On November 3, 2010, the Canadian Minister of Industry, Tony Clement, announced his rejection of BHP's proposed acquisition of Potash Corp. on the basis that it is not likely to be of "net benefit to Canada". This is only the second non-approval under the Investment Canada Act which came into force in 1985. Unless BHP within the 30 day period following the November 3 announcement (or within any further period agreed to by BHP and the Minister) is able, through additional representations and undertakings, to persuade the Minister to change his determination, the Minister's decision will become final following which the Minister will likely make the reasons behind his decision public.
In summary, the Investment Canada Act provides for Ministerial review and approval of, among other things, transactions that involve the acquisition of control of a Canadian business by a non-Canadian and that exceed prescribed dollar thresholds. The review and approval must be conducted according to a "net benefit to Canada" test by the Minister, having regard to factors set out in the Act. Such factors include the effect of the investment on the level and nature of economic activity in Canada; the degree and significance of participation by Canadians in the Canadian business; the effect of the investment on productivity, industrial efficiency, technological development, product innovation and product variety in Canada; the effect of the investment on competition within the affected industries; and, likely of particular significance in the case of BHP's bid for Potash Corp., the compatibility of the investment with national industrial and economic policies taking into account the policy objectives enunciated by the government or legislature of any province likely to be significantly affected by the investment.
Importantly, the Act does not prescribe a weighting of the factors. Moreover, for all practical purposes, the Minister's final decision is non-appealable. This, together with the opacity of the decision-making process, means that the Minister has very substantial discretion. Where he chooses to do so, the Minister may, in effect, abandon or compromise previously articulated policy positions and objectives to satisfy political needs. This may be what has occurred in relation to BHP's application for review under the Act. The current Conservative minority government may well be facing an election within the next six months and because of this there have been suggestions in the press and elsewhere that the Minister chose the route that appeared to have the greatest support of the electorate and the Members of Parliament in the Province most affected by the transaction, Saskatchewan. The Premier of Saskachewan, with the support of a number of other provinces, had actively opposed BHP's bid on the basis that it was not in Saskatchewan's best interests.
In our view, this episode does not signal a sea change in the administration and enforcement of the Act. The vast majority of transactions that are reviewable under the Act have in the past and will, we think, continue to be reviewed according to articulated policy positions and objectives where politics plays a less significant role. These transactions are 'lawyered' through the Investment Canada process.
However, transactions that are likely to engage political sensibilities do arise from time to time. The key is to be able to identify this category of transaction early in the process and to develop and implement a plan (which will include both government relations and public opinion strategies) that addresses the concerns of all affected constituencies. The BHP-Potash decision suggests that there may be increased concern both by Members of Parliament and by the Canadian electorate with respect to the acquisition of 'national champions', including those businesses involved in the resource sector. Parties proposing such transactions must proceed with special care.
Also, the BHP-Potash Corp. transaction has arguably strengthened the hand of the provinces in the Investment Canada process. Provinces have always had a role under the legislation but, save for Quebec, have rarely been seen to actively participate in the process. In the future, one can expect opponents of transactions will more regularly appeal to the affected provinces to intervene. The federal government may have, depending on the size and sensitivities of a transaction, a more difficult task in dismissing genuine provincial concerns given the precedent established in BHP-Potash decision. The roadmap provided by Premier Wall of Saskatchewan in BHP-Potash suggests that provincial positions on future transaction could be an important element in the decision-making process in the event of a proposed takeover of other 'national champions' such as RIM, Suncor, Encana and Bombardier.
Additonally, having regard to Canada's recent experiences regarding the alleged breach of undertakings given to secure Investment Canada approval in the case of US Steel's acquisition of Stelco, one should be prepared for a more vigorous negotiation and enforcement of undertakings by Investment Canada in connection with those transactions that it does approve.
Further lessons may be derived from the reasons for the decision that are ultimately released by the Minister in accordance with the Act (assuming his decision remains unchanged through the appeal period). Stay tuned for updates in this regard, as well as for updates with respect to the government's announced intention to undertake a review of the foreign investment review regime under the Act.