Responding to concerns arising from investments by foreign state-owned enterprises (SOEs) in Canadian companies, the Government of Canada has announced special guidelines for the review of such investments under the Investment Canada Act (ICA). Released on December 7, 2007, the Guidelines:
- Define SOEs as enterprises owned or controlled directly or indirectly by a foreign government (which may include sovereign wealth funds);
- Do not apply to all SOE investments but only those that result in an acquisition of control of a Canadian business and exceed certain monetary thresholds;
- Focus on the SOE's adherence to Canadian standards of corporate governance and its commercial orientation;
- Do not single out particular economic sectors or countries for special scrutiny.
The new guidelines in brief
Under the ICA, direct acquisitions of control of Canadian businesses exceeding certain monetary thresholds must be approved by the Minister of Industry prior to closing. The test for approval is whether the transaction will yield a "net benefit to Canada".
In addition to the factors that the Minister of Industry typically considers in deciding whether to approve reviewable investments, the Guidelines identify the "governance and commercial orientation of SOEs" as central considerations in reviewing SOE investments.
The Guidelines state that the Minister will assess the SOE's adherence to Canadian standards of corporate governance, such as commitments to transparency and disclosure, independent directors, audit committees and equitable treatment of shareholders, as well as compliance with Canadian laws and practices. The Minister will also consider how and to what extent the investor is owned or controlled by a state.
In addition, the Minister will scrutinize the commercial orientation of the SOE in relation to its prospective operation of the target business, in particular, regarding: "where to export; where to process; the participation of Canadians in its operations in Canada and elsewhere; the support of on-going innovation, research and development; and the appropriate level of capital expenditures to maintain the Canadian business in a globally competitive position".
Finally, the Guidelines outline the types of binding commitments or undertakings an SOE may be required to provide to pass the "net benefit" test. These include commitments to appoint Canadians as independent directors, the employment of Canadians in senior management, the incorporation of the target business in Canada and the listing of shares of the acquiring company or the target Canadian business on a Canadian stock exchange.
Assessment of the guidelines
The Guidelines provide some useful guidance on the scope of the Government's concerns about SOEs. Unfortunately, much is left unsaid with the result that the Guidelines raise many questions.
Definition of SOEs
The Guidelines do not offer any nuanced guidance on the degree of ownership or control required to be an SOE. The Minister may choose to define an "SOE" in accordance with the nationality of control provision in the ICA. If this is the case and the state is only one of a number of shareholders of the investor, "control in fact" will likely be the measure of control. Interestingly, however, under the ICA nationality provision, investing companies controlled by individuals closely linked with a foreign government might well fall outside the SOE definition.
A widespread concern about SOEs is that they will acquire strategic businesses with the objective of pursuing political objectives that could be at odds with Canadian national interests. To address this, the Guidelines list factors that might reflect a deviation from commercial principles. For example, the Guidelines indicate that the Minister will consider the destination of exports, reflecting a possible concern that the SOE may use the target company's scarce resources to supply only the SOE's "home" country rather than existing Canadian customers. It is not clear, however, whether the Government will distinguish between plans to ship the target's products to one country rather than another.
Adherence to Canadian standards
The SOE will be held to Canadian corporate governance standards. While investors that are publicly listed on an exchange and only partly state-owned may readily meet such a standard, many wholly state-owned companies will not achieve this level of transparency and disclosure. For such SOEs, it is not apparent what specific objectives the Government wishes to achieve nor what commitments would be sufficient in any given case.
SOEs may be particularly concerned about a possible requirement that the SOE or the target business be listed on a Canadian exchange. Such a requirement would ensure that the SOE meets Canadian securities laws with their disclosure requirements and would guarantee participation by Canadians in the target company. However, the SOE could regard this as unwarranted meddling by Canada in the affairs of a foreign state and the Guidelines offer no indication regarding the circumstances in which a listing would be demanded.
The Guidelines' impact is limited to investments that are already reviewable under the ICA. Proposed SOE investments that do not constitute acquisitions of control (e.g. small shareholdings), or that are below the review thresholds are therefore not reviewable.
The Government of Canada has repeatedly expressed an openness to foreign investment. Yet the Guidelines suggest that it may take a more restrictive stance on state-owned investment than was previously the case. It is hoped that the Government will make every effort to clarify the application of the Guidelines in a timely and transparent way. Without this, the Guidelines may create a chillier climate for foreign state investment in Canada.