In August 2019, Genworth Financial, Inc. (Genworth) announced that it had agreed to sell its approximate 57% shareholding in Canadian subsidiary Genworth MI Canada Inc. (Genworth Canada) to Canadian headquartered Brookfield Business Partners L.P. (Brookfield) for approximately C$2.4 billion. Genworth Canada, through one of its subsidiaries, is Canada's largest private-sector residential mortgage insurer. The deal is expected to close before the end of 2019.
One of the more interesting aspects of the announced deal is the reason that Genworth decided to divest of what its CEO had referred to as "one of [Genworth's] top performing businesses".
In October 2016, China Oceanwide Holdings Group Co., Ltd. (Oceanwide), a company incorporated in the People's Republic of China, agreed to acquire Genworth. As a result, Oceanwide was required to obtain Canadian regulatory approval of its indirect acquisition of control of Genworth Canada and, in considering whether to grant that approval, the Canadian regulator was required to consider a number of factors including the potential impact of the transaction on Canada's "national security".
When the Canadian regulator failed to grant its approval in a timely fashion, at least from the parties' perspective, Genworth, in the words of its CEO, found itself with "no choice" but to dispose of Genworth Canada in order to remove the need for such clearance. Brookfield then stepped in and agreed to purchase Genworth's stake in Genworth Canada.
Why such a drastic action was required in order to avoid the need for a Canadian regulatory approval should be of interest to foreign investors considering making direct or indirect investments in Canada.
Background
The October 2016 merger agreement between Oceanwide and Genworth contemplated that the transaction would have to clear numerous regulatory hurdles in the United States, Canada, Australia, New Zealand and the People's Republic of China before it could close – not unusual for a transaction involving multinational companies.
What probably was not expected was that the regulatory hurdles would turn the proposed takeover into a 3-year marathon transaction that still has not closed. That delay in closing appears, in large part, to have been caused by national security concerns raised in both the United States and Canada. Most recently, a 12th waiver and agreement extended the closing to December 31, 2019.
In the United States, the parties agreed to file a joint voluntary notice with the Committee on Foreign Investment in the United States (CFIUS). CFIUS has the power to undertake national security reviews in respect of transactions in which a non-American proposes to acquire control of a U.S. business.
The CFIUS review in this case proved initially problematic but, after protracted negotiations and re-filings, CFIUS concluded in June, 2018 that there were "no unresolved national security concerns with respect to the proposed transaction."
It was reported that the CFIUS clearance had stalled because of concerns about China-based Oceanwide having access to sensitive U.S. personal data which Genworth obtained and retained in the ordinary course of its financial services business. In a press release, Genworth confirmed that Genworth and Oceanwide had, in order to obtain the CFIUS clearance, entered into a mitigation agreement with the U.S. government that, among other things, requires Genworth to use a U.S.-based, third-party service provider to manage and protect personal data related to Genworth's U.S. policyholders.
Because of Genworth's controlling interest in Genworth Canada, the proposed indirect acquisition of control of Genworth Canada by Oceanwide also required the filing of a notification under the Investment Canada Act and, because at least one of Genworth Canada's subsidiaries is regulated under the Insurance Companies Act by the Office of the Superintendent of Financial Institutions Canada (OSFI), the prior approval from the Canadian Minister of Finance (MoF). Under both pieces of legislation, Canadian regulators are required to take into consideration potential Canadian national security concerns, and under the Insurance Companies Act, OSFI may also take into account "Canada's international relations".
Oceanwide submitted a notification under the Investment Canada Act on December 1, 2016 and received confirmation on December 6, 2016 that the proposed transaction would not be subject to that Act's economic "net benefit" review and approval process.
The Investment Canada Act also expressly provides for a separate review process with respect to Canadian related investments by non-Canadians if the Minister of Innovation, Science & Economic Development (Innovation Minister) has reasonable grounds to believe that such an investment could be injurious to Canada's national security. The December 6 confirmation did not rule out the possibility that such a national security review might still be conducted; however, that review process had to be initiated by notice issued within 45 days of Oceanwide's December 1, 2016 notification and its does not appear that such a notice was issued by the Innovation Minister.
Oceanwide also filed its application for MoF approval with OSFI on December 8, 2016. As noted above, national security and Canada's international relations are factors that may be considered under the Insurance Companies Act in deciding whether to grant that approval.
During an earnings conference call in early May, 2019, Genworth's CEO reported that, although the Canadian filings had been made in December 2016, given the changes to the transaction and delays caused by the CFIUS clearance process, the parties had not started "significant discussions" with the Canadian regulator until January 2019. The CEO also confirmed that a mitigation approach similar to that agreed to with CFIUS had been presented to the Canadian regulator and that the parties had met with OSFI in person several times to answer OSFI's questions and to provide additional information regarding the proposed mitigation plan. Further, during the last meeting in early February 2019, OSFI had informed the parties that OSFI had all of the information that it needed to complete its review. Since then, the Canadian regulator had been reviewing the matter but had not committed to a time frame for the completion of that review.
By the end of June 2019, the parties still had not received Canadian clearance and, as part of a further waiver and agreement to extend closing to November 30 2019, Oceanwide agreed that, in the absence of any substantive progress in discussions with OSFI, Genworth could solicit interest for a potential disposition of its controlling interest in Genworth Canada. Genworth's CEO stated that "the lack of transparent feedback or guidance from Canadian regulators about their review left us no choice but to look at strategic alternatives for [Genworth Canada] that would eliminate the need for Canadian regulatory approval of the Oceanwide transaction."
