Introduction & Background
On December 7, 2012, the Government of Canada (the “Government”) approved two major foreign state-owned enterprise (“SOE”) acquisitions of Canadian oil sands businesses: the China National Offshore Oil Corporation’s (“CNOOC”) acquisition of Nexen Inc. (“Nexen”) and Petronas’ acquisition of Progress Energy (“Progress”). On the same day, the Government released a policy statement (the “December 2012 Statement”) and announced important changes to the “Guidelines – Investment by State-Owned Enterprises” (the “SOE Guidelines”) under the Investment Canada Act (the “ICA”). The changes represent important steps in a more restrictive approach to foreign SOE investment in Canada.1 The Government placed a particular emphasis on Canada’s oil sands, stating that foreign SOE acquisitions of control over Canadian oil sands businesses will be approved under the ICA’s “net benefit to Canada” test on an “exceptional basis” only.2
The $15.1 billion CNOOC/Nexen transaction received much public attention. The acquisition proposal underwent a rigorous review before ultimately being approved by the Government. In making its assessment, the Government aimed to strike a balance between its desire to promote foreign investment in the Canadian oil industry and concerns about allowing a foreign SOE to acquire control of a large Canadian oil sands player. In the December 2012 Statement, the Government acknowledged that foreign investment in the oil sands is essential to Canada’s economic prosperity, but also recognized the risks associated with extensive SOE control over Canada’s oil resources. The concern is that SOEs may be influenced by a foreign government’s political agenda and that this political agenda may conflict with Canadian industrial and economic objectives.3 In its December 2012 Statement, the Government also expressed concerns that SOE acquisitions of Canadian businesses may adversely affect the “efficiency, productivity and competiveness”4 of the acquired companies, resulting in a negative impact on Canada’s long-term economy.
On April 29, 2013, Finance Minister Jim Flaherty tabled the Economic Action Plan 2013 Act (“Bill C-60”), which introduces several amendments to the ICA. The proposed amendments take several steps further than the December 2012 Statement in restricting foreign SOE investment in Canada. If implemented, Bill C-60 will codify the changes made to the SOE Guidelines, expanding the Government’s power to declare that a foreign investing entity is an SOE and consequently, declare that an otherwise non-reviewable acquisition by an SOE is subject to governmental review.5 To date, Bill C-60 has passed through the House of Commons and received its first reading in the Senate.
While it was hoped that the Government would clarify the treatment of foreign SOEs investing in Canada,6 the language of the Bill and of the 2012 December Statement creates some uncertainty as to how and when SOE investments will be reviewable. Specifically, it is unclear what will constitute “indirect government influence” for the purposes of defining an SOE under the ICA and what will qualify as an “exceptional basis” for approving SOE investments.
The new amendments met with mixed reaction and concerns that the Government “has erased that nice, clear dividing line and replaced it with a much looser standard that focuses on de facto control.”7 In fact, G-8 countries are all faced with the tension between the need to attract foreign investment and ensure that the Government is welcoming, and the need to ensure that economic, commercial, and national security interests are protected. It is and will remain a balancing act.
Policy Changes - Revisions to the SOE Guidelines and the Government’s Policy Statement
The SOE Guidelines are neither law nor resolutions and are not binding. Nevertheless, they inform the Government’s approach to foreign SOE investment review under the ICA. As indicated, the recent changes to the SOE Guidelines reflect the Government’s more restrictive approach to foreign SOE investment in Canada.8
For one, the definition of “SOE” for the purposes of the Guidelines was expanded to include not just an entity directly or indirectly owned and controlled by a foreign government, but one that is directly or indirectly under foreign government influence.9
Assessing whether an SOE investment will be of “net benefit” to Canada under the SOE Guidelines, the Minister of Industry (the “Minister”) must be satisfied that the investor will:
- Operate on a commercial basis;
- Be free from political influence;
- Operate in conformity with Canadian corporate standards, including commitments to transparency and disclosure, independent members of the board of directors, independent audit committees, and equitable treatment of shareholders;
- Be committed to Canadian laws and practices, including adherence to free market principles; and
- Contribute to the productivity and industrial efficiency of the Canadian business.10
Pursuant to the SOE Guidelines, the Minister is responsible for examining the degree of control or influence an SOE will likely exert on the Canadian business it seeks to acquire and the industry in which the Canadian business operates. The Minister will also consider the degree of control or influence the foreign government will exercise over the SOE.11
A successful bid by a foreign SOE would likely require a convincing submission addressing the issue of susceptibility to home government influence and include a strong commitment to transparency and commercial operations in its business plans and undertakings.12 The SOE Guidelines suggest that SOEs may consider, for example, employing Canadians in senior management positions, incorporating the business in Canada, and listing shares of the company on a Canadian stock exchange.13
One of the challenges for potential foreign investors is that the SOE Guidelines are applied on a case-by-case basis. When the CNOOC/Nexen acquisition was approved, CNOOC publicized a list of commitments that it would undertake in order to increase its chances of obtaining the Minister’s approval, some of which mirror the examples in the SOE Guidelines.14 However, a foreign investor’s final undertakings are not publicized and the Minister is not required to release the reasons for his final decision. Even if this information was publicly available, the fact that decisions are made on a case-by-case basis means that a similar application will not necessarily be approved. Thus, potential investors cannot predict the course of a review assessment when proposing an investment with any degree of certainty.
