Just before midnight on Friday, October 18, Canada’s Industry Minister announced his interim conclusion that Petronas’ proposed C$6 billion acquisition of Progress Energy does not satisfy the “net benefit to Canada” test under the Investment Canada Act.  Petronas is a Malaysian state owned enterprise (SOE).  Progress is a Calgary-based natural gas producer.

The Minister’s decision immediately became the subject of extensive coverage in major Canadian and international business newspapers and websites, with numerous commentators offering opinions and raising questions about whether the decision will cause a chill in foreign investment, whether the “net benefit” test is too vague, whether the review process  unnecessarily lacks transparency, and the implications of the decision for proposed acquisitions by SOEs generally and for CNOOC’s proposed C$15.1 billion acquisition of Nexen, which is currently under review, in particular.

Due to the largely confidential nature of the review process, many important facts relating to the Minister’s decision are not public.  However, based on our experience advising clients in relation to the Act, including SOEs on high profile acquisitions, and on information that is publicly available, we are able to offer the following insights:

  • While we know the Minister’s interim decision, we are not aware of either the undertakings that were put on the table by Petronas, or the Minister’s particular concerns with the package that was presented.  There is a range of possible concerns that could hold up approval, ranging from concerns about the sufficiency of the benefits provided to concerns about the transparency of the acquired business with the investor post-acquisition.  As discussed below, it is even possible that the refusal could be solely related to timing – the government was simply not able to complete its review within the 75 day period and was not prepared to approve the transaction absent a completed review.
  • The Minister’s decision is interim, not final.  Petronas still has 30 days to convince the Minister that its acquisition of Progress is likely to be of net benefit to Canada, which Petronas may seek to do by sweetening the undertakings it is prepared to offer.  We understand that the CEO of Progress remains optimistic that the acquisition will ultimately be approved.
  • It is possible that the Minister’s interim rejection had more to do with process than with substantive objections to the acquisition.  Some media reports suggest that Petronas had refused to consent to an extension of the review period mandated by the Act, and that the Minister responded by issuing an interim rejection minutes before the review period expired (if the Minister needs more time to consider a proposed acquisition, this is effectively his only option if the foreign investor does not consent to an extension, as the Minister would otherwise be deemed to approve the acquisition).
  • The Canadian government has been grappling for some time with how best to deal with proposed acquisitions by foreign SOEs.  Its approach to foreign SOEs is driven by two primary goals: (i) securing foreign investment that is vital to the Canadian economy, of which SOEs have been an eager and abundant source; and (ii) ensuring that acquired Canadian companies continue to be operated on a commercial basis, with transparent governance processes, and not to serve the geopolitical objectives of a foreign government.  The Canadian government has provided some guidance as to the application of the net benefit test to acquisitions by SOEs, in the form of SOE guidelines that were issued in late 2007 following the acquisition of several iconic Canadian companies by SOEs.  However, in our experience, the Canadian government’s approach to SOEs is still evolving and has moved beyond its published position.  We expect that more definitive guidance will be forthcoming with or shortly following the Petronas/Progress and CNOOC/Nexen transactions.  In this regard, on Monday, October 22, Canada’s Prime Minister stated that “The government does in the not too distant future have an intention to put out a clear and new policy framework regarding these sorts of transactions”.  In the meantime, we continue to believe that, given sufficient planning and patience, acquisitions of Canadian businesses by SOEs can continue to proceed.