Last week the Canadian Government introduced amendments to the Investment Canada Act (ICA) to implement its revised policy towards state-owned enterprises (SOEs) which it announced in December last year. At that time, while it approved the acquisition by Chinese SOE, CNOOC, of Canadian oil and gas company, Nexen, the Government announced its intention to prohibit acquisitions of control of Canadian oil sands businesses by SOEs except on an exceptional basis, but welcomed joint ventures and minority investments. In addition, it indicated that it would closely monitor SOE acquisitions in other sectors of the economy and would distinguish between SOE and non-SOE investments when setting the ICA review threshold. (See Focus on Foreign Investment Review, December 2012)
As expected, the proposed amendments would retain for SOEs the current review threshold which is based on the target Canadian business’ book value of assets ($344 million in 2013) while non-SOEs would be subject to a higher review threshold based on enterprise value (to be set at $600 million when implemented, rising to $800,000 in two years and then to $1 billion four years later). The result is that SOE investments will be more often subject to Ministerial approval on the basis of the “net benefit to Canada” test, enabling the Government to scrutinize more SOE investments in Canada.
What may be surprising about the proposed amendments is that they give the Government very broad latitude to ignore the general ICA rules in making a number of critical determinations that affect whether a proposed transaction is subject to review under the ICA. If reviewable, a transaction will be subject to a time-consuming process, potential delays to closing (and in rare cases, rejection) and almost always significant commitments to the Canadian Government on a broad range of issues. The uncertainty generated by the Government’s latitude under the amendments is exacerbated by the potentially very broad scope of the term “SOE”.
Potential for Increased Government Scrutiny of SOE Investments
The proposed amendments could significantly increase the number of SOE investments requiring Ministerial approval by permitting the responsible Minister (the Minister of Industry except where the target industry is cultural) to avoid the general ICA rules and presumptions:
- defining when an acquisition of control occurs. The ICA general rules establish presumptions regarding when control is acquired. For example, they state that the acquisition of less than one-third of the voting shares of a corporation or of less than a majority of the economic interests of a partnership is deemed not to be an acquisition of control. If there is no acquisition of control, there is no requirement for a “net benefit” review under the ICA. For an SOE, these rules need not be applied if the Minister concludes based on “any information and evidence” made available to him that the SOE will acquire control in fact.
- determining whether one entity is controlled by another. The ICA general rules set out rules and presumptions regarding when control exists. However, the proposed amendment would permit the Minister to go beyond those rules in assessing whether an SOE controls another entity in fact.
- whether an investor is Canadian or not. The ICA establishes rules to determine the Canadian status of an investor. Pursuant to the proposed amendment, an entity that would otherwise be considered Canadian-controlled may be judged to be an SOE if the Minister concludes that it is controlled in fact by an SOE.
All of the above decisions may be retroactive to April 29, 2013.
As noted above, the repercussions of bypassing the normal presumptions and rules on these points could be serious for an SOE investor. A decision by the Minister that the investor is controlled in fact, directly or indirectly, by a foreign state means that the transaction will be subject to a lower review threshold. In addition, a transaction that would not otherwise be subject to the ICA “net benefit” review and notification regime - such as a minority investment, including a 50% interest in a partnership or joint venture - because it did not constitute an acquisition of control, could be reviewed because of the Government’s determination that control in fact was acquired. As an assessment of “control in fact” can be relatively subjective and depend on terms of the investment which are fluid and in the negotiating process, it may be unclear, especially early on the deal process, whether the SOE investment is an acquisition of control under the ICA and therefore potentially reviewable.
Uncertainty regarding the Scope of an SOE
The uncertainty described above may be exacerbated by the vague definition of an “SOE”. As contemplated in the Government’s statements on its new SOE policy in December last year, the definition of an SOE now includes not only the government of a foreign state or agency of such government and an entity that is controlled, directly or indirectly, by such a government, but also an entity that is influenced, directly or indirectly, by a foreign government. There is no guidance as to what constitutes “influence” which raises the spectre of foreign corporations being deemed to be SOEs because of the presence of foreign government representation on boards or because of senior management links to government officials (e.g., Huawei whose founder was a senior officer in China’s People’s Liberation Army) or to political parties (e.g., would the presence of party officials in key positions in major Chinese corporations make them influenced by a foreign government?).
Significantly, the definition of an SOE has also been expanded to capture individuals acting under the direction of a foreign government or under the direct or indirect influence of a foreign government.
As a result of the proposed amendments, private companies or individuals could be subject, at the Government’s discretion, to the lower SOE review threshold and to the potentially more stringent review process applicable to an SOE .
Longer Timelines for National Security
Finally, the proposed amendments would extend timelines for the national security review of transactions. There are numerous prescribed time periods in the review process and these are to be lengthened from five days to 30 days or as agreed to between the foreign investor and the Government.
The Government’s message in the proposed ICA amendments is clear but also muddied. What is clear is that the Government will be watching out for SOE investments and will scrutinize such transactions more closely. What is muddied is the reviewability of investments by SOE investors (especially minority investments) as well as the potential application of the lower SOE review threshold to investments by individuals and private companies that are not owned, directly or indirectly, by foreign governments, but somehow subject to foreign government influence. While investors may request a Ministerial opinion to clarify whether a given investment is subject to review, there is no requirement under the ICA for the Minister to provide such an opinion, unless the request relates to a determination about the Canadian status of the investor (and even this exception is to be limited under the proposed amendments to transactions in which the target Canadian business is in a cultural industry).
In short as a result of the proposed amendments, SOEs and foreign investors that might possibly be viewed as SOEs may, depending on the type of investment planned, face a higher risk of Investment Canada “net benefit” review compared to non-SOEs investing in Canada.