In the wake of the Canadian government’s announcement that it plans to make targeted changes to the Investment Canada Act (ICA), the Honourable Christian Paradis, Minister of Industry, announced on May 25 that additional amendments will be made to the ICA and the foreign investment review process. Other proposed amendments, including the publication of reasons for interim decision, and enabling the Minister to accept the posting of security for the performance of undertakings, had already been announced on April 27, 2012.
The latest proposed changes include:
- Implementing the increase in the review threshold from C$330 million (based on book value of assets of the Canadian business) to C$1 billion (based on enterprise value) for WTO member countries(part of the 2009 amendments, the implementation of which had been stalled – see below);
- A new guideline for mediation procedures under the ICA for resolving disputes in relation to compliance with undertakings.
Asset value—or book value—is the traditional metric used for valuing Canadian businesses under the ICA to determine whether an acquisition of control by a non-Canadian investor will meet the applicable threshold and require Ministerial review and approval under the Act. Currently, the review threshold for investments by WTO investors is set at C$330 million and is indexed to the growth in nominal GDP at market prices, pursuant to section 14.1(2) of the Act. The government’s proposed switch to “enterprise value” was originally included in draft regulations under the ICA in March, 2009 which, to date, have not been promulgated.
As discussed in our previous post, the concept of “enterprise value” for publicly-traded companies was proposed in 2009 to be defined as market capitalization, plus total liabilities, minus cash and cash equivalents. As for privately-held entities, such organizations would continue to be valued on the basis of the book value of the assets in question. Exactly how and when these values were to be determined, however, proved more difficult to implement than anticipated.
A letter from the Canadian Bar Association (CBA) in August, 2009, raised concerns about the market capitalization component of “enterprise value” due to the volatility of this metric and the requirement contained in the draft regulations to update it on a quarterly basis. In particular, the CBA noted that “a transaction might close very shortly after the end of a fiscal quarter such that the value of the equity securities cannot be determined until very close to closing, or may not even be known at closing. In situations where the market capitalization hovers around the review threshold, this would cause substantial unpredictability for the investor.”
The government has not indicated whether it will be making changes to the definition of “enterprise value” in view of the comments made by the CBA, however it has stated that the changes to the ICA will be made in accordance with the core recommendations of the Compete to Win report of the Competition Policy Review Panel published in June, 2008.
New draft regulations on “enterprise value” were to have been issued this weekend, but had not materialized, as of the time of posting.
Guidelines for Mediation Procedures
The second major change announced by Minister Paradis on May 25 is the issuance of a Mediation Guideline (Guideline) to ensure the availability of formal mediation procedures under the ICA. The Guideline, issued pursuant to section 38 of the ICA, will apply where the Minister believes that a non-Canadian investor has failed to comply with a written undertaking made in relation to an approved investment. This mediation process is designed to avoid costly and protracted litigation in the courts, which, as seen in the U.S. Steel case, can be expensive and burdensome for all the parties involved.
The ability to mediate disputes over breaches of undertakings will likely make it easier for the Minister to enforce undertakings, since mediation is generally simpler and cheaper than litigation, particularly in the context of the complex ICA regime.