Early this week, the Investment Canada Act (“ICA”) enforcement case brought by the Canadian Government against U.S. Steel was resolved by way of a landmark settlement. Under the terms of the settlement, U.S. Steel has agreed to (i) continue steel production in Canada until 2015, (ii) make at least $50 million in additional capital investments, and (iii) make further financial contributions of $3 million toward community and educational programs. These commitments are above and beyond U.S. Steel’s undertakings from 2007, as well as beyond the remedies that could have been ordered by the Federal Court. This case and the resulting settlement represents a high-water mark for ICA enforcement and sends an unequivocal message to foreign investors that the Canadian Government will aggressively pursue companies that breach undertakings made to secure ICA approval.
This case stems from undertakings given by U.S. Steel in 2007 to secure ICA approval to acquire Canadian steel maker Stelco. Specifically, U.S. Steel undertook to increase production and maintain certain employment levels in Canada. However, in 2008 and 2009 the company transferred considerable production from Canada to its U.S. facilities and laid-off a significant portion of its Canadian work force. In the face of U.S. Steel’s continued refusal to abide by its undertakings, the Canadian Minister of Industry took the unprecedented step of suing U.S. Steel to enforce the undertakings in question, as well as seek monetary penalties.
The settlement follows the Supreme Court of Canada’s recent decision denying U.S. Steel leave to appeal the Federal Court of Appeal’s decision affirming the constitutional validity of the enforcement provisions of the ICA, including the imposition of fines of up to $10,000 per day per breach until the investor complies with its undertakings.
While the settlement appears to be a clear victory for the Canadian Government, the basis for the settlement is unclear. Specifically, it is not clear whether the cost of the settlement exceeds the financial benefits realized by U.S. Steel by breaching its undertakings – a potentially significant issue from a deterrence perspective. This lack of transparency underscores a significant concern with the ICA review process generally. This concern aside, this case has impacted the ICA process in two key ways: (i) it sends a strong message to foreign investors that compliance with their undertakings is not optional, and (ii) it has caused the Canadian Government to adopt a more rigorous approach to documenting undertakings.
A copy of Industry Canada’s press release announcing the settlement can be accessed here.