Yesterday, Canada’s Industry Minister announced that he had approved, under the Investment Canada Act, the proposed acquisitions by CNOOC, a Chinese stated-owned enterprise (“SOE”) of Nexen, an oil and gas company with significant oil sands assets, and Petronas, a Malaysian SOE of Progress Energy, a natural gas producer. While the two allowances had been expected by many observers, approval uncertainty had impacted on the share prices of both targeted companies. 

Perhaps more important than the announcement of the allowances was the concurrent release of the Revised SOE Guidelines under the Investment Canada Act, which were accompanied by a speech by Prime Minister Harper and the issuance of a Policy Statement directed at future investments by SOEs in Canadian companies. While the Industry Minister had previously announced that revised SOE Guidelines would be issued in connection with the two decisions, surprisingly only modest changes to the existing Guidelines were made. The Prime Minister’s speech and the new Policy Statement is where the substance of yesterday’s announcement resides.

Key Messages

The Prime Minister’s statement that the announced decisions were “not the beginning of a trend, but the end of a trend” clearly signals that future SOE investments in Canada are going to be assessed under the more onerous government policy, which is set out in his speech, the Policy Statement and the Revised SOE Guidelines. The Prime Minister also indicated that non-controlling minority investments by foreign SOEs will continue to be welcomed.

One consistent theme running throughout the new policies is a concern with the “influence” that foreign governments may directly or indirectly have on Canadian businesses and the Canadian economy through their SOEs. With this announcement, Canada has made it clear that, in the future, the onus under the Investment Canada Act will be on the foreign SOE investors to demonstrate, on a case by case basis, that such concern is unfounded.

While not going into detail, the Prime Minister has indicated that there will be limits within certain industry sectors to the amount of foreign SOE ownership, control and influence that will be acceptable to Canada. With respect to the oil sands in particular, Canada has decided that existing foreign SOE control of oil sands development has reached the point at which further such foreign state control would not be of net benefit to Canada, the message being that no further acquisitions of control of oil sands businesses by foreign SOEs will be permitted, barring exceptional circumstances.

The energy sector generally seems to be an area of concern to the Government as well as industries where Canada itself has exited government ownership. Harper stated:

“To be blunt, Canadians have not spent years reducing the ownership of sectors of the economy by our own governments, only to see them bought and controlled by foreign governments instead.”

Industries in which Canada has reduced governmental ownership include the transportation sector.

In short, SOEs continue to be treated differently from non-SOEs under the Investment Canada Act. Indeed, the bar for approvals of investments has been raised and additional restrictions have been imposed:

  • There is a broadened definition of SOE - whereas in the pre-existing SOE guidelines, an SOE was defined to be an entity owned or controlled by a foreign government, the Revised SOE Guidelines stipulate that an SOE also includes an entity that is “influenced” directly or indirectly by a foreign government.
  • SOEs will not benefit from the forthcoming increased review thresholds (i.e., they will be subject to the existing $330 million asset value review threshold).
  • Canada will have the ability to extend the timeline for national security review in the case of SOE investments.
  • Increased SOE scrutiny - in particular, review of SOE investments will include the following considerations:
    • the degree of control or influence of the SOE on the Canadian business being acquired;
    • the degree of control the SOE would exert on the industry involved;
    • the extent to which the relevant foreign government controls or influences the SOE - the Policy Statement stipulates that the investor will need to demonstrate freedom from political influence.

Important Questions Remain

While the additional guidance has brought some clarity, a number of questions remain. For example:

  • How is the concept of “influence” by a foreign state to be applied?
  • What are the “exceptional” circumstances that would permit an acquisition of control of a Canadian oilsands business? Would insolvency or bankruptcy of the Canadian oil sands business without a viable non-SOE purchaser suffice?
  • Aside from energy, and oil sands in particular, what other sectors may give rise to concerns? Will the sectors previously considered sensitive under the Investment Canada Act be included?
  • What degree of concentration by SOEs in any given industry would give rise to governmental concern?
  • Whether, and when, we can expect further clarity on the application of the net benefit factor outside of the SOE context, which was promised in the wake of the BHP-Potash disallowance?
  • Will the changes result in further delays in bringing into force the 2009 threshold amendments to the Investment Canada Act?