On December 7, 2007, Canada's Minister of Industry issued guidelines clarifying the application of the Investment Canada Act (ICA), Canada's foreign investment review regime, to proposed investments in Canada by foreign state-owned enterprises (SOEs).
Foreign investment is critical to the Canadian economy. A recent Statistics Canada study found that, among other significant benefits, foreign companies operating in Canada have generated two thirds of Canada's productivity growth over the last three decades. However, foreign investment by SOEs has accounted for a very small percentage - only about 2% - of the substantial total amount of foreign investment in Canada since 1985.
In light of the above facts, an explanation as to the perceived need for the new guidelines is warranted. Over the past several years, several foreign SOEs have acquired control, or have attempted to acquire control, of major Canadian businesses, including Canada's largest nickel producer, and others have expressed an interest in making multi-billion dollar investments in Canada, particularly in the natural resource sector. This trend is expected to grow, as many SOEs are flush with massive amounts of cash and mandates to invest it outside their home countries. Canada's government is concerned that, in some circumstances, foreign SOEs may invest in Canada with non-commercial objectives. In addition, some SOEs have unclear corporate governance and reporting regimes. An investment by an SOE with either of these characteristics may not be of "net benefit to Canada", which is the test mandated by the ICA to determine whether a proposed foreign investment in Canada that exceeds the applicable threshold amount may proceed.
Before the new guidelines were introduced, it was not clear how the net benefit test should be applied in the context of a proposed investment by an SOE. The new guidelines attempt to clarify this by identifying the factors that will be considered. These include: the nature and extent of control of the SOE by its government, the corporate governance, operating and reporting practices of the SOE, and whether the acquired Canadian business would retain the ability to operate on a commercial basis. The new guidelines also provide a non-exhaustive list of undertakings that SOEs may offer to demonstrate net benefit to Canada. These include: appointment of Canadians to boards of directors, employing Canadians in senior management positions, incorporation of a company in Canada and listing of shares on a Canadian stock exchange.
The full text of the new guidelines is available at: http://www.ic.gc.ca/epic/site/ica-lic.nsf/en/lk00064e.html#state-owned.