Legal Changes - Bill C-60 Amendments to SOE Investments
Bill C-60 includes a broad definition of “SOE” which, if adopted, would codify the definition now found in the SOE Guidelines. Again, the definition includes an entity that is directly or indirectly controlled or influenced by a foreign government or government agency. The definition also includes an individual acting under the direction or influence, directly or indirectly, of a government or government agency.15 Given that the term “indirect influence” is not specifically defined in the Bill, the expanded definition appears intended to give the Government greater discretion to label a foreign investor an SOE.
Under the current version of the ICA, an investment by a non-Canadian in a Canadian business is a reviewable transaction if there is an acquisition of control of the Canadian business (an acquisition exceeding 33.3%) and the acquired business exceeds a threshold of $344 million in asset value. Bill C-60 however, will extend the reach of the Government under the ICA where foreign SOE investors are concerned, subjecting proposed investments to greater scrutiny.16
First, under the proposed amendments, an otherwise “Canadian” business may be deemed non-Canadian if the Minister is satisfied that it is controlled in fact by one or more SOEs. The Minister may consider “any information and evidence” made available to him. If an entity refuses or fails to provide, within a reasonable time, any information that the Minister requests in order to make a decision, the Minister may declare that entity to be a non-Canadian-controlled entity. Note that these powers may be exercised retroactively.17
Also, Bill C-60 blurs the dividing line between an acquisition of control and an acquisition of control in fact. Under the new regime, the Government may declare that a proposed foreign investment is an acquisition of control in fact, even where the 33.3% threshold is not met, if the Government is satisfied that the entity is under the control of one or more SOEs. Consequently, an otherwise non-reviewable acquisition may be subject to review if proposed by an SOE. In making this determination, the Minister may consider “any information and evidence” made available to him. Again, these powers may be exercised retroactively.18
Further, investments proposed by investors classified as SOEs are, and will remain, subject to a review threshold of $344 million in asset value. Under Bill C-60, however, the review threshold for private sector investors will increase to $600 million enterprise value when the legislation comes into force, and will continue to increase by $200 million every two years until it reaches $1 billion.19 Effectively, this will create a much lower review threshold for SOEs as compared to private investors, reflecting the Government’s openness to private foreign investment, on the one hand, and scepticism of SOE investment in Canada on the other.
Is the CNOOC/Nexen transaction indicative of an “exceptional circumstance”?
CNOOC’s acquisition of Nexen was reviewed and approved under the old SOE Guidelines, before the December 2012 Statement was announced. However, the Government was deliberating the changes to SOE investments while considering the $15.1 billion SOE transaction and thus, it will be presumed that the new restricted approach influenced the Government’s review of the transaction to some degree.
As noted above, the final undertakings CNOOC made to win the Minister’s approval are not publicly available, although CNOOC did publicly release a number of significant commitments that it made. These commitments include: establishing Calgary as CNOOC’s North and Central American headquarters; seeking to retain Nexen’s current management team and employees; investing significant capital in the development of oil and gas resources in Canada; listing CNOOC shares on the Toronto Stock Exchange; and maintaining Nexen’s corporate social responsibility, particularly with respect to First Nations and local communities.20
Many of these commitments address concerns of transparency and disclosure, commercial orientation, adherence to Canadian laws and practices including free market principles, and long-term commitment to the Canadian economy, as outlined in the SOE Guidelines. Without knowledge of CNOOC’s specific undertakings though, it is difficult to know whether the commitments outlined above are enough to convince the Government that a similar transaction would be of net benefit to Canada.
If Bill C-60 is implemented, the Government will have a greater reach to review proposed investments involving foreign entities, subjecting them to stricter scrutiny. It remains to be seen whether SOE investors emulating CNOOC’s approach will be able to survive the Government’s scrutiny and satisfy the “exceptional basis” net benefit test.