The reasons for the Canadian government’s recent rejection of the proposed acquisition of Progress Energy by Malaysia-based Petronas are unclear, but it now appears that there were procedural or timing differences that could not be resolved. If that is the case, the Petronas/Progress Energy rejection is an anomaly and does not signal a rejection by Canada of foreign investment by SOEs or other investor types. For the vast majority of deals, it continues to be business as usual.
Media and government-relations advisers have reported that the Petronas/Progress Energy rejection was based on Petronas’s refusal to agree – possibly because it could not be contacted – to a last-minute request for an extension of the review period. The government may have wanted a delay to have time to develop its revised policy for the approval of investments by state-owned enterprises (SOEs) in Canada. Under the Investment Canada Act (the ICA), the Minister is deemed to approve a transaction if the review period expires unless he authorizes its non-approval. In the circumstances, the government may have believed that it had little choice.
Despite the recent rejection, there are indications that Petronas’s proposed acquisition will get approved under the ICA appeal process. Petronas and the government were reportedly close to reaching a settlement before the refusal was issued and, since then, the outside date for the deal to close has been moved. The parties also announced an intention to meet with government officials to try to resolve outstanding issues.
If the transaction was in fact refused because of a timing misstep, Petronas is an anomaly that should not have significant broader implications, other than serving as a reminder that investors ought to be prepared to agree to extensions, possibly at the 11th hour. The median review time under the ICA is 69 days, but SOE reviews usually take longer. Petronas was at the 89 day-mark; in contrast, two recent transactions in which we participated, one of which involved an SOE investor, were approved after reviews of 109 days and 103 days.
The government has tried to make clear that it welcomes, and believes Canada needs, foreign investment. Numerous SOE investments have been approved by the federal government, including numerous investments by SOEs that, like Petronas, are not publicly traded and/or relate to the oil & gas industry. Examples are TAQA/PrimeWest Energy Trust, IPIC/Nova, CNOOC/Opti Canada, Statoil/North American Oil Sands, Korea National Oil Corp/Harvest Energy Trust (and the later acquisition by Harvest of Hunt Oil) and Sinopec/Daylight.
A very small number of deals, particularly involving SOEs or sensitive industries (such as potash in BHP/Potash or financial services in TMX/LSE), will continue to attract increased scrutiny. Hostile transactions may also be more difficult to complete (such as Lowe’s/Rona).
On consensual transactions, targets on these deals should try to build safeguards into purchase agreements. Petronas was required to use "commercially reasonable" efforts to obtain regulatory approvals. This "efforts standard" is not uncommon in transactions involving SOE investors, but in some cases we have seen more rigorous requirements, including commitments to offer undertakings as long as they would not have a material adverse financial impact on the buyer. Parties may also agree to have longer than ordinary outside dates to accommodate extended reviews and reverse break fee payments to targets in the event that a transaction does not proceed as a result of the failure to secure regulatory approvals.
On high-profile transactions, the Prime Minister’s Office and provincial governments are now regularly involved, so investors need to actively manage the government and public relations process to minimize potentially negative political, media or stakeholder attention.
Also on transactions subject to review, investors ought to be prepared to offer significant "net benefit" undertakings, such as maintaining the target’s Canadian head office, employment levels and, in some cases, a stock exchange listing. SOE investors should expect further guidance from the government on the application of the net benefit test in guidelines that are expected to be released later this year.
Finally, it is worth remembering that it is business as usual for the vast majority of deals. For example, there have been 14 approvals this year to date. Of those, only Glencore/Viterra received some degree of publicity; most were dealt with in the ordinary course.