Federal Industry Minister Tony Clement has rejected BHP Billiton’s bid for Potash Corporation of Saskatchewan on the basis that it does not meet the “net benefit to Canada” test under the Investment Canada Act. This decision is widely regarded as a political response to the intense public relations campaign led by the Premier of Saskatchewan (the province in which most of Potash Corporation’s mines are located) that has galvanized popular opposition to the deal over the past two months. BHP Billiton has 30 days under the statute to make additional representations and submissions to the Industry Minister to prove net benefit.

This case is only the second rejection of a deal in the history of the Investment Canada Act (outside of the cultural sector). The first deal to be rejected was the 2008 proposed acquisition by an American company, Alliant Techsytems, of the geospatial business of MacDonald, Dettwiler and Associates Ltd. for (broadly speaking) “national interest” reasons (among other rationales reported in the media, the protection of Canadian sovereignty in the Arctic) under the “net benefit” test.

The calculus as to what constitutes a “net benefit to Canada” is an elastic one based generally on economic considerations (such as the impact of the proposed investment on employment, capital expenditures, head office location, participation of Canadians in senior management) but also including industrial and economic policy objectives of a province likely to be significantly affected by the investment. As a result, the Minister’s decision under the Investment Canada Act can readily be made for political reasons.

While Industry Minister Clement’s announcement of his decision offered almost no detail, it will be important to see how the Government characterizes this decision to the international investor community. The Government has been seen as a strong supporter of foreign investment in the past and will no doubt try to distinguish this acquisition from others, either on the basis that potash is of such strategic importance to Canada (given Potash Corporation’s significant global share of this commodity) that it should be protected from any foreign takeover or that BHP Billiton’s commitments to the Canadian Government are simply not sufficiently positive to meet the “net benefit” test.

The next 30 days will not only give BHP Billiton the opportunity to test the Government’s rationale for rejection, but will also no doubt give the Government more time to monitor the political winds. Opposition to the deal has been unusually unified and vociferous with other Premiers, including the Premier of Alberta (which, along with Saskatchewan, is a stronghold for the governing federal Conservative Party), some members of the business community and federal opposition parties, condemning the deal.