to do so more generally in cases involving proposed investments in Canada by investors considered to be SOEs (notably sovereign wealth funds). A copy of Guidelines that were published in December 2007 on this subject can be found on Investment Canada's website at: http://www.ic.gc.ca/epic/site/ica-lic.nsf/en/lk00064e.html#state-owned. For a review of these Guidelines, see the December 7, 2007 Osler Update, "New State-Owned Investment Guidelines Released."
- It is too early to say whether Mr. Prentice's decision signals a shift towards a more vigorous approach to the review of proposed foreign investments in Canada for investments which do not give rise to national security concerns or concerns about foreign state influence.
Retention of Assets Vital to Canadian Industries
Despite a public outcry about the "hollowing out" of corporate Canada, Industry Canada has allowed foreign investors to acquire control of some of Canada's most well-known companies, such as Dofasco, Inco, Falconbridge and Alcan. However, in a speech to the Canadian Space Agency in St. Hubert, Québec on April 11, 2008 Mr. Prentice made a number of statements in defence of his decision to block the sale of MDA which suggest that the basis for his decision was not solely related to national security considerations.
Notably, Mr. Prentice 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." This statement suggests that Minister Prentice is of the view that maintaining Canadian-owned national champions and Canadian ownership of assets vital to Canadian industries is itself a worthy goal, in addition to the existing requirement that foreign investments involving an acquisition of control should be carefully reviewed and only permitted where there is a demonstrable "net benefit to Canada."
Competition Policy Review Panel
The Competition Policy Review Panel is, amongst other things, undertaking a wholesale review of the ICA and foreign investment in Canada (other than national security and SOE issues). Particularly in light of this most recent development, the recommendations of the Panel will be of significant interest. These recommendations are expected in June 2008.
Peter Franklyn is the Chair of the firm's highly regarded Competition/Antitrust Law Group. Shuli Rodal is a partner in the Competition & Antitrust Law Group of the firm's Business Law Department. Nicole Brown is an associate in the firm's Competition & Antitrust Law Practice Group in the Toronto office.
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