On September 8th, 2012, a Foreign Investment Promotion and Protection Agreement ("FIPPA") was signed by Canada and China ("Agreement"). The timing of the signing is appropriate considering the current level of investment between the two states.
In 2011, Canadian foreign direct investment in China was nearly $4.5 billion (CDN). In the same year, Chinese foreign direct investment in Canada was $10.9 billion (CDN). There are recent high profile examples of this activity. For instance, the Chinese company CNOOC Limited is attempting to acquire the Canadian company Nexen Inc. for a price of $15.1 billion (USD). Also Canada's Scotiabank is in the process of buying a 19.99% stake in the Bank of Guangzhou, the 29th largest bank in mainland China. The purchase price is in excess of $700 million (CDN).
The two states are currently going through their respective ratification processes in order to bring the Agreement into force.
What are FIPPAs and Why Do They Matter?
A FIPPA requires that each signatory state provide certain protections to foreign investors and foreign investments coming from the other state. The protections provided typically include non-discrimination obligations, rules regarding expropriation to the agreement, and binding dispute settlement.
FIPPAs provide protection to a wide range of investments. The investments usually covered include securities such as shares in a company, intellectual property rights, and tangible assets such as real property and property acquired for a business purpose.
FIPPAs are especially important for Canadian businesses making investments in countries where the rule of law is not well established, there is regulatory uncertainty or there is a threat of expropriation. In such circumstances, FIPPAs protect Canadian businesses, thus encouraging them to make foreign direct investments that they might not otherwise make.
It is important for Canada that our businesses engage in foreign direct investment. Such investment strengthens the Canadian economy by creating new markets for Canadian goods and services and by making Canadian businesses more efficient because of increased access to new technologies, global supply chains, and human and natural resources.
The Agreement contains the following key obligations:
- National Treatment / Most-Favoured-Nation Treatment
The Agreement contains two non-discrimination obligations. First, each state is required to treat investors of the other state and their investments no less favourably than it treats resident investors and their investments. However, there is an important exception to this rule. The national treatment obligation does not extend to the establishment or acquisition of investments ("Pre-Acquisition Rights"). The obligation only extends to the expansion, management, conduct, operation, and disposition of investments ("Post-Acquisition Rights").
Pre-Acquisition Rights are excluded from the national treatment obligation to ensure that each state can still control the establishment or acquisition of businesses in its territory by a non-resident. This ensures that the Investment Canada Act and its Chinese equivalent are not overridden by the Agreement. Therefore, even after the Agreement is ratified, Canada would be able to veto or regulate an acquisition like the proposed CNOOC Limited takeover of Nexen Inc.
The second non-discrimination obligation requires each state to treat investors of the other state and their investments no less favourably than investors resident in any other state and their investments. This rule applies to both Pre-Acquisition Rights and Post-Acquisition Rights. However, the obligation specifically excludes rights granted under existing or future bilateral or multilateral free trade agreements. This prevents China from accessing rights granted to the United States and Mexico under the North American Free Trade Agreement.
- Minimum Standard of Treatment
Each state is required to provide to investments covered by the Agreement fair and equitable treatment and full protection and security in accordance with international law. This provision establishes the minimum standard of treatment that is to be granted.
The Agreement restricts expropriation. A state cannot expropriate, whether directly or indirectly, the investments of a resident of the other state unless the expropriation (1) has a public purpose, (2) is done in accordance with due process of law, (3) is done in a non-discriminatory manner, and (4) fair market value compensation is paid.
- Transfer of Funds
Each state must permit all transfers relating to investments covered by the Agreement. Such transfers include profits, capital gains, dividends, interest, royalties and other income derived from an investment. Such transfers also include contributions of capital.
This provision does not override China's exchange controls. Transfers in to or out of China must still comply with that country's exchange control regulations.
The Agreement contains a series of exceptions to the above mentioned rules. These exceptions are standard for this type of agreement and ensure that neither state loses the ability to protect its culture, environment, banking and financial systems or national security.
Arbitration can be used by an investor to address possible breaches of the Agreement by one of the states. This process enables investors from one state to receive an award for damages against the other state. The ability to go to arbitration is restricted to matters involving expropriation or transfers if the potential breach is in respect to investments in financial institutions.
A process must be followed before a dispute can be taken to arbitration. First, the investor must engage in consultations with the defendant state to determine whether a settlement can be reached. Unless otherwise agreed, these consultations will take place in the capital of the defendant state. Second, a claim to arbitration cannot be submitted until six months have elapsed since the events giving rise to the claim. Third, the investor must deliver to the defendant state written notice of its intent to submit a claim to arbitration at least four months prior to submitting the claim. Fourth, the aggrieved investor must waive its rights to initiate or continue dispute settlement proceedings under any agreement between a third state and the defendant state in relation to the alleged breach of the Agreement. There is a three year limitation period on claims.
In addition to the above process, an investor must also comply with specific rules relating to each state prior to submitting a claim to arbitration. In the case of claims against China, an investor must engage in China's domestic administrative reconsideration procedure. If the investor still considers the dispute to exist four months after the investor has applied for the administrative reconsideration, the investor may submit its claim to arbitration. The investor is also required to withdraw any related claim initiated in a Chinese court before judgment is rendered.
In the case of claims against Canada, the investor and possibly the entity invested in must waive any right to initiate or continue a related claim to an administrative tribunal, court, or other dispute settlement procedure. There is an exception to this rule for proceedings for injunctive, declaratory or other extraordinary relief not involving the payment of damages.
The Agreement will be important for Canadians that have or are planning to make investments in China. Canadians should educate themselves about the protections provided for in the Agreement.