Forsys Metals Corp (“Forsys") which was at the last stage of a proposed plan of arrangement that would result in it being acquired by non-Canadian controlled George Forrest International Afrique S.P.R.L. ("GFI") announced on August 19, 2009 that GFI had received an unsolicited letter from Industry Canada advising GFI that it was prohibited from implementing the transaction pending further notice from Industry Canada. In comments to the press, GFI indicated that it would be meeting with the Canadian government in response to the prohibition letter.
On August 25, Forsys announced that it had terminated the C$579 million takeover after GFI failed to transfer funds to complete the deal and that it had demanded that GFI pay a C$20 million reverse break fee. GFI’s response was to say that it intended to pursue its legal remedies against Forsys.
The transaction was first announced in November, 2008 and had received the final court order approving the plan of arrangement in March of this year. With GFI’s August 4 announcement that it had obtained the necessary financing commitment for the transaction, GFI appeared to have overcome the final obstacle that had previously prevented it from closing the deal.
As the transaction appeared to fall below the monetary threshold that required mandatory pre-merger approval under the Investment Canada Act (the “Act”), the power upon which the Canadian government relied to prohibit the closing remains unclear. In response to press enquiries, Industry Canada declined to comment on why it had taken this action.
March amendments to the Act gave the Industry Minister a new power to intervene in transactions that he views as being potentially “injurious to national security”. No guidance as to what types of transactions would merit such an intervention has been provided and, as such, Industry Canada’s intervention in the GFI acquisition of Forsys could be the first public exercise of the Minister’s right under section 25.2 of the Act to prohibit a transaction from closing until the Canadian government has had a opportunity to consider the potential impact of the transaction under the new national security provisions.
Once a section 25.2 notice is issued, the Minister has the right to demand that the acquirer provide any information that the Minister may require in furtherance of his assessment of the potential national security impact of the transaction and as to whether the transaction merits further review under the Act. Under proposed regulations that are not in force at this date, a decision to subject the transaction to full review under the Act would have to be made within 25 days of the issuance of that notice.
Assuming that the notice referred to in GFI’s August 19 press release was a Section 25.2 notice, the national security concern that the Minister had with this transaction remains unclear. However, the fact that the transaction had been public for over eight months and that Industry Canada had only recently intervened may suggest that the intervention related to a recent development in the transaction and, as such, Industry Canada’s interest may have been directed at the source or sources of the recently announced financing that GFI had obtained to permit it to close the transaction. This would be consistent with the fact that the Act’s proposed regulations would require in connection with an approval application that the sources of funding be identified. Interestingly, the Forsys business connection to Canada appears to be very limited as its principle uranium mining and development activities are focused in Africa.
So as the parties continue to debate who owes who what as a result of the terminated transaction, foreign investors and Canadians are left to wonder whether they have just seen Canada’s first exercise of its new power to intervene in acquisitions by non- Canadians on the basis of national security concerns.
Regardless as to the actual basis upon which Canada intervened, the last minute intervention appears to have played a role in the termination of a substantial merger that had been in progress for over 8 months.