On December 12, 2011, Canada's federal Minister of Industry, the Honourable Christian Paradis, announced that the Canadian government will discontinue its application for an order requiring U.S. Steel to abide by certain undertakings provided under the Investment Canada Act (the "ICA") in connection with U.S. Steel's acquisition of Stelco in 2007. The Canadian government agreed to discontinue proceedings in exchange for U.S. Steel's commitment to what the government describes as "significant new and enhanced undertakings" in respect of its Canadian business.

The government brought an application after U.S. Steel shut down most of its Canadian operations in 2009. U.S. Steel argued that it was justified in doing so under ICA guidelines which provide that foreign investors will not be held accountable for non-compliance with undertakings where the "inability to fulfil a commitment is clearly the result of factors beyond the control of the investor". The Canadian government took a different view and commenced proceedings in Federal Court for an order requiring U.S. Steel to comply with its undertakings and pay $10,000 in penalties for each day that it was in breach of these commitments. This marked the first time that the Canadian government had applied to a court to enforce ICA undertakings.

As part of its defence to the Canadian government's application, U.S. Steel challenged the constitutionality of the ICA's enforcement provisions. U.S. Steel alleged that the ICA enforcement process violated the right to be presumed innocent and the right to have a fair hearing, as enshrined in the Canadian Charter of Rights and Freedoms, as well as the right to a fair hearing provided for in the Canadian Bill of Rights. Both the Federal Court, Trial Division and the Federal Court of Appeal dismissed U.S. Steel's constitutional arguments. In particular, the Courts held that the ICA is not the type of "penal" statute to which these constitutional protections apply, notwithstanding that the ICA contemplates the potential imposition of significant monetary penalties on parties found to be in breach. On November 24, 2011, the Supreme Court of Canada denied U.S. Steel's application for leave to appeal. This appears to have precipitated settlement discussions with the Canadian government, the results of which have now been made public.

According to Minister Paradis's announcement, U.S. Steel has agreed to operate its Lake Erie and Hamilton plants until at least 2015 and to make at least $50 million in additional capital investments to maintain its Canadian facilities by December 2015 (over and above its original undertaking to invest $200 million by October 31, 2012). The plants were re-opened by U.S. Steel during the dispute, but are operating at reduced employment levels. The company has also agreed to contribute $3 million towards community and educational programs in Hamilton and Nanticoke, with $1 million of this contribution due by early February 2012.

The U.S. Steel settlement allows the Canadian government to avoid protracted litigation while underscoring its intended message, namely that foreign investors must take their ICA undertakings seriously. It also comes against the backdrop of recent statements by the Prime Minister and Minister Paradis that while the Canadian government continues to welcome foreign investment, it will also insist on commitments that promote economic activity and employment in Canada, where appropriate.

This resolution also brings the U.S. Steel case into line with the more usual practice of foreign investors negotiating new replacement undertakings if they are subsequently unable to meet commitments negotiated at the time of acquisition. Since 2009, the ICA has expressly authorized the Minister to accept a new undertaking from an investor which has failed to comply with prior undertakings.

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