The Canadian government's 2013 budget implementation bill (C-60) will enact a number of previously announced adjustments to the Investment Canada Act (ICA). The proposed amendments address three main areas:
- the long-awaited increases in the thresholds for review of most acquisitions to C$1 billion in "enterprise value", phased-in over a four-year period;
- the manner in which state-owned enterprises (SOEs) will be defined and the introduction of an additional "control in fact" test for acquisitions by SOEs; and
- modest extensions to the timelines for national security reviews.
These amendments follow on the heel of revisions to the guidelines for assessing investments by SOEs in December 2012. At the time, the government emphasized Canada's continuing openness to foreign investment generally and signalled these areas of further fine-tuning. It also approved two major SOE investments in the oil and gas sector, while noting that further investments by SOEs in the Western Canadian oil sands would likely be limited to joint ventures and minority interest transactions. (The revised SOE guidelines and the accompanying materials are more fully discussed in our September 2012 and December 2012 bulletins).
Notably, after the December 2012 announcements and revised SOE guidelines, Industry Canada allowed a $2.2 billion joint venture between Encana Corp. and PetroChina Company Limited without ICA review. The transaction gave PetroChina, a subsidiary of the SOE China National Petroleum Corporation, a 49.9% interest in the joint venture while Encana obtained 50.1% ownership and will serve as operator of the joint venture.
thresholds for review
Substantial increases in the financial thresholds for review were proposed by the Competition Policy Review Panel in June 2008 and approved by the government in 2009.
The amendments will raise the standard review threshold for acquisitions by investors from World Trade Organization (WTO) countries from the current C$344 million in asset value to C$1 billion in "enterprise value" over a four year period. The threshold will increase to C$600 million the day that the amendments come into force and apply for a two-year period. The threshold will then increase to C$800 million for the following two years, and then reach the C$1 billion level at the end of this four-year period.
Investments by non-WTO investors and in the cultural sector will continue to be subject to the C$5 million asset value threshold (or $50 million for indirect acquisitions). Investments by SOEs (where the acquiror or vendor is from a WTO country) will continue to be subject to the existing C$344 million review threshold (with annual indexing to reflect changes in Canada's GDP).
The definition of "enterprise value" is still pending. Recent draft regulations proposed to calculate "enterprise value" as market capitalization, plus liabilities, minus cash and cash equivalents in the case of a publicly traded entity carrying on business in Canada. In the case of a non-publicly traded Canadian business, the proposed enterprise value would equal the total acquisition value, plus the entity's total liabilities, minus cash and cash equivalents. There is, unfortunately, no indication in Bill C-60 as to when the definition will be finalized.
definition of "SOE"
Bill C-60 will broaden the definition of "SOE" as indicated in the revised SOE guidelines. A SOE would include an entity that is directly or indirectly controlled or influenced by a foreign government or agency, as well as the foreign government itself or an agency of such a government. An individual acting under the direction or influence of a foreign government or agency could also be a SOE.
It is not yet clear what degree of influence by a foreign government or agency will be applied to the SOE determination. However, the Investment Review Division of Industry Canada has already started using a structured list of questions to determine the degree of control and/or influence by a foreign state. The analysis considers, among other things, share ownership by a foreign government, special decision-making rights attached to these shares, and the powers to appoint senior management and nominate board members. Further clarification will be important, and we expect that in relatively short order there will be precedents or guidance demonstrating that this provision will be applied in a responsible and workable manner.
"control in fact"
Bill C-60 gives the Minister of Industry discretionary power to determine:
- whether an entity is or is not controlled in fact by a SOE;
- whether there has or has not been an acquisition of control of an entity by a SOE; and
- whether an entity which is otherwise Canadian-controlled is controlled in fact by a SOE.
The existing status and acquisition of control rules focus heavily on ownership of voting shares but also include a control in fact aspect in the presumed control provision. Currently, control is deemed to exist above 50% and not to exist below 33.33% of the voting shares of a corporation. Within the 33.33 – 50% shareholding range, control is presumed to exist unless it can be shown that the acquiror will not control the corporation in fact through ownership of voting shares.
The amendments would give the Minister discretion to examine those transactions where an SOE obtains less than one-third of the voting shares or interests, but would acquire control in fact over the entity. The Minister may request information from the entity in order to make the determination, and an entity will have the opportunity to make submissions regarding such determinations. This is similar to the control in fact provisions applicable to acquisitions of cultural businesses and national security reviews. These provisions rarely come into play and we are not aware of reported cases under the cultural or national security provisions relating to the control in fact of a particular entity.
Control in fact provisions also exist in the broadcast, telecommunications and transportation sectors. In these areas, control is defined as the ability to determine strategic decision-making activities, or the ability to manage the day-to-day operations of an enterprise, whether this ability is exercised or not. Recent cases show that the government has not applied the control in fact test in a protectionist manner. Several transactions have been approved with modest adjustments to governance structures. Most notably, when the Canadian Radio-television and Telecommunications Commission decided that a new wireless provider with foreign financial backing was "controlled in fact" by a non-Canadian, the federal Cabinet reversed the decision.1 This is consistent with the government's "open for business" message. We do not expect that the control in fact rules would be used in a protectionist manner in the SOE context any more than they have been in the cultural industry or national security contexts.
extension of timelines for national security reviews
Currently, national security reviews can take up to 135 days to complete. Bill C-60 extends the deadlines for the Minister to take specific steps in relation to national security reviews to 30 days after the expiry of each prescribed period instead of five days. The amendments will also allow timelines to be extended by agreement between the Minister and the applicant.
While the changes may increase the theoretical maximum length of national security reviews, the timelines in Canadian foreign investment reviews are not excessively long compared to reviews by other agencies, such as the Committee on Foreign Investment in the United States, or second-phase review transactions by the Canadian, US, European, or other competition agencies.
The Bill C-60 amendments have been anticipated and do not represent a departure from Canada's openness to foreign investments. The increase in the review threshold to C$1 billion in enterprise value underscores this principle. The control in fact provisions are not inconsistent with other Canadian regulatory regimes and there is no reason to expect that the government intends to apply this discretion in a protectionist manner. The extended timelines for national security reviews provide the Minister with reasonable additional flexibility.
Our takeaway from these recent developments is that the government wants to maintain the ability to look carefully at SOEs and potential national security transactions, but generally continues to welcome foreign investments. Investors may need to take a more proactive and comprehensive approach to the foreign investment review process, but should not be discouraged from pursuing transactions in Canada.