Foreign Investment Review in Canada – After Potash Potash, once a relatively obscure commodity, became the unlikely centre of a foreign investment review controversy in Canada in 2010 as the Canadian Government rejected BHP Billiton’s bid for Potash Corporation of Saskatchewan (PotashCorp.) under the Investment Canada Act’s “net benefit to Canada” test. The decision raised concerns that Canada was closing the door on foreign investment.
However, the circumstances surrounding the Potash decision suggests that it will be “business as usual” for most foreign investments, although high profile investments in politically sensitive sectors may be more carefully scrutinized. The Potash decision is widely regarded as the result of the confluence of two factors:
- the intense public relations campaign led by the Premier of Saskatchewan (the province in which most of Potash Corporation’s mines are located) to characterize potash as a “strategic asset”. Premier Wall was successful in galvanizing popular opposition to the deal not only in Saskatchewan but also across Canada; and
- the minority government status of the reigning Conservative party in an election year (which made it more vulnerable to the highly charged public opinion).
The Potash decision is only the second time in the history of the Investment Canada Act (outside of the cultural sector) for a deal to be rejected. The first was the 2008 proposed acquisition by an American company, Alliant Techsytems, of the geospatial business of MacDonald, Dettwiler and Associates Ltd. for national interest reasons relating to the protection of Canadian sovereignty in the Arctic and of Canadian‐funded technology.
The calculus as to what constitutes a “net benefit to Canada” is an elastic one based generally on economic considerations (such as the impact of the proposed investment on employment, capital expenditures, head office location, participation of Canadians in senior management) but also including industrial and economic policy objectives of a province likely to be significantly affected by the investment. As a result, the Canadian Minister of Industry has broad discretion under the Investment Canada Act.
The Potash decision has highlighted to foreign investors the potential for Canadian stakeholders affected by a proposed foreign takeover to lobby the Government to advance their own ends, especially where the target is a Canadian icon or in a high profile or politically sensitive sector. In particular, provinces are now alert to the possibility of having a significant influence by shaping public opinion. This underscores the importance for investors to consult early on with legal counsel and public/government relations specialists to pre‐empt possible backlash against a transaction.
In addition, foreign investors may wish to address uncertainty raised by the Potash decision by making minority investments and/or entering supply agreements instead of acquiring ownership interests. Minority investments of less than a third of a corporation’s voting shares may reduce the economic or political risks of a full takeover because such acquisitions are not subject to “net benefit” review under the Investment Canada Act (unless they would be potentially injurious to Canada’s national security). In the resource sector in particular, foreign businesses may also wish to negotiate a right to receive a share of production or an “off‐take agreement” as an alternative means of securing long term access without triggering review under the Investment Canada Act.
Shortly after BHP’s transaction was rejected, Prime Minister Harper announced that the ICA will be subject to review. This review will likely cover the transparency of the review process, the review criteria and holding investors accountable for their commitments to the Government. In the meantime, foreign investors would be well‐advised to monitor the Government’s review of proposed merger of the Toronto Stock Exchange and London Stock Exchange. This merger will serve as a test of the Government’s avowed openness to foreign investment.