The sale of a treasured national asset, especially in an unsolicited purchase, can evoke fierce and unlikely battles over FDI policy. In the case of the attempted hostile takeover of Potash Corp of Saskatchewan for a bid of close to $40 billion by Anglo-Australian BHP Billiton Ltd., a right-leaning provincial government of Saskatchewan is pitted against a Conservative national government in Ottawa. Strains in Canada’s federal structure emerge, as the blunt editorial in the National Post warning Canada’s national government to stay out of provincial matters demonstrates. We in the U.S. watch with rapt fascination as the drama above the border plays out.
Because of the importance of FDI policy to the U.S., it may be useful to speculate how the transaction would fare if Potash Corp. were a U.S. company. Suppose that in a single U.S. state there were a resource company that supplied 25% of the world’s fertilizer. And further suppose that the state in question was responsible for more than half of the world’s production of that fertilizer. If local interests saw themselves seriously threatened by a takeover from a non-U.S. company, and if the state’s governor urged the Committee on Foreign Investment in the United States (CFIUS) not to permit the transaction, what would the response be? Would CFIUS find that the national security of the United States was threatened? Could a resource that is not energy or energy-related, or that does not have a direct military application, be considered to be strategic?
Then, to ratchet up the hypothetical, what effect might there be if the buyer were not a private company, but a state-owned enterprise (SOE)? Would it matter if the state were the Netherlands? Germany? China? Does the resource take on more security overtones as the identity of the proposed buyer changes?
As background, the Investment Canada Act permits the Canadian government to block any takeover by a foreign-based company if the government finds that a deal would not provide a “net benefit” to Canada. This language is highly subjective. The comparable standard set forth in the United States legislation governing inbound investment, the Foreign Investment and National Security Act of 2007 (FINSA), is an adverse effect on US national security. The Canadian Competition and Antitrust Law reporter explains that under Investment Canada no single factor is determinative, including regional economic policies. Nor is there any meaningful authority as to which factors should be given any particular weighting by the Canadian government in making its decision.
As a result, politics – including provincial politics – have come into play. Saskatchewan has a obvious strong interest in maintaining job and revenues and has in fact asked for a C$1 billion upfront payment to compensate it for estimated losses of future royalty revenues. However, according to one Ontario newspaper, the Standard Freeholder, legitimate concerns notwithstanding, politics is at the core of the fight. Saskatchewan Premier Brad Wall is vigorously opposing the deal because 74% of his constituents are against it. The federal case for approval rests on the fact that Potash already is majority-owned by non-Canadians, mainly U.S. stockholders. The Investment Canada decision is made by the Canadian Minister of Industry Tony Clement. Minister Clement is a longstanding member of the Conservative Party of Canada. The Conservative Party is well-known for its anti-protectionist views. Mr. Clement must make his decision by November 3 – the end of a 75-day review period – and the prevailing view is that no extension will occur.
Under the Investment Canada Act, the Saskatchewan government does not have any formal or statutory power to block or veto BHP’s proposed takeover of Potash. The federal Minister of Industry is obligated under the Act to “take into consideration” the economic policy objectives of the provinces. The final decision nonetheless rests with the Minister. This important distinction, i.e., the requirement for the Minister to consider provincial views with no formal obligation to consult with the provinces, was one of the current Canadian government’s political wins during the drafting of Canada’s FDI legislation. The process under FINSA is far more closed. CFIUS has no obligation to consider the views of any government or government agency other than those executive bank agencies that are represented on the committee itself. FINSA put in place a process that is intended to be insulated from political pressure.
The outcome with Canada’s federal government may not be much in doubt. Reuters quotes a Canadian professor who reports that no Canadian government has ever blocked a foreign takeover of a resource firm. The Canadian Competition and Antitrust Law reporter states that since 1985 only one foreign takeover out of 1500 transactions proposed has been turned down on non-cultural grounds. The likely outcome may be that, as a condition to approval, BHP must give greater assurances that preserve the benefit of Potash Corp. to Canadians. This type of outcome frequently occurs in the U.S. CFIUS negotiates mitigation agreements with acquirers instead of rejecting a transaction outright. The mitigation agreements impose post-completion obligations on the buyer to reduce risks to U.S. national security.
The debate on our hypothetical deal would quickly focus on U.S national security. Neither FINSA nor its regulations define “national security.” The list of factors that CFIUS may consider includes “the long-term projection of United States requirements for sources of energy and other critical resources and material” even if unrelated to defense requirements. In his October 21 statement, Saskatchewan Premier Wall stated “Potash is a strategic resource and the country should act like it.” So the debate would be joined on that very issue.
Would the outcome itself under FINSA be predictable? Writing alternative history is difficult. Writing it in the future tense is even more so. Our prediction would be similar to the consensus prediction on the Canadian outcome – after much hue and cry, with ample political posturing, approval with conditions that mitigate any real strategic risk. Even that result would be welcome, as it would preserve the appearance of an open investment policy, so vital to the U.S. recovery.