On Friday, July 17, the Minister of Industry filed a Notice of Application with the Federal Court of Canada seeking to force United States Steel Corporation to fulfill regulatory undertakings that the company made to the Canadian government on acquiring Canadian steelmaker Stelco Inc. in 2007. The move follows a demand letter that the Minister sent to U.S. Steel in May after media reports suggested that there may be non-compliance with its undertakings. The Minister said that he was not satisfied with the company’s response to that letter. He has requested that the Court order U.S. Steel to (i) increase steel production in Canada and maintain employment levels and (ii) pay a monetary penalty of C$10,000 per day for every day that it is not in compliance with its undertakings.
Under the Investment Canada Act, foreign buyers must establish that their investment is “likely to be of net benefit to Canada.” The Minister’s approval is usually conditional upon investors entering into binding three- to five-year undertakings with the government in which investors commit to maintaining Canadian operations, production levels, employment levels, R&D expenditures and capital expenditures.
According to guidelines issued by the Investment Review Division (IRD) of Industry Canada, an acquiror will not be held accountable for breaching a commitment “where inability to fulfill an undertaking is clearly the result of factors beyond the control of the investor.” In practice, it is also often possible to negotiate new or revised undertakings when an original commitment cannot be fulfilled. It is widely believed that a number of investors have recently been released from commitments or have renegotiated revised undertakings because current market conditions have made it difficult to comply with undertakings entered into two or three years ago.
The U.S. Steel case marks the first time since the Investment Canada Act became law in 1985 that the Minister has sued a foreign acquiror for failing to honour its Investment Canada Act undertakings. It is also an extreme and unusual case. When U.S. Steel acquired Stelco in 2007, it undertook to increase steel production in Canada by at least 10% and maintain Canadian employment levels. Instead, it closed most of Stelco’s Canadian operations and laid off over 1500 employees. Apparently no attempt was made to renegotiate new or revised undertakings. According to court filings, U.S. Steel has taken the position that it has not breached its undertakings because they require compliance to be measured at the end of their three-year term, as opposed to a point in time within the three-year period. (U.S. Steel has advised the Minister that it is planning to recall workers and restart Canadian production.) The company has also asserted that investors should not be held accountable for breaches due to factors beyond their control.
Whether there has been a breach of the production or employment undertakings will depend in part on the specific wording of the undertakings and whether there is, in fact, a three-year performance metric. In other cases, it has not been unusual for compliance with undertakings to be measured on the basis of total performance over the entire term of the undertakings. It is unclear how the Court will react to U.S. Steel’s suggestion that any inability to fulfill its undertakings was due to factors beyond its control. The IRD’s guidelines were likely not intended to allow investors to breach multiple undertakings that formed the basis upon which the Minister concluded that the investment would be of “net benefit” to Canada. Some media reports have also stated that U.S. Steel is increasing production at facilities in the United States. That may raise questions about the extent to which the Canadian plant closures were truly “the result of factors beyond the control of the investor,” as opposed to a business decision to concentrate production in the United States.
Although this case is an important reminder that the government views undertakings seriously and will endeavour to enforce them in extreme cases, there is no indication that it signals a change in the government’s basic approach to foreign investment. The Minister said that he has no intention of discouraging foreign investment and that “[w]e welcome foreign investors who can create jobs and opportunities for Canadians, who want to pursue research and development in Canada.” The government also recently amended the Investment Canada Act to reduce the number of acquisitions subject to review. Shortly before the amendments were enacted, the Minister said, “We are reducing the challenges currently facing international investors who want to invest here. This is critical, because international investment is vital to our country. It spurs innovation and enhances productivity. It makes our economy more dynamic and better able to compete in world markets. It provides greater access to capital and ideas, enabling Canadian companies to expand and improve. And it creates more jobs for Canadians.”
The U.S. Steel case also serves as a reminder that investors should carefully assess business plans before entering into commitments with the government. Because future economic conditions are impossible to predict with certainty, the IRD is usually sympathetic to reasonable and conservative business plans. If investors adopt a cooperative and proactive approach with the IRD to deal with changed circumstances, the IRD would also normally allow variances when aspects of undertakings cannot be carried out.
Investors should also expect the IRD to be more concerned about its ability to enforce undertakings in the future. More stringent drafting of undertakings (especially with respect to performance measurements) and more frequent compliance reporting (to increase the detection of possible violations) are likely to be the norm. However, absent similarly extreme circumstances, investors should not expect the government to bring more enforcement actions similar to the U.S. Steel case.