Copyright 2009, Blake, Cassels & Graydon LLP
Originally published in Blakes Bulletin on International Trade & Investment–China Focus, January 2009
Chinese, and indeed all non-Canadian, investors who plan to invest in Canada through the establishment or acquisition of a Canadian business, must pay careful attention to the Investment Canada Act (ICA). In some cases, the ICA requires transactions to be approved by the Minister of Industry and/or the Minister of Canadian Heritage as being of net benefit to Canada before they may proceed.
In recent years, in response to public interest in the growth of foreign direct investment in Canada, particularly in relation to certain sectors of the economy – such as the mining, natural resource, and military sectors – politicians have focused on the adequacy of the ICA to protect Canadian interests, while at the same time attracting sufficient foreign direct investment. In this regard, discussions have focused on three main issues:
- amending the ICA to address the absence of a "national security" test;
- amending the ICA thresholds and process for ICA merger review (as set out in the Competition Policy Review Panel Report released in June 2008, and then later endorsed by the federal government in its Throne Speech on November 19, 2008); and
- addressing investments by State-Owned Enterprises (SOEs).
If Canada were to amend the ICA to address these concerns, however, questions arise, in light of its international trade and investment obligations, as to how far the government can actually go in amending the legal framework for investment in Canada.
LEGAL FRAMEWORK FOR INVESTMENT IN CANADA
The purpose of the ICA is to encourage investment in Canada "that contributes to economic growth and employment opportunities" and to provide for a review of certain investments in Canadian companies to ensure that such investment is of "net benefit to Canada". In making this determination, the Minister will apply the principles set out in the ICA. The Minister will consider the plans of the investor and the undertakings it submits in relation to:
- the impact of the investment on the level and nature of economic activity in Canada;
- participation by Canadians in the newly acquired business and in the industry in which the business forms a part;
- the impact on productivity, efficiency, technological development and innovation;
- the impact on domestic competition;
- compatibility with industrial, economic and cultural policies;
- the impact on Canada's ability to compete globally.
These factors apply to all investors, including SOEs. However, additional rules apply to SOEs as set out in the SOE Guidelines.
The SOE Guidelines
The SOE Guidelines note that in addition to the above, the Minister will examine the following criteria when reviewing applications for review from an SOE:
- the corporate governance and reporting structure of " the SOE – this examination will include whether the SOE adheres to Canadian standards of corporate governance (including, for example, commitments to transparency and disclosure, independent members of the board, independent audit committees, and equitable treatment of shareholders); and
- whether the Canadian business to be acquired by the " SOE will have the ability to continue to operate on a commercial basis regarding where to export, where to process, the participation of Canadians in its operations in Canada, support of ongoing R&D, and appropriate levels of capital expenditures to maintain the Canadian business in a globally competitive position.
The SOE Guidelines suggest that to ensure that an acquisition by an SOE is of "net benefit to Canada", the foreign investor may submit specific undertakings, including the appointment of Canadians as independent directors on the board of directors, the employment of Canadians in senior management positions, the incorporation of the business in Canada, and the listing of shares of the acquiring company or the Canadian business being acquired on a Canadian stock exchange.
The SOE Guidelines clarify that the Minister will continue to examine SOEs in a manner similar to how the Minister examines all other foreign investors, i.e., whether the investment is likely to be of net benefit to Canada. In this regard, the Canadian government has not created any additional apparent barriers for investments by foreign SOEs into Canada. At the same time, the SOE Guidelines suggest that SOEs must demonstrate some degree of transparency in their operations and governance, and their commitment to continue the operation of the Canadian business to be acquired on a commercial basis.
NATIONAL SECURITY AND CALL FOR AMENDMENTS
On May 8, 2008, the Minister refused to approve the acquisition of MacDonald, Dettwiler and Associates Ltd. by a U.S. company called Alliant Techsystems Inc. At the time, this decision was speculated to be based largely on concerns over national security (although the Minister's reasons are not public). This move was applauded by Parliament and the public, and suggested an acceptance of national security as a ground for not approving a transaction.
In June 2008, the Competition Policy Review Panel Report was released noting:
"The Panel believes that it is in Canada's interests in a post-9/11 world to have in place an explicit national security test to support its trade and investment policies. As such, we support the Minister of Industry's statement that the government intends to carefully consider the creation of a new review requirement for transactions that raise "national security" concerns. We respectfully suggest that the scope of this review requirement should be aligned with that of the investment review process used by the Committee on Foreign Investment in the United States. This would bring Canada into line with other countries that have introduced a national security screening procedure, including the United Kingdom, China, Japan and Germany.
The Panel also welcomes the Minister of Industry's recent clarification concerning the ICA's application to state-owned enterprises. We believe that the new guidelines will improve transparency in the administration of the ICA [emphasis added]."
More recently, on November 19, 2008, the federal government, in its Throne Speech, announced its intention to introduce legislation to "expand the opportunities for Canadian firms to benefit from foreign investment" and to safeguard "Canada's national security". In doing so, it announced its intention to make the changes to the ICA as set out in the aforementioned Competition Policy Review Panel Report.
If Canada were to change the ICA, any such amendment cannot broaden the scope of review by Canada of foreign investments. Any amendment of the ICA – even if to simply include an express national security test – would need to be carefully scrutinized from the perspective of Canada's international trade and investment obligations to determine whether any such obligations are violated. Similarly, introduction of new legislation to create a national security review mechanism would also need to be tested against such obligations.
With respect to SOEs, it is unlikely that the Canadian government would wish to be viewed as blocking foreign investment without a strong justification for doing so. As Canadian International Trade Minister David Emerson made clear at a gala for the Canada China Business Council in Beijing on January 10, 2008, China's investment – even by SOEs – is sought after: "Let me be clear ... Canada welcomes Chinese investment. Canada remains open and welcomes foreign investment – both private and state-owned." The president of the CCBC (a former Canadian minister of international trade and Canadian ambassador to the WTO) reaffirmed this sentiment: "[Canada] must welcome investment from China, including FDI by the State-Owned Enterprises, and under proper circumstances, investments in Canada's natural resources sector."
With the return of Parliament on January 26, 2009, it remains to be seen whether amendment proposals will come to fruition, and in light of the economic conditions facing all major OECD countries, whether they are willing to enact any rules relating to SOEs specifically and risk chilling the much needed foreign direct investment Canada requires as a small open economy.
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