Last week, Industry Minister Tony Clement sent a demand letter
to United States Steel Corp. ("US Steel") insisting that
it fulfill the undertakings given to the Canadian government in its
2007 takeover of Stelco Inc. ("Stelco"). Given the
combination of the political sensitivity of foreign acquisitions of
Canadian businesses, and an economic climate marked by increasing
governmental involvement in business and concern about maintaining
and supporting business activity in the country, the delivery of
the letter and its consequences are being – and will be
– carefully scrutinized.
The focal point for analysis of governmental involvement in
foreign acquisitions of Canadian businesses is the Investment
Canada Act (the "Act"). Under that Act, if a
proposed acquisition by a non-Canadian of a Canadian business meets
or exceeds certain size thresholds, the transaction is subject to
review by the Industry Minister (and/or, in the case of certain
cultural acquisitions, the Minister of Canadian Heritage). The
relevant Minister(s) must be "satisfied that the investment is
likely to be of net benefit to Canada." In most cases, the
acquiror will propose binding undertakings to address governmental
concerns and which support the "benefits" of the
transaction. This was the context for the undertakings given by US
Steel; US Steel's acquisition of Stelco met the threshold for
review, and its undertakings were given in order to satisfy the
Industry Minister that the acquisition was of net benefit to
Canada. Those undertakings were oriented to provide comfort
concerning, among other things, the protection of Canadian jobs and
continued investment in Stelco's operations in Hamilton.
The Act provides the government with the power to impose fines
or even seize assets if a foreign owner does not comply with its
undertakings. The government has now demonstrated that it has an
interest in communicating that undertakings must have some teeth.
However, enforcement may present challenges, in light of the fact
that undertakings are often conditional on factors beyond the
acquiror's control. The current state of the economy may
provide support for foreign acquirors taking the position that they
are unable to comply with their commitments. A potential middle
ground would involve re-negotiation of the undertakings taking into
account changed circumstances.
The issuance of the Minister's letter is the first time the
government has formally commenced enforcement proceedings for
non-compliance by a foreign owner of its undertakings. Whether
Minister Clement's letter is reflective of a new approach to
the enforcement of Investment Canada undertakings or whether it is
intended to achieve other objectives such as results at the
bargaining table may become clearer as the process unfolds, the
fact of the letter is in itself likely to cause acquirors to
consider even more carefully the Investment Canada implications to
proposed M&A transactions.
The content of this article does not constitute legal advice
and should not be relied on in that way. Specific advice should be
sought about your specific circumstances.
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The Canadian Office of the Superintendent of Financial Institutions ("OSFI") recently ruled that a bank cannot promote comprehensive credit insurance ("CCI") within its Canadian branches under the Insurance Business (Banks and Bank Holdings Companies) Regulations (the "Regulations").
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