Following its approval in December 2012 of two high-profile transactions involving foreign state-owned enterprises acquiring Canadian businesses, the Canadian government announced new policies that would guide the minister of industry in applying the Investment Canada Act (ICA) to subsequent similar transactions.
On April 29, 2013, the government introduced its budget implementation bill, Bill C-60, which contains amendments to the ICA to implement the December 2012 policies. If enacted in their current form, these amendments will provide the minister greater authority to require net benefit reviews as well as the ability to prolong reviews of transactions that may raise national security concerns.
The December 2012 policies
During the reviews of the proposed acquisitions of Nexen Inc. by China National Offshore Oil Company and of Progress Energy Resources Corp. by PETRONAS, members of the Canadian government, including the prime minister, indicated that further guidance would be forthcoming about how the government would review investments by state-owned enterprises (SOEs). Under the new rules announced on December 7, 2012, the acquisition of control of a Canadian oil sands business by an SOE would only be found to be of net benefit “on an exceptional basis.” In addition, the government indicated that it would carefully monitor investments by SOEs in other sectors as well where an industrial sector becomes subject to an inordinate amount of foreign state influence.
Details of the government’s new policy statement and updated guidelines on SOE investments were contained in our legal update Navigating the new Investment Canada rules for state-owned enterprises and included:
- Broader definition of an SOE: The definition used in the original 2007 SOE Guidelines has been broadened to include not just an enterprise that is “owned or controlled” directly or indirectly by a foreign government, but one that is influenced directly or indirectly by a foreign government. No definition of “influence” was provided, but the term is amenable to broad application.
- Lower review threshold for SOEs: In 2009, the ICA was amended to change the manner in which the review threshold is calculated to one based on the target’s enterprise value, and to significantly raise the review threshold (to C$1 billion over four years). Those changes have not yet come into force as regulations must be finalized. However, the government announced that the current threshold, based on book value of assets of the target, will remain in force for acquisitions by SOEs. The threshold will continue to be adjusted annually for inflation and is currently C$344 million.
- Ability to extend deadlines for national security reviews: Since 2009, the minister has had the authority to review any investment in a Canadian business by a non-Canadian to determine whether the transaction may be injurious to Canada’s national security. There is no minimum threshold for such reviews, which may take up to 130 days. However, the government announced it will amend the ICA to provide additional flexibility to extend the national security review timelines. No guidance was provided regarding such flexibility, but the policy does state that the extensions will only be used in exceptional circumstances.
Bill C-60 amendments
If enacted in its current form, Bill C-60 will codify into the ICA the three reforms outlined above. The increased breadth of the SOE definition is troubling because there is no guidance provided to explain the concept of “influence.” Businesses contemplating a transaction with an entity associated with a foreign government need to know whether that entity will be considered an SOE in order to properly assess the regulatory risk associated with the transaction. Not only will it determine whether a transaction is subject to the lower book value of assets review threshold, but Bill C-60 will also authorize the minister to determine whether that entity is controlled in fact by an SOE or whether there has been an acquisition of control in fact by an SOE even if less than a majority of the target company was acquired.
With respect to the latter point, the ICA already contains a rebuttable presumption that control is acquired where more than one-third of the voting shares are acquired. As a result, acquisitions of less than one-third of the voting shares are not considered acquisitions of control. Bill C-60 will permit the minister to deem an otherwise non-reviewable minority acquisition to be an acquisition of control, resulting in a net benefit review being necessary if the book value of assets threshold is exceeded. The minister of Canadian heritage has a similar power with respect to acquisitions of cultural businesses.
Finally, the proposed amendments could considerably extend the duration of a national security review under the ICA. There are various stages of a national security review, and Bill C-60 will extend the timelines associated with most of these stages. As well, various timelines can be extended for a period to be agreed by the minister and the investor.
Greater uncertainly could increase requests for guidance
Given that the ICA review process has been criticized as insufficiently transparent, the changes that will result from Bill C-60 will only increase the uncertainty associated with the review process. To properly assess the regulatory risk of a transaction, parties should have clear guidance on what constitutes an SOE in order to know which review threshold will be engaged. Knowing whether an entity will be considered an SOE will also permit the parties to know whether the minister can use Bill C-60’s new powers to deem an acquisition to be an acquisition of control and therefore subject to review.
Finally, the government already has up to 130 days to complete a national security review and it is unclear why more time is needed for national security reviews. There has been no evidence provided to demonstrate why additional time is needed nor guidance to indicate the circumstances under which additional time could be needed.
Parties seeking greater certainty may consider the availability of ministerial opinions under section 37 of the ICA. Parties may obtain an opinion on the Canadian status of an individual or entity, including in relation to some situations involving SOEs; the opinion is binding on the minister so long as the facts underlying the request remain accurate. A person may request, though the minister is not obliged to provide, a binding opinion on the applicability to that person of any other provision of the ICA. In theory, at least, this mechanism could be used to try to obtain guidance on national security issues. In any event, parties considering a ministerial opinion need to allow considerable time for this process as the minister can take up to 45 days from the date he considers he has sufficient information to provide the opinion.
It is hoped these issues will be discussed while Bill C-60 is reviewed in committee and additional clarity will be provided. We will continue to monitor the progress of this legislation and provide additional guidance as warranted.