On November 3, 2010, the Canadian Minister of Industry (the Minister) surprised many industry experts and legal advisors when he announced that the BHP Billiton (BHP) bid to acquire Potash Corporation of Saskatchewan Inc. (Potash) failed to satisfy the “net benefit to Canada” test pursuant to the Investment Canada Act (ICA).1

In the event BHP’s acquisition of Potash is ultimately unsuccessful, this will only be the second time where a foreign investor has been prohibited from acquiring a Canadian business as a result of the ICA. The last time was two years ago when American defence contractor, Alliant Techsystems, was blocked from acquiring MacDonald Detwiller for what was believed to be related to national security concerns.

In addition to these significant decisions, in July 2009, the Minister took the unprecedented step of initiating litigation to force Pittsburgh-based US Steel to respect undertakings it provided the government when it acquired Hamilton-based Stelco.2 These recent ministerial decisions have now put into question just how “open to business” Canada really is.

With respect to the ongoing BHP/Potash matter, in August 2010, Anglo-Australian miner BHP, in an effort to accelerate its entry into the fertilizer industry, made an unsolicited, all-cash offer to acquire all common shares of Saskatchewan based Potash, the largest producer of potash in the world.3 Since BHP is a foreign investor and because the proposed transaction exceeded the ICA’s Can$299 million application for review threshold, the Minister had to make a “net benefit to Canada” determination by relying in large part on representations made by BHP in its application as well as in the course of meetings with the company’s representatives. Generally, when making a net benefit determination, the Minister considers factors that include the effect of the investment on the level and nature of economic activity in Canada; the degree and significance of participation by Canadians within the business and the industry post-investment; the effect of the investment on productivity, industrial efficiency, technological development, product innovation and product variety in Canada; the compatibility of the investment with national industrial, economic and cultural policies; and the contribution of the investment to Canada’s ability to compete in world markets. While the Minister has broad discretion in determining whether or not a transaction meets the net benefit test, the burden lays with the investor to explain how the proposed investment will be of net benefit to Canada.

In addition, a foreign investor is usually obliged to provide binding undertakings to the Minister in order to secure approval. They typically relate to the factors listed above and can include commitments to maintain certain employment levels, undertake capital and/or research and development investments and to ensure Canadian participation in the management of the business, among others.4 In BHP’s case, it had publicly announced its willingness to make appropriate undertakings as part of its ICA submissions. For example, BHP noted its intention to: establish a global potash business in Canada; base the President and management of the Canadian potash operations in Saskatchewan; maintain Potash’s current levels of employment; identify and propose a Canadian nominee to stand for election to the BHP Board; continue Potash’s previously announced capital programs; and to invest in local community programs.5

Although review of the proposed acquisition of Potash fell exclusively within federal jurisdiction, the government of the Province of Saskatchewan voiced its strong objection to the transaction. Saskatchewan Premier Brad Wall stated that the “takeover bid fails the “net benefit” test in three key areas: job and investment, Canadian control of an important Canadian resource, and provincial revenues.”6 Due to the lack of transparency within the ICA review process, it is unclear to what extent the Premier’s objections impacted the Minister’s decision. In any event, BHP now has less than 30 days to make, should it wish to do so, further representations and/or submit or revise any undertakings in order to secure a favourable net benefit ruling from the Minister.

It is noteworthy that further to recent criticism of the ICA’s review process and demands for a more public, transparent and accountable process,7 the Minister has since stated in media reports that the Canadian Government supports, in principle, a review of the ICA in order to determine whether improvements to the 25-year old statute can be made.8

While Canada labels itself as being a country which is “open for business” and welcoming of foreign investors, recent actions by the Canadian Government are being perceived in a slightly different light. Whereas the ICA was not traditionally considered a major bottleneck for investments into Canada, there is a concern that it has become an overtly political statute which is creating much uncertainty for both investors and advisors alike. As such, investors and advisors will be wise to take note of this matter and recognize the importance of identifying this potential risk during the early planning stage of a transaction so as to ensure that it is properly evaluated and managed.