On November 3, 2010, Industry Minister Tony Clement announced that the proposed $38-billion acquisition of Potash Corporation by BHP Billiton was not likely to be of net benefit to Canada under the Investment Canada Act.
BHP had applied for the Minister’s approval pursuant to the Investment Canada Act, which provides that where a non-Canadian (such as BHP) proposes to acquire control of a substantial Canadian business (such as Potash Corp.), the non-Canadian must file an Application for Review with the Minister of Industry. The transaction can only be consummated if the Minister concludes that the take-over will likely be of "net benefit" to Canada. In his statement, Minister Clement said, "I can confirm that I have sent a notice to BHP Billiton indicating that, at this time, I am not satisfied that the proposed transaction is likely to be of net benefit to Canada. I came to this decision after a careful and rigorous review of the proposed transaction."
The Minister confirmed the Investment Canada Act requirement that BHP Billiton has 30 days to make any additional representations and submit any undertakings. At the end of that period he will make a final decision. If Minister Clement ultimately confirms the rejection, he will provide an explanation of the reasons behind his final decision at the time that decision is made, in accordance with the provisions of the Act.
Minister Clement was careful to point out that "Canada has a long-standing reputation for welcoming foreign investment. The Government of Canada remains committed to maintaining an open climate for investment."
BHP's reaction in its press release is disappointment, but BHP stated that it continues to believe that the offer is of net benefit to Saskatchewan, New Brunswick and Canada. BHP Billiton indicated that it will continue to cooperate with the Minister and will review its options.
Ministerial Rejection is Rare
This is only the second time there has been a rejection by a Minister of a transaction that does not raise Canadian cultural or heritage concerns since the inception of the Investment Canada Act in 1985 (which replaced a significantly more protectionist foreign investment review law, the Foreign Investment Review Act, known as FIRA).
Over the past number of years, there has been a slow escalation of the rigour of enforcement of the Investment Canada Act by the Minister of Industry, as evidenced by the increase in the length of reviews and the scale and scope of written undertakings that foreign investors were required to provide in order to secure approval, culminating in the blocking in 2008 of the proposed $1.3-billion acquisition of the Information Systems Business of MacDonald, Dettwiler and Associates Ltd. (MDA) by Alliant Techsystems Inc. (ATK) by then Industry Minister Jim Prentice. Arguably, the MDA transaction was blocked because of reasons relating to national sovereignty and security. The preliminary rejection of the BHP transaction is the first refusal of a transaction wholly on the basis of the "net benefit" threshold not having been met.
Reason for the Rejection
While the reasons for the rejection (if the rejection stands) will not be made public for a month or so, the Investment Canada Act enumerates a number of factors that are to be taken into account, where relevant, for purposes of making the "net benefit" determination. These are:
- the effect of the investment on the level and nature of economic activity in Canada, including, without limiting the generality of the foregoing, the effect on employment, resource processing, the utilization of parts, components and services produced in Canada and exports from Canada;
- the degree and significance of participation by Canadians in the Canadian business or new Canadian business, and in any industry or industries in Canada of which the Canadian business or new Canadian business forms or would form a part;
- the effect of the investment on productivity, industrial efficiency, technological development, product innovation and product variety in Canada;
- the effect of the investment on competition within any industry or industries in Canada;
- 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; and
- the contribution of the investment to Canada’s ability to compete in world markets.
This BHP/Potash development highlights the importance of early identification and management of transactions that can raise concerns under the Investment Canada Act. Before bringing a deal that raises sensitive issues to the Minister for approval, it will be critical for investors, their counsel and advisers to evaluate carefully all possible implications. In short, foreign investors must do their homework on the implications of the Investment Canada Act very early on in the planning stage of a transaction.