The Minister of Industry recently issued new guidelines that apply to reviewable transactions for the acquisition of control of a Canadian business where the proposed acquirer is a foreign state-owned enterprise.

The Investment Canada Act requires that where a non-Canadian proposes to acquire control of a significant Canadian business, the Minister of Industry (or the Minister of Canadian Heritage in respect of cultural businesses) must review and approve the acquisition. The Minister must be satisfied that the proposed acquisition is likely to be of "net benefit" to Canada before issuing the approval. The application process usually takes 45 to 75 days.

The new guidelines reflect the potential for concern that the Minister may have with the "governance and commercial orientation" of some state-owned enterprises (i.e., enterprises that are controlled directly or indirectly by foreign governments).

Further, the guidelines specify that the Minister will examine the corporate governance and reporting structure of the state-owned entity and that this examination will include whether the non-Canadian adheres to Canadian standards of corporate governance — including, for example, commitments to transparency and disclosure, independent members of the boards of directors, independent audit committees and equitable treatment of shareholders, and to Canadian laws and practices.

As many state-owned enterprises are probably not public companies, it is not clear how the guidelines in respect of some of these commitments that typically apply to public companies (such as independent directors, audit committees and treatment of shareholders) would apply.

In making the net benefit determination, the guidelines state that the Minister will assess whether the Canadian business to be acquired by the state-owned enterprise will continue to have the ability to operate on a commercial basis regarding a number of important indicia, including where exports go, where processing takes place, the participation of Canadians in the operations and the level of capital expenditures to maintain the Canadian business. A foreign government-controlled entity can therefore anticipate that to secure approval by the Minister, it may be required to provide undertakings beyond those normally expected of a privately owned company.

McCarthy Tétrault Notes:

While the new guidelines do not amend the Investment Canada Act — indeed the Minister states that the factors of assessment enumerated in the Act will be continue to be applied — the guideline sends a clear signal that acquisitions by entities controlled by a foreign government will be subject to additional scrutiny. The guidelines go so far as to suggest that state-owned enterprises should submit specific undertakings at the time of the application. Undertakings are usually submitted at a much later stage of the application process.

The increased scrutiny to which entities owned by foreign governments will be subject will not apply to transactions that are not otherwise subject to review under the Investment Canada Act as described in the 2008 update below.