The high level of activity of foreign acquirors and investors in
the natural resources area, particularly in the mining sector, has
resulted in heightened interest in the requirements of the
Investment Canada Act and recent developments relating to
Under the Investment Canada Act, a direct acquisition
of control of a Canadian business is generally subject to review if
the acquiror is not Canadian and the asset value of the Canadian
business exceeds C$312 million. Under amendments expected to come
into force later this year, the review threshold will increase to
an enterprise value of C$600 million or more, and the threshold
will further increase to C$1 billion over the next four years.
The Act now also provides for review of any foreign investment,
regardless of its size, that could be "injurious to national
security." There is some uncertainty about the scope of the
new provision because "national security" is not defined.
Although we expect that reviews will be infrequent and unlikely to
be generally targeted at the natural resources sector, investments
in certain resources, such as productive uranium assets, could be
Reviews of transactions that meet the applicable size threshold
normally last 45-75 days and require that the transaction be of
"net benefit" to Canada. The test for net benefit is
assessed by reference to a number of factors such as employment,
capital expenditures, technological development and level of
resource processing in Canada. If the investors are state-owned
enterprises, additional net benefit criteria to be considered are
whether the investor operates under standards similar to other
commercial enterprises and whether the investor adheres to Canadian
standards of corporate governance and transparency. The Industry
Minister's approval is usually conditional upon investors
entering into binding three- to five-year undertakings with the
government in which investors commit to maintaining Canadian
operations, production levels, employment levels, R&D
expenditures and capital expenditures.
Given the effects of the global economic crisis, attention has
been focused on situations in which foreign acquirors are having
difficulty fulfilling the undertakings. According to guidelines
issued by the Investment Review Division (IRD) of Industry Canada,
an acquiror will not be held accountable for breaching a commitment
"where inability to fulfill an undertaking is clearly the
result of factors beyond the control of the investor." In
practice, it is also often possible to negotiate new or revised
undertakings when an original commitment cannot be fulfilled. It is
widely believed that a number of investors in the mining sector,
including Vale and Xstrata, have been released from commitments or
have negotiated revised undertakings because current market
conditions have made it difficult to comply with undertakings
entered into two or three years ago.
Recently, there has been significant media focus on the Canadian
government's court proceedings seeking to force United States
Steel Corporation to fulfill regulatory undertakings that the
company made to the Canadian government on acquiring Canadian
steelmaker Stelco Inc. in 2007. The U.S. Steel case marks the first
time since the Investment Canada Act became law in 1985
that the Canadian government has sued a foreign acquiror for
failing to honour its commitments. It is also an extreme and
unusual case. When U.S. Steel acquired Stelco in 2007, it undertook
to increase steel production in Canada by at least 10% and maintain
Canadian employment levels. Instead, it closed most of Stelco's
Canadian operations and laid off over 1,500 employees. Apparently,
no attempt was made to negotiate new or revised undertakings.
Although this case is an important reminder that the government
views undertakings seriously and will endeavour to enforce them in
extreme cases, there is no indication that it signals a change in
the government's basic approach to welcoming foreign
investment. If investors adopt a cooperative and proactive approach
with the IRD to deal with changed circumstances, the IRD would also
normally allow variances when aspects of undertakings cannot be
carried out. But investors should expect the IRD to be more
concerned about its ability to enforce undertakings in the future.
More stringent drafting of undertakings (especially with respect to
performance measurements) and more frequent compliance reporting
(to increase the detection of possible violations) are likely to be
the norm. However, absent similarly extreme circumstances,
investors should not expect the government to bring more
enforcement actions similar to the U.S. Steel case.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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Canada is a constitutional monarchy, a parliamentary democracy and a federation comprised of ten provinces and three territories. Canada's judiciary is independent of the legislative and executive branches of Government.
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