On December 7, 2012, the Canadian government approved two proposed investments in Canadian energy companies by state-owned enterprises (SOEs) under the Investment Canada Act (ICA): the proposed acquisition by PETRONAS of Progress Energy Resources Corp. (Progress) and the proposed acquisition of Nexen Inc. (Nexen) by China National Offshore Oil Company (CNOOC). Norton Rose Canada represented PETRONAS before the Investment Review Division of Industry Canada.
Concurrent with these announcements by the Minister of Industry, the government unveiled new guidelines applicable to future acquisitions of control of Canadian businesses by SOEs. However, the general test under the ICA remains –such acquisitions must be found "likely to be of net benefit to Canada." In any case, acquisitions of control of Canadian businesses with asset book value of less than $330 million are not subject to review.
This update reviews the two approvals, explains the new rules, and provides practical suggestions for investors—both SOEs and private sector investors— who may be faced with navigating the ICA in the future.
The oil and gas approvals
On June 28, 2012, PETRONAS, the Malaysian national oil and gas company (and one of the largest LNG producers in the world), and Progress announced that PETRONAS Canada would acquire Progress for approximately C$5.5 billion. Progress is focused on the exploration, development and production of large, unconventional natural gas resources in northeast British Columbia and northwest Alberta. The announcement identified several areas where the transaction was likely to be of net benefit, including PETRONAS Canada’s plan to combine its Canadian business with that of Progress and to retain all the employees of Progress to capitalize on the experience and depth of the Progress team.
On October 19, 2012, the Minister of Industry provisionally advised PETRONAS Canada that he was not satisfied the transaction was likely to be of net benefit to Canada. Under the ICA, PETRONAS Canada had an additional 30 days (or a longer agreed period) to make additional representations to the Minister, and PETRONAS Canada held further meetings with Investment Canada officials.
In approving the PETRONAS transaction, the Minister’s statement did not include a detailed description of the commitments provided by PETRONAS to demonstrate net benefit to Canada. However, the statement does indicate that,“PETRONAS has made significant commitments to Canada in the areas of governance, including commitments on transparency and disclosure; commercial orientation, including an adherence to Canadian laws and practices as well as free market principles; as well as employment and capital investments, which demonstrate a long-term commitment to the development of the Canadian economy."
On July 23, 2012, CNOOC, China’s largest producer of offshore crude oil and natural gas, announced it had agreed to acquire Nexen for approximately US$15.1 billion. Nexen has interests in the Canadian oil sands, but also has projects in Europe, the United States and Africa. In announcing the transaction, CNOOC identified a number of plans that were designed to demonstrate its commitment to Canada and that the transaction was likely to be of net benefit. These included:
- plans to establish Calgary as the head office of its North and Central American operations, responsible for operating and growing Nexen’s assets in North and South America, Europe and West Africa and CNOOC Limited’s portfolio in Canada, the U.S. and Central America.
- plans to retain Nexen’s current management team and employees.
- plans to implement and enhance Nexen’s current planned capital expenditure program, thereby investing significant capital in Canada and in Nexen’s other international assets.
- CNOOC stated that it would bring greater financial capacity to better realize the full potential of Nexen’s significant resource base.
- plans to list its common shares on the TSX (shares are already listed on the Hong Kong Exchange and the NYSE).
- highlighting its strong track record of outstanding corporate citizenship and social responsibility in Canada and the other jurisdictions around the world in which it operates.
- a commitment to build upon Nexen’s existing and highly regarded community and charitable programs, particularly with respect to First Nations and local communities.
- continuing to support oil sands research at Alberta universities and participate in the Canada’s Oil Sands Innovation Alliance.
The final approval from the Minister of Industry for CNOOC did not provide a detailed discussion of the specific commitments required by the Minister, but did identify the general topics of those commitments: “governance, including commitments on transparency and disclosure; commercial orientation, including an adherence to Canadian laws and practices as well as free market principles; and employment and capital investments, which demonstrate a long-term commitment to the development of the Canadian economy. A compliance report related to the undertakings will be provided to Industry Canada annually."
The new SOE policies and guidelines
During the course of the reviews of these two transactions, members of the Canadian government, including the Prime Minister, indicated that further guidance would be forthcoming about the manner in which the government would review investments by SOEs. Under the new rules, the acquisition of control of a Canadian oil sands business by an SOE will be found to be of net benefit “on an exceptional basis only.” The government noted they will carefully monitor investments by SOEs in other sectors as well where an industrial sector becomes subject to an inordinate amount of foreign state influence.
Importantly, however, ICA review remains inapplicable to SOE investments where (i) the target’s asset book value is less than C$330 million, or (ii) there is no acquisition of control.
Also, in releasing the new guidelines, the government re-affirmed that Canada “is open for business” and private sector investors are not subject to the new scrutiny. Indeed, private sector investors can look forward to a time when only acquisitions of targets with an enterprise value of more than C$1 billion will be subject to review.
