On October 7, 2013, Industry Minister James Moore blocked the proposed $520 million acquisition of the Allstream division of Manitoba Telecom Services Inc. Allstream by Accelero Capital Holdings (Accelero).
Accelero had applied for the Minister’s approval pursuant to the Investment Canada Act, which provides that where a non-Canadian (such as Accelero) proposes to acquire control of a substantial Canadian business (such as Allstream), the non-Canadian must file an Application for Review with the Minister of Industry. The transaction was reviewed under the net benefit and the national security provisions of theInvestment Canada Act.
In a press release, Minister Moore stated that as a result of the national security review, Accelero’s proposed acquisition of Allstream would not proceed. Minister Moore provided the following singular statement as the reason for the rejection:
"MTS Allstream operates a national fibre optic network that provided critical telecommunications services to businesses and governments, including the Government of Canada".
First Known Rejection under the Investment Canada Act’s National Security Regime
This is the first known rejection of a transaction under the Investment Canada Act’s national security review regime which was introduced in 2009.1
In our experience, the scope of a national security review is potentially very broad. It is also important to remember that a national security review can apply to any transaction (no matter the size, and even retroactively) if the buyer is ultimately controlled outside of Canada. A review can be undertaken for an acquisition of a majority or minority investment in an existing business or the start-up of a new business.
The criteria for evaluating a particular transaction is quite vague: the government need only be satisfied that it has "reasonable grounds to believe that an investment by a non-Canadian could be injurious to national security". The terms "injurious" and "national security" are not defined. Moreover, the remedies are very broad. The government can block a pending transaction or allow it to proceed subject to conditions. It can also order divestitures for completed transactions.
The Minister can demand information from the non-Canadian or any other person involved. The investor will also be given the opportunity to make representations to the Minister. The Minister digests the information, consults the Minister of Public Safety and Emergency Preparedness and other agencies and then sends a report to the Governor in Council (i.e. the federal cabinet) with recommendations. The cabinet then makes a decision and issues an order that can block the investment, authorize the investment on conditions, or require divestiture (in the case of a completed investment).
There has been a slow escalation of the rigour of enforcement of the Investment Canada Act by the Minister of Industry over the past years, as evidenced by the increase in the length of reviews and the scale and scope of written undertakings that foreign investors are required to give the Minister to secure approval. The Investment Canada Act is also undergoing amendment which tightens the rules around investments by state-owned enterprises (SOE).2
Reason for the Rejection of the Acquisition of Allstream
Evident from its press release, MTS Allstream was caught off-guard by the government’s decision. It was "extremely surprised" by the rejection due to "unspecified national security concerns",3 including the parties’ offer to take "whatever actions are necessary" to address the government’s concerns. MTS Allstream further stated that:
In deciding to proceed with this transaction, MTS Allstream was heavily influenced by the fact that Accelero's principals are a well-known and experienced group of telecom executives who have previously been permitted to invest in and operate telecom assets in a number of countries around the world, including Canada (through Wind Canada) and several of its trading partners. Of particular note, the same group of principals led the investment of approximately $1 billion in Canada's telecommunications sector, beginning with the 2008 AWS spectrum auction. The Federal government's past active support of Accelero's principals played a significant role in MTS Allstream's decision to sell to Accelero following the Company's strategic review process. The Company was also heavily influenced by the fact that the proposed transaction is entirely consistent with recent changes in Federal policy aimed at increasing foreign direct investment in Canada's telecom sector.
The review of applications under the Investment Canada Act are conducted pursuant to very strict confidentiality provisions. Beyond the Minister’s statement that "MTS Allstream operates a national fibre optic network that provides critical telecom services to businesses and governments", one can only speculate as to why the transaction was rejected. Furthermore, the nature of the review undertaken in this case – national security – adds another layer of opacity. Possibly only individuals with national security clearance would have access to the specifics of the government’s national security concerns.
What does this mean for future investments?
Future foreign investors would want to know in advance of proposing a transaction what the Minister’s policy is in respect of the application of national security considerations might be. Clarity, transparency and predictability in respect of these matters would be ideal. Unfortunately, other than what can be gleaned from the Minister’s Accelero/All Stream press release and news reports surrounding the Minister’s 2008 rejection of MDA by Alliant Techsystems,4 there is limited guidance from the Canadian government on the types of transactions that are more prone to national security attention.
The rejection of Accelero’s proposed acquisition highlights the importance of early identification and careful management of sensitive issues. With this decision, the Government of Canada has shown that it will avail itself to the powers it has under the Investment Canada Act to reject foreign investments based on national security concerns. Now more than ever, before bringing a deal that raises such sensitivity to the Minister for approval, it will be critical for investors and their advisors to carefully evaluate whether there is a sufficient basis for the Minister to reach a positive conclusion. To the extent it may have been in past deals, the importance of the national security dimension of a transaction can no longer be underestimated.