A press report stated that OSFI had confirmed that it was continuing its review of Genworth's application in consultation with the Department of Finance and Public Safety Canada. Further, in an email OSFI stated that "while there is no specific time limit on the assessment of applications, OSFI endeavours to complete all application assessments as quickly as possible". Obviously not quickly enough for the parties, given the announcement of the disposition of Genworth Canada to Brookfield about a month and half later and over six months after Genworth and Oceanwide reportedly had completed their substantive submissions to OSFI.
Canadian National Security Reviews Pursuant to the Insurance Companies Act and the Investment Canada Act
Little is publicly known about how OSFI conducts its national security assessments. However, given OSFI's acknowledgement that Public Safety Canada was involved in the Genworth matter, it is likely appropriate to assume that the process is similar to that used by the Innovation Minister in conducting national security reviews under the Investment Canada Act.
As part of that review process, the Innovation Minister consults with the Minister of Public Safety and Emergency Preparedness, who, in providing advice, will take into account and often reflect the views of his or her own department as well as those of security agencies and relevant departments such as the Canadian Security Intelligence Service, Communications Security Establishment, National Defence and Royal Canadian Mounted Police, among others.
The Guidelines on the National Security Review of Investments issued under the Investment Canada Act provide a non-exhaustive list of factors that can be taken into consideration in connection with a national security review including factors such as the potential effect of the foreign investment on Canada's defence capabilities and interests, the potential effects of the foreign investment on the transfer of sensitive technology or know-how outside of Canada, the potential impact of the investment on the security of Canada's critical infrastructure, and perhaps of specific relevance to the Genworth transaction in light of the mitigation agreement that CFIUS required and Canada's ongoing diplomatic issues with China, the potential of the investment to enable foreign surveillance or espionage, and the potential impact of the investment on Canada's international interests, including foreign relationships.
Investments originating from China appear to have attracted particular interest from Canada's national security apparatus. The Innovation Minister's 2017/2018 Annual Report confirms that, during the period April 1, 2012 to March 31, 2018, 15 national security reviews were conducted under section 25.3 of the Investment Canada Act. Of those reviews, two thirds involved investments originating from China, with the result that 2 were blocked, 3 required divestitures, 4 were allowed with conditions and 1 was withdrawn.
The 10 reviewed Chinese investments involved a range of business activities including telecommunications, computer equipment and related services, electrical equipment, ship building, heavy and civil engineering construction and pharmaceutical businesses.
Given Canada's interest in protecting its defence capabilities, sensitive technologies and know-how and infrastructure, it can be understood why such sectors attract special attention. A casual observer might however have been surprised that an indirect investment in a Canadian insurance company managed to set off national security alarm bells in Ottawa.
When the Investment Canada Act and a number of other federal laws were amended in 2009 to provide for national security assessments, the risk posed by allowing foreigners to obtain access to large volumes of the personal data of Canadians might not have been top of the mind with Parliamentarians. However, if this was ever the case in 2009, matters have clearly evolved as evidenced by a number of data-related transactions reviewed by CFIUS in the U.S. and now Canada's review of the Genworth transaction.
CFIUS recently broadened its interest in foreign investments to include both acquisitions of controlling and non-controlling interests in what it refers to as "TID US businesses" – i.e., critical technology, critical infrastructure and sensitive personal data businesses. Canada's review of the Oceanwide/Genworth transaction suggests that it is equally concerned in protecting sensitive Canadian personal data. In any event, it is safe to say that the industries or business activities that may attract the interest of Canada's security agencies have broadened since what may have initially been expected in 2009.
Potentially complicating the decision-making process in the Genworth transaction was the strained diplomatic relation between the People's Republic of China and Canada. Factors such as the PRC's ongoing detention of 2 Canadian citizens (allegedly in response to Canada's detention at the request of the U.S. Department of Justice of Huawei senior executive Meng Wanzhou), trade actions taken against Canadian agricultural products and the then looming 2019 federal election in Canada all would very likely have impacted on the clearance process. Additionally, since the Investment Canada Act defines what may constitute a "state-owned enterprise" very broadly, it is also conceivable that the Canadian regulators may have been concerned with the extent of China's ability to influence the operations of Oceanwide, further complicating an already complicated clearance process.
While one could easily conclude, based on the foregoing, that politics played a role in the clearance process, the secrecy surrounding the substantive aspects of national security reviews in Canada makes it difficult to know definitively why, after CFIUS had conditionally cleared the transaction in the US, Canada could not or was unwilling to move more quickly to come to a similar decision. However, given the uncertainties of timing and whether approval would ultimately be granted, Genworth's decision to cut the Gordian knot represented by the ongoing Canadian review process and to simply divest its interest in Genworth Canada becomes more understandable.
Takeaways from Oceanwide's experience include the reality that it is vital for a foreign investor to consider at an early stage in any merger or similar transaction that may have a Canadian aspect to it whether the transaction might raise national security concerns in Canada, and that such concerns may be considerably broader than might be conventionally considered a matter of national security. Canada's relations with friends and foes alike – and even the domestic electoral calendar – could drive decision-making as easily as the hard assessments of traditional security agencies. In the final analysis, Oceanwide/Genworth also stands as a reminder that, while investors might hope that transactional reviews are limited to the strict confines of traditional security assessment, the express role of ministers and Cabinet in the two Acts means that politics must never be discounted in anticipating final outcomes.
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