In early June 2007, the federal government announced a plan to review the Investment Canada Act. Amid political pressure to protect national interests after several high-profile foreign takeovers of Canadian companies, including Hudson’s Bay Co., Dofasco and Inco, the Government will reconsider the principles and criteria used by Investment Canada in evaluating foreign takeovers of Canadian businesses.
The review should be closely monitored by Canadian companies considering the option of selling to foreign buyers. It should also be monitored by companies looking for foreign equity injections which result in foreign ownership of more than 33% of their business, which is the initial threshold limit for review under the Act. Although the review will likely focus on takeovers by foreign state-owned companies, it could establish principles for other types of foreign purchasers or for particular industries, such as resources and defence electronics, which could make future transactions more difficult.
CURRENT INVESTMENT CANADA ACT REGIME
Under the Act, direct or indirect investments by non-Canadians resulting in the commencement of a new business activity in Canada or in the acquisition of control of an existing Canadian business are subject to a requirement to file either a notification or an application for review with Investment Canada, if they exceed certain monetary thresholds. Those investments for which an application for review is required must receive, generally prior to the completion of the investment, a “net benefit to Canada” ruling from the Minister of Industry or, for businesses in prescribed cultural industries, the Minister of Canadian Heritage or, in limited circumstances, from both. If the Minister finds the investment is not of net benefit to Canada, the investor may not implement it or may be required to divest control of the business if the investment has already been implemented.
NET BENEFIT TO CANADA TEST
When deciding whether the investment is of net benefit, the Minister must consider a series of economic factors that are detailed in the legislation. These factors include the effect of the investment on domestic competition; on Canada’s ability to compete globally; on the level and nature of economic activity, productivity, industrial efficiency and product innovation in Canada; on the degree and significance of participation by Canadians; and on the compatibility of the investment with national and provincial economic and industrial policies. These factors do not, however, explicitly require that the Minister consider whether a proposed transaction is injurious to national security.
Historically, the “net benefit” criteria in the Act have rarely proved to be a significant impediment to the acquisition of Canadian companies by foreign investors. This is largely because of the ability of foreign investors to enter into binding undertakings with the Minister(s) governing the ongoing operation of the Canadian business in order to secure a net benefit ruling. In practice, Ottawa has not blocked any foreign takeovers since the legislation was enacted in 1985, preferring to extract concessions from foreign buyers in the form of undertakings instead.
POSSIBLE IMPACT OF REVIEW OF ACT
Although the acquisition of Canadian companies by foreign investors has become an important political issue in Canada, the amendments to the Act resulting from this new initiative may not in the end have a significant impact on foreign investment in Canada. The government of the day has, on several occasions, said that it will generally not meddle with market forces. However, if the issue becomes politicized and if interest groups opposed to the sale of Canadian companies mobilize effectively, the current minority government may have to acquiesce to changes that could impact adversely on transactions, both substantively and on timing.
Amendments to the Act resulting from the review will primarily impact acquisitions of Canadian businesses by foreign, state-owned companies that have “unclear corporate governance and reporting” or that are guided by “non-commercial objectives” which are not in line with those of the Government of Canada. Additional provisions are expected to be added to the Act to require the Minister to consider issues related to whether a foreign investor is state-owned and whether such investments could be viewed as serving that foreign government’s agenda to the potential detriment of the interests of Canada. The Act will also likely be amended to provide the Minister with clear authority to screen, and potentially block, foreign takeovers on grounds of “national security” to prevent the acquisition of Canadian businesses by buyers tied to organized crime or terrorism.
Investment by private foreign investors may not be adversely affected by the review given the current government’s position. However, it is possible that the initiative could lead to more stringent undertakings being imposed on private companies upon acquiring a Canadian company. As well, certain industry sectors could face more intensive reviews or be required to meet special rules, such as is currently the case for cultural industries. Industrial sectors deemed important for Canada, such as mining, oil, water resources, defence technologies, satellite technologies and others may face new or more stringent rules.
The question of whether to rewrite the criteria used when reviewing acquisitions by non-Canadians will be referred to an expert panel that will rethink Canada’s foreign investment and competition rules. Although the timing of the review is not certain, it could start in the fall of 2007. It would be prudent for companies and industry associations concerned with the matter to begin preparing their views and making them known to relevant Cabinet ministers and Members of Parliament