Highlights of the government’s new policy statement and updated guidelines on the issue of SOE investments (and the manner in which the ICA would be applied to such investments) include:
- Broader definition of an SOE: The definition used in the original 2007 SOE guidelines has been broadened to include not just an enterprise that is “owned or controlled” directly or indirectly by a foreign government, but one that is influenced directly or indirectly by a foreign government. No definition of “influence” was provided, but the term is amenable to broad application. The revised SOE guidelines specifically state that “SOE investors are expected to address in their plans and undertakings, the inherent characteristics of SOEs, specifically that they are susceptible to state influence. Investors would also need to demonstrate their strong commitment to transparent and commercial operations.” At a minimum, SOE investors should be prepared to provide historical, anecdotal evidence of the independence between the government and the SOE to support related undertakings.
- Limits on SOE investments in the oil sands: Although not specifically addressed in the guidelines, the government indicated that investments by SOEs to acquire control of a Canadian oil sands business will, going forward, be found to be of net benefit on an exceptional basis only. SOEs can continue to take non-controlling positions in oil sands businesses and carry out acquisitions below the threshold review. However, no guidance was provided on what will constitute an exceptional circumstance, and future dialogue with the government on a case-by-case basis will be needed to assess whether the new policy is largely prohibitive or more robust and able to take account of extra-ordinary net benefit in conjunction with clear “independent operation” of the SOE. (When the revised guidelines were announced, the Alberta premier indicated that the government of Alberta will seek clarity on how “exceptional circumstances” will be defined). In addition, any investment by an SOE that is subject to review and does not involve the oil sands will continue to be closely examined. There will be no change to the manner in which minority investments, joint ventures, or the creation of a new business will be treated, regardless of whether an oil sands business is involved.
Key additional scrutiny for SOE investments: In addition to the factors identified in the original 2007 SOE guidelines, the updated guidelines note the Minister will closely examine:
- the degree of control or influence an SOE would likely exert on the Canadian business that is being acquired;
- the degree of control or influence an SOE would likely exert on the industry in which the Canadian business operates; and
- the extent to which a foreign state is likely to exercise control or influence over the SOE acquiring the Canadian business.
A public announcement by the government states that, “Where due to a high concentration of ownership a small number of acquisitions of control by SOEs could undermine the private sector orientation of an industry, and consequently subject an industrial sector to an inordinate amount of foreign state influence, the Government will act to safeguard Canadian interests.”
- Lower review threshold for SOEs: In 2009, the ICA was amended to change the manner in which the review threshold is calculated to one based on the target’s enterprise value, and to significantly raise the review threshold (to C$1 billion over four years). Those changes have not yet come into force as regulations must be finalized. However, the government announced that the current C$330 million threshold, based on book value of assets of the target, will remain in force for acquisitions by SOEs. The threshold will continue to be adjusted annually for inflation.
- Ability to extend deadlines for national security reviews: Since 2009, the Minister has had the authority to review any investment in a Canadian business by a non-Canadian to determine whether the transaction may be injurious to Canada’s national security. There is no minimum threshold for such reviews. Such reviews may take up to 130 days. However, the government announced it will amend the ICA to provide additional flexibility to extend the national security review timelines. No guidance was provided regarding such flexibility, but the policy does state that the extensions will only be used in exceptional circumstances.
The new and updated policies and guidelines do not provide any additional guidance on the meaning of the phrase “net benefit to Canada,” but traditional measures such as increases in employment and capital expenditures may be emphasized more in reviews of future proposed investments by SOEs. Thus, although navigating the ICA review process remains shrouded with areas of uncertainty, the PETRONAS and CNOOC decisions—as well as the policies and guidelines—do provide some bearing points for investors. What follows are some tips for investors that are SOEs as well as investors looking to invest in significant Canadian companies where controversy may arise.
Tips for navigating an ICA review
- The oil sands are not closed to foreign investment, particularly SOE investment. Although the new policy is intended to convey that further acquisitions of control of a Canadian oil sands business by SOEs will not likely be permitted, the government made clear that foreign investment —including by SOEs—continues to be welcome, albeit in a non-controlling position. This presents opportunities for creative structuring of investments, as the test for what constitutes an acquisition of control under the ICA is complex.
- An ICA review involving the acquisition of control of a significant Canadian company will continue to attract considerable political and media scrutiny, regardless of whether the buyer is an SOE. As such, it is important to consider ICA-related issues early in the process, including identifying key stakeholders (local, provincial and federal politicians, employee representatives, community leaders) to consult and potential undertakings or plans that could be offered. This will, in most cases, require a coordinated legal, government relations and public relations strategy.
- SOE investors and non-SOE investors in significant Canadian companies should expect that the duration of a review will be longer than would be the case with a private sector investor. Extensions beyond the statutory time frame of 75 days are not uncommon in cases involving SOE investors and non-SOE investors in significant Canadian companies.
- The Canadian government has made statements about the “inherent risks of influence” with SOE investors. Review applications for SOE acquisitions of control might include undertakings to ensure the commercial orientation and transparency to separate the Canadian business operations from the risk of such influence.
- An SOE investor and a non-SOE investor in a significant Canadian company still have the fundamental test of "net benefit to Canada" as an ally, and a thorough and reasoned plan for the Canadian business that takes account of broader industry and political concerns and makes a compelling argument for the benefit to Canadians can still win the day.