On November 3, 2010, Canada's Minister of Industry announced he was not satisfied at this time that the proposed acquisition of Potash Corporation of Saskatchewan Inc. ("Potash Corp.") by BHP Billiton plc ("BHP Billiton") was likely to result in a net benefit to Canada. BHP Billiton now has 30 days to make additional submissions to the Minister before a final decision will be rendered. If this decision holds, it will be only the second transaction to have been rejected under the Investment Canada Act for failing to demonstrate a net benefit, and the first one where the rejection is not based on "national security" concerns.
The announcement by BHP Billiton of its unsolicited offer to acquire control of Potash Corp. resulted in a significant focus on Canada's foreign investment review process. Under the Investment Canada Act, the federal Minister of Industry must determine that a proposed acquisition by a non-Canadian of a Canadian business with assets above a prescribed threshold is "likely to result in net benefit to Canada" before the transaction can proceed. While the Act contains criteria that the Minister is to consider when making the "net benefit" determination, these criteria are broad and afford the Minister substantial discretion in his decision-making.[i] The BHP Billiton/Potash transaction has brought to the forefront the scope of the net benefit criteria, the role of provinces affected by transactions, and whether transactions involving natural resources should be treated differently than other transactions.
In addition, some have questioned whether the decision was politically motivated, as the ruling Conservative party is a minority government drawing strong support from Saskatchewan, where there was significant opposition to the transaction. This perception could undermine Canada's professed openness to foreign investment and its traditionally rules-based approach to international trade.
What is certain, though, is that this decision brings more uncertainty for foreign investors and will require foreign acquirers of Canadian businesses to be more mindful of the Investment Canada review process.
Opposition to proposed BHP Billiton/Potash transaction
Among the leading opponents of BHP Billiton's proposed acquisition was the premier of Saskatchewan, Brad Wall. He had argued that BHP Billiton's proposal to increase potash production and sell potash at market prices (rather than through the Canpotex marketing and distribution company jointly owned by Saskatchewan potash producers) would cost the province approximately $5.7 billion over 10 years from lower royalty payments and an additional $2 billion from lost federal and provincial tax revenues. He also questioned whether jobs would be lost as a result of the transaction.[ii] However, his key argument related to the "strategic interest" of potash to Canada and Saskatchewan.[iii] Potash is an important component in fertilizer, and world demand for it is expected to increase in the future. Canada houses approximately 53% of the world's potash reserves, and Potash Corp. holds approximately 25-30% of the world's reserves.
Premier Wall also argued that control over natural resources is a provincial matter under Canada's constitution. As such, he did not rule out a constitutional challenge to the decision had the federal Minister of Industry approved the transaction.[iv] This raises the question of the extent to which provincial considerations are taken into account by the Minister. At law, it is the Minister who makes the final net benefit determination. However, one of the net benefit criteria is "the compatibility of the investment with national industrial, economic and cultural policies, taking into consideration industrial, economic and cultural policy objectives enunciated by the government or legislature of any province likely to be significantly affected by the investment."[v] (emphasis added) It is standard practice for Investment Canada officials to consult with provincial officials where the Canadian business is located. Traditionally, the Minister pays close attention to provincial views, though he is not bound by them. In this case, in addition to the premier of Saskatchewan, four other provincial premiers expressed their opposition to the transaction. This underscores the need for investors when planning their transactions to be mindful not only of the potential federal reaction, but also of local and provincial reactions.
Net benefit test
With respect to the argument that natural resources should be given special consideration, it is important to remember that one of the net benefit criteria already addresses resources: section 20(a) refers to the effect of the transaction on "resource processing" within the context of the overall effect of the transaction on the "level and nature of economic activity in Canada." If the concern is that the company being acquired is a significant participant in the industry, there are net benefit criteria that look at the effect of the transaction on competition and industrial efficiency. As such, it is unlikely that there needs to be a special category for natural resource transactions.
Finally, much has been written about the scope of the net benefit test. Prior to this transaction, the effect of a transaction on tax and royalty revenues was paid little - if any - consideration by investors and the Investment Review Division staff that administer the statute. There were published reports that BHP Billiton was willing to structure its acquisition in a way that would save Saskatchewan approximately $300 million in tax revenues that would otherwise have been lost.[vi] If true, this represents a new high-water mark in potential undertakings that the Minister may seek before approving a transaction.
The Minister's decision to reject the BHP Billiton/Potash Corp. transaction will very likely have implications for Canada's ability to attract foreign direct investment. Despite professing that Canada is a free-trading country that has benefited greatly from free trade and foreign direct investment, the Minister's actions in rejecting the proposed transaction have highlighted that the Investment Canada Act can be somewhat of a wildcard in the process, and that the political climate and considerations can weigh heavily on the ultimate decision in cases where the acquisition concerns established Canadian businesses in important economic sectors. This underscores the need to carefully prepare a strategy for dealing with these matters that includes consulting key stakeholders at all levels of government and developing key messages for government, the public and the media regarding the benefits of the transaction.
The Minister is now required to provide reasons for rejecting the proposed investment. It is expected that the Minister will do so following the issuance of his final determination in approximately 30 days. It is hoped that these reasons will provide some guidance for future transactions and illuminate how the Minister applied the "net benefit" criteria in this case.