On October 7, 2013, the Canadian Government announced its decision to block Accelero Capital Holdings’ proposed $520 million acquisition of Manitoba Telecom Services’ Allstream Division under the national security provisions of the Investment Canada Act.
The government explained that “MTS operates a national fibre optic network that provides critical telecommunications services to business and governments, including the Government of Canada”. When pressed for more specific details, the government issued another statement advising that the Investment Canada Act has “strict confidentiality provisions that prevent further comment...”
The government’s decision surprised the parties; particularly because MTS had selected Accelero as the proposed buyer partly because its controller, an Egyptian businessman, had helped start Wind Mobile and was presumably already known to, and considered acceptable by, the government. In addition, in order to win government approval, Accelero is reported to have offered, among other things, to give up federal government contracts, to stop carrying sensitive government data, and to refrain from using telecom equipment from Chinese manufacturer Huawei Technologies Co. Ltd. on the Allstream network. In speaking of the review process, MTS’s CEO stated that “through all these discussions – and you have to assume over five months there have been lots of discussions – I would say nothing was identified to us that was a major concern”.
The government’s announcement immediately generated significant controversy, including questions about how open Canada is, or may be perceived as being, to foreign investment that is vital to Canada’s economy. The government, which has rejected a number of other proposed transactions under the Investment Canada Act in recent years, seemed to anticipate this. It has been reported that, shortly after its announcement, the government provided Conservative members of Parliament with a memo of talking points that, among other things, mention Accelero’s controller’s Egyptian nationality and states that “we are open to foreign investment in all sectors, but not at the expense of our national security”.
It is worth noting that the national security review provisions could again come into play in the near future in relation to Blackberry. When recently asked about a potential takeover of Blackberry, Treasury Board President Tony Clement stated that the government will “…have a role to play obviously, which involves national security and making sure that what occurs is in the public interest…”
The national security review powers are relatively new, having been added to the Investment Canada Act in early 2009, and provide the government with a great deal of latitude to review, block or condition any foreign investment in Canada that “could be injurious to national security”. The government has refrained from providing guidance as to what could constitute a national security concern, opting instead for what is effectively a “we’ll know it when we see it” approach that provides it with maximum flexibility. In addition, national security reviews are conducted under a high degree of confidentiality, or even secrecy, where even the fact that a review has been conducted may not be broadly disclosed.
In our own experience with national security reviews, and based on the relatively little public information that is available, national security reviews are extremely rare. However, when they do occur, they are extremely frustrating to the transacting parties. They tend to take a long time – in the case of Accelero/MTS the government announced its decision 136 days after the parties announced the transaction (this is also consistent with our experience). And, the process is highly opaque, to the point of effectively being a black box – the parties provide information and respond to questions, and the government subsequently advises them of its decision with little to no explanation of the specific basis for the decision.
For the small percentage of transactions that could raise issues, which based on the experience to date appears to include target Canadian companies that operate in the defence or communications related sectors and have government contracts or historical links to government, we recommend that the parties give serious consideration to approaching the government early in the process, before they have signed and announced a definitive transaction agreement, and possibly also engaging government relations professionals. While this will not necessarily convert a transaction that would otherwise have been blocked into one that is approved, or not reviewed it all, it may give the parties an early read on how they may wish to address potential concerns - or whether they even wish to proceed with a transaction at all, before committing a lot of time and money to it.