On May 9, 2008, in an unprecedented decision, the Honourable Jim Prentice, Minister of Industry, rejected the proposed $1.3 billion acquisition of the information systems and geospatial businesses of MacDonald, Dettwiler and Associates Ltd. (MDA) by U.S. -based Alliant Techsystems Inc. (ATI), on the basis he was not satisfied the transaction would likely be of a net benefit to Canada, as required under the Investment Canada Act (ICA). Prior to this decision, Canada never blocked (except for three investments relating to cultural businesses) any foreign takeovers of Canadian businesses since the ICA was enacted in 1985, preferring instead to protect Canadian interests by extracting concessions from foreign buyers in the form of undertakings.

MDA, a leading Canadian information technology and space products and services company, builds robotic parts for the International Space Station and is the maker of the state-of-the-art Radarsat-2 satellite, which has various capabilities, including monitoring Canada's Arctic. MDA also designed and built the iconic Canadarm and Dextre robotics for the International Space Station. MDA argued the sale was necessary to ensure its space and satellite business could thrive, arguing it needed access to the U.S. market in the absence of consistent work in Canada. MDA's shareholders and management overwhelmingly approved the deal.

Critics of the transaction, however, lobbied the Minister to block it, saying it amounted to a handing over of Canadian taxpayer funded technology to the United States (Canada provided MDA with a reported $445 million in research and development funding). Of particular concern is that a national sentiment appears to be at play creating fears that, in the case of Radarsat-2, Canada would be giving away technology designed to protect Canada's sovereignty, as Canada could lose control of the use of Radarsat-2 and of sensitive data in a dispute over Arctic sovereignty. Canada remains at odds with the U.S., as well as Russia, Denmark and Norway, over a number of issues related to Arctic sovereignty, including a dispute over 1.2 million square kilometres (460,000 sq. miles) of Arctic seabed estimated to hold up to 25% of the world's undiscovered oil and gas reserves.

It remains to be seen whether this decision could signal a change by Investment Canada to a more restrictive enforcement approach, or whether it should be more appropriately considered as confined to its specific set of facts. Until the decision, the current Canadian government consistently ignored calls for restraints on foreign investment in Canada, as Prime Minister Stephen Harper repeatedly said he did not want to "micromanage" international investment flows and pick which transactions to allow. Minister Prentice is also on record as stating "the Investment Canada Act should not - and will not - become a shield to protect Canadian industry from the full rigours of global competition."

However, the decision should also be looked at in the context of continued pressure on the Government of Canada to ensure the protection of national interests after several recent high-profile foreign takeovers of iconic Canadian businesses, including Hudson's Bay Co., Dofasco, Inco and Alcan. These takeovers led to ongoing reviews of the ICA by both the federal government and by the Competition Policy Review Panel (established in 2007 by the Government) to consider, among other issues, potential amendments to the ICA to give Investment Canada clearer powers to reject proposed acquisitions of Canadian businesses on the basis of "national security" and other considerations. The Panel reported its recommendations to the Minister on June 26, 2008. In December 2007, Minister Prentice released new guidelines clarifying the application of the ICA to acquisitions of Canadian businesses by foreign stateowned enterprises.

These guidelines state the governance and commercial orientation of state-owned enterprises will be examined when determining whether their investments are of net benefit to Canada.

In such context, the decision on the MDA transaction could be a precursor to forthcoming proposed amendments to the ICA (or its related regulations or guidelines) to provide the Minister with clear authority to screen, and potentially block, foreign takeovers on grounds of "national security" to prevent the acquisition of Canadian businesses by buyers tied to organized crime or terrorism or that are otherwise a threat to "national security." The rejection of the MDA transaction may also coincide with an attempt by the federal government to redirect, or at least clarify, Canada's space policy.

What is certain is this decision will require foreign acquirers of Canadian businesses to be mindful of the Investment Canada review process and its potential impact on their transactions.