Canada’s Industry Minister, Jim Prentice, has released guidelines clarifying the application of the Investment Canada Act to takeovers of Canadian businesses by foreign state-owned enterprises (SOEs). This follows the government’s identification of these transactions as an issue in its Advantage Canada report in 2006 and fulfills the Minister’s commitment in early October to act on the issue as part of the government’s consideration of changes to the Act.
Another area – national security – remains under review, and a broader policy review of the entire Act by an independent panel is expected to be completed by next June. Although the government has made it clear in this current announcement that foreign investment – even by SOEs – is welcome, investments by SOEs will now be subject to increased scrutiny.
The guidelines reflect the government’s policy that the governance and commercial orientation of SOEs should be taken into account when considering whether their investments would be of net benefit to Canada. With respect to governance, the focus of foreign investment reviews will be on whether the SOE would adhere to Canadian standards of corporate governance. These standards may include commitments to transparency and disclosure, independence of members of the board of directors, independence of audit committees and equitable treatment of shareholders.
As for the commercial orientation of an SOE, the Minister will assess whether the Canadian business to be acquired can continue to operate on a commercial basis regarding destination of exports; place of processing; the participation of Canadians in its operations in Canada and elsewhere; support of ongoing innovation, research and development; and the appropriate level of capital expenditures to maintain the Canadian business in a globally competitive position.
Although the guidelines do not represent a radical shift from past practice with regard to the review of acquisitions by SOEs, they are somewhat atypical in considering the nature of the foreign buyer, rather than its plans for the Canadian business, as one of the net benefit factors. That said, the guidelines set out standards designed to ensure that SOEs and their Canadian operations will carry on business in a manner similar to that of publicly traded business enterprises. (Although privately owned foreign businesses may not meet the same standards of corporate governance as set out in the SOE rules, the government presumably believes that the commercial character of privately owned businesses would not raise red flags under the net benefit analysis.) A non-Canadian SOE that already has reasonable governance standards and a clear commercial orientation can therefore expect to be treated no differently from other foreign investors.
However, some uncertainties about the new rules remain. The scope of the application of the guidelines is, for instance, somewhat unclear: an SOE is defined as “an enterprise that is owned or controlled directly or indirectly by a foreign government” but assessing the degree to which a foreign government exercises indirect control over an investor may in practice be difficult to determine.
How restrictively the guidelines will be interpreted in the context of a particular transaction is also not known. Nevertheless, in an era of active foreign investment by SOEs, the guidelines provide timely and important clarification of the way in which the Minister may be expected to enforce the